CHANGING COURSE
Mitsui OSK chief weathers shipping downturn
Junichiro Ikeda is no stranger to adversity. In his first decade with Mitsui OSK Lines (MOL), he witnessed a massive downsizing of the company brought on by bottom-line pressure as a result of an appreciating Japanese yen. That experience throughout the 1980s clearly left an imprint on his mind even with his steady progress up the corporate ladder in the years to come.
“Shipping, especially Japanese shipping, suffered the most [and] many colleagues of mine left the company,” recalls the MOL veteran, now its president and CEO.
Given that lifetime employment was still deeply ingrained in the Japanese corporate culture back then, Mr Ikeda was understandably deeply affected by that first downsizing exercise of his shipping career.
In the 1980s, MOL relied on Japanese customers for 80-90% of its business volume. This also exposed the company — which was founded in 1884 — to severe recessionary pressures in Japan from a steep hike in energy costs following the Arab oil embargo in the 1970s.
By its very nature of serving the world’s trade flows, shipping is a highly cyclical sector. As a shipping company then leaning largely on transporting resources into Japan and re-exporting manufactured goods overseas, MOL had its fortunes closely entwined with the ebb and flow of its home economy.
“It was an export-driven economy then and our Japanese customers were very reliant on MOL for the transport of their manufactured goods,” said Mr Ikeda, who will turn 60 in July.
He had joined MOL in 1979 upon graduating from the University of Tokyo’s faculty of law, and — despite the initial trough in the 1980s — has soldiered on with the company throughout his entire career. He rose steadily through the ranks, including an early stint with MOL (Europe) in London, and took the helm in June 2015, determined to steer the company toward its longterm vision of becoming “an excellent and resilient organisation that leads the world shipping industry”.
There was no honeymoon for the new CEO. The latter half of 2015 was marked by a steep decline in oil prices and fleet oversupply across most of MOL’s key business segments. The challenging environment prompted Mr Ikeda to urge his colleagues to aspire toward excellence and resilience by opening up to new ways of doing things.
“We must not be content to rely on methods that worked in the past … because past experience does not guarantee our future success,” he said in his 2016 new year address.
The shipping giant had moved with the times, in line with changes in the Japanese economy over the years, through its ventures into new businesses including the transport of liquefied natural gas (LNG) cargoes and the leisure cruise ship business in the 1980s.
Its fleet of LNG carriers in particular has grown strongly to reach 69 vessels as of March 31, helped not least by Japan’s push to reduce its energy dependency on crude imports from the Middle East by importing LNG from producers in the Asia-Pacific.
That puts MOL at number one in LNG carrier (LNGC) vessel count, or about 15% of the about 530strong global operating fleet, said Mr Ikeda. The LNGCs in the fleet have secured long-term contracts guaranteeing stable income for MOL in the years to come.
This developing revenue stream, however, would take time to gain traction in the company’s shipping portfolio, which is still over-represented in terms of top-line performance, by revenue contributions from bulk and container ships.
A large bulk of the 1.71 trillion yen in revenue the MOL posted in the 2015 financial year still comes from bulk and container ships, which bring in 839.1 billion and 721.1 billion yen respectively.
Mr Ikeda notes the current downturn is “especially more profound” in these two core segments of the company’s portfolio, because of dramatic declines in vessel charter rates resulting from a commodity slump and slowing global trade.
Cape-size bulk ships — the biggest in the category of cargo ships — took the biggest hit, with declines of about 50% or more in average charter rates through the first three months of 2016 as the Baltic Dry Index (BDI) fell by 33-46%, MOL said in an April 2016 disclosure.
The Shanghai Containerised Freight Index — which largely tracks spot rates in the shipping market for containers leaving China — has also fallen by 58% since February 2016, in line with the downward trend in the BDI, according to a published report by Blackwell Global Investments.
Speaking to Business Times during a visit to Singapore in early March, Mr Ikeda indicated that downsizing plans for the bulk and container ship segments were in the offing. He would subsequently follow through with an announcement in late March, which confirmed that the shipping giant would be recording an extraordinary loss of 179.3 billion yen in this fiscal year as a result of the structural reforms.
MOL’s fleet of bulk and container ships has since shrunk to 403 and 95 as of March 31, down from 411 and 118 a year ago.
Besides streamlining its operating fleet through early cancellation of charter-in vessel contracts and divesting capesize bulkers of charter-in vessels, MOL also decided to dissolve the Singapore-based subsidiary, MOL Bulk Carriers Pte Ltd (MOLBC), and consolidate its operations into a division based out of Tokyo.
In the container ship segment, MOL has sought to reduce operating costs by rationalising trade routes and reducing sailings.
“The years of 2016-17 will spell continued tough times for bulk ships and container ship segments,” Mr Ikeda said. But he also maintained that these two segments “will remain (MOL’s) core” and the downsizing does not equate to “reducing our market presence”.
Looking beyond this downturn, he said: “I believe in the future of the two segments … [although] I would like to see a balanced mix of our shipping portfolio going forward to hedge against down cycles in any individual segment.”
Weeks after announcing the closure of MOLBC, MOL inaugurated its Hong Kong-based LNG carrier management company, MOL LNG Transport (Asia) Ltd, which began its ship management operations with its first vessel on April 18.
Mr Ikeda is bullish on the revenue expansion from the LNGC segment, partly because he expects the vessels that have already secured long-term contracts with Japanese utility groups to bring new revenue streams for MOL when they begin operations in two to three years.
Yet, the future of Japan’s LNG demand is also looking uncertain with the government of Prime Minister Shinzo Abe having set out to restart nuclear reactors shut since the Fukushima disaster, which will reduce the country’s reliance on LNG imports from Asia Pacific.
Within the LNG market, MOL has already secured charters with clients outside Japan, in line with Mr Ikeda’s vision of geographic diversification.
In a tie-up with Chinese partners, MOL has been transporting LNG cargoes for China’s national oil company, Sinopec, from an ExxonMobil-operated project in Papua New Guinea.
The contract win with Sinopec is aligned with Mr Ikeda’s aim of diversifying the geographic spread of MOL’s operations. With its globalisation drive, MOL seeks to go beyond tracking the manufacturing footprint of its Japanese clients.
And the results are encouraging. “We have diversified our customer base — now about 60% of our [group] revenues come from Japanese customers, compared with 80-90% in the 1980s,” he points out.
MOL has already successfully extended its reach to Indonesia. Since its first contract win for coastal transport of LNG in Indonesia using the 126,300-cubic-metre ship, the LNG Aquarius, with Trada Maritime in 2011, it has also ventured into small-scale LNG shipping.
The 20,000-cubic-metre LNG tanker, Surya Satsuma, jointly owned by MOL and Jakarta-listed Humpuss Intermoda Transportassi, was reported as a strong contender for the first in a series of mini-LNG vessel contracts lined up in Indonesia to supply power plants being built under the independent power producer scheme of the state utility PLN.
Beyond transporting cargoes, Mr Ikeda says MOL can also extend its expertise in the LNG trade to promoting the use of the cleaner-burning hydrocarbon fuel in ship bunkering.
As a ship owner, MOL has taken the first step toward building LNG bunkering capabilities into its fleet. “We have decided to build and charter six 20,000 TEU container ships and the main engines have specifications which enable LNG use as a fuel (on further modification). These ships will be delivered in 2017,” Mr Ikeda said.
The MOL president is referring to the contract the Japanese ship owner has signed for the construction of four mega-container ships with Samsung Heavy Industries and a second long-term charter with Shoei Kisen Kaisha for two further units being built at Imabari Shipbuilding. The contract with Samsung carries an option to modify the vessels to be powered by LNG. All six vessels have been earmarked for servicing Asia-Europe trade.
The shipbuilding and chartering contracts announced in March 2015 will go toward helping MOL meet regulatory caps on greenhouse gas emissions being imposed by the International Maritime Organisation.
Mitigating the environmental footprint of shipping operations is, to Mr Ikeda, “one of the most important considerations” for the future of the industry.
As with many others in the trade, Mr Ikeda maintains that “shipping is one of the most eco-friendly modes of transporting goods”, with a carbon footprint much smaller than air freight. He acknowledges however, that in absolute terms, the industry as a whole emits massive volumes of carbon dioxide.
The MOL president believes ship bunkering will eventually shift from oil to LNG. He sees a global thrust toward green shipping that could evolve into a competitive advantage for larger shipping companies such as MOL. Smaller players lacking the financial clout to invest in ships compliant with new environmental standards could most likely get squeezed out of the game.
Well into his fourth decade at MOL, Mr Ikeda is still passionate about an industry and a company that caught his eye when he was on the hunt for his first job on graduation.
He recalls being drawn to photographs of ships in the recruitment pages while sifting through the newspapers back then.
After paying a visit to MOL, he had his heart set on joining a “dynamic organisation” that he would helm 37 years later, becoming now a busy corporate man who likes to enjoy, during what little leisure he has, a good laugh watching his favourite Japanese entertainment programme at home.
“I knew I wanted to do great things on a global scale,” he said, and those words still hold true today.
Business Times
I believe in the future of the [bulk and container] segments … [although] I would like to see a balanced mix of our shipping portfolio going forward to hedge against down cycles in any individual segment.”