Overview of Operations

BULKSHIPS Dry Bulkers

MASAFUMI YASUOKA The Capesize bulker BAOSTEEL EMOTION Senior Managing Executive Officer (Port Walcott, Australia)

Fiscal 2011 in Review Looking at the world iron ore seaborne vessels after deducting the 67 scrapped In fiscal 2011, we secured stable profits trade in 2011, imports to Japan and Europe vessels. As a result, the number of vessels from long-term carriage contracts of iron stagnated. Overall, however, there was a at the end of 2011 was 1,354, 16% higher ore, coal, wood chips and other cargoes. 6.7% year-on-year increase, driven by year on year. This deterioration in the However, four types of vessel*1 on spot emerging markets. Even China, where a supply-demand balance is the underlying contracts, including Capesize bulkers, slowing growth rate has attracted attention, factor for the lackluster freight rates since posted lackluster performances due to imported 11% more iron ore year on year, last year. persistently low rates since the latter half of or 690 million tons. But the increase in the MOL operates more than 100 Capesize fiscal 2010. As a result, our earnings supply of vessels exceeded transportation bulkers. Of these, 70% operate on dropped sharply from fiscal 2010 and we demand. In 2011, 256 Capesize bulkers medium- to long-term contracts, while the recorded a loss. were built, resulting in a net increase of 189 remaining 30% operate on the spot

*1 Please refer to the Dry Bulker Fleet Table regarding types of dry bulker.

Dry Bulker Fleet Table n Coal and Iron Ore Carriers (1,000 DWT) (As of March 31, 2012)

(Capesize) Standard No. of Vessel Type Use and Features Capesize bulkers are the largest of the dry DWT Vessels Capesize 170 107 Steel raw materials (iron ore, coking coal) bulkers and transport mainly steel raw Panamax 72 48 Iron ore, coking coal, steaming coal, grains, etc. materials. In 2011, freight rates for Cape- Handymax 55 60 Steaming coal, grains, salt, cement, size bulkers were initially soft because of steel products, etc. disruptions to shipments of iron ore from Small Handy-size 28 34 Steel products, cement, grains, ores, etc. Steaming coal carriers 93 37 Steaming coal Brazil following heavy rains there. The daily Wood chip carriers 50 53 Wood chips, soybean meal, etc. charter rate for Capesize bulkers dropped Other (Heavy lifters, coastal vessels) 12 53 – well below US$10,000. Thereafter, a Total 392 sudden rise in imports of iron ore by China drove the daily charter rate back up over Consolidated Revenues Breakdown US$30,000 from September 2011. How- (Results in FY2011) ever, freight rates dropped at the beginning Subsidiary (Mitsui O.S.K. Kinkai, Ltd.) Iron Ore and Coking Coal of 2012 due again to a precipitous fall in 6% 49% iron ore shipments from Brazil because of Steaming Coal bad weather. There has been no apparent 13% recovery since then, with the daily charter Wood Chip rate remaining below US$10,000 midway 12% through 2012. General Bulk 20%

34 RISING ABOVE ADVERSITY Mitsui O.S.K. Lines Cargo (Iron Ore) The Capesize bulker MAIZURU DAIKOKU Cargo (Coal) (Newcastle, Australia) market. In fiscal 2011, medium- to long- MOL operates approximately 120 bulk- n Specialized Vessels (Steaming term contract vessels provided highly ers, including Panamax class and other Coal Carriers/Wood Chip Carriers) stable profits as expected. However, spot small and medium-sized vessels. These Steaming coal carriers transport coal for vessels operated at a loss, prompting us bulkers transport a variety of cargo from power generation mainly to power compa- to scrap and sell 4 vessels and take other coal and grains to so-called minor dry bulk nies in Japan and operate on long-term actions to limit the number of vessels on cargoes such as steel products, cement, contracts. For these reasons, they continue spot contracts. and fertilizer. Approximately 70% of these to contribute highly stable profits. bulkers operate on spot contracts, meaning Likewise, wood chip carriers earn highly n General Cargo Bulkers we found it tough in fiscal 2011 as our stable profits based on long-term agree- (Panamax/Handymax/Small operations were hard hit by the impact of ments with paper manufacturing companies. Handy-size Bulkers) soft freight rates. However, vessels operating on spot Panamax bulkers saw demand rise, particu- larly for transporting coal. However, freight rates were soft as the supply of vessels Import/Export Areawise World Iron Ore Seaborne Trade exceeded this demand growth. In 2011, (million tons) 1,200 2006–2011 2011 283 new Panamax bulkers were delivered (Import) (Export) China Others and 71 were scrapped, for a 212 net 1,000 Others Sweden increase. This resulted in a 12% rise to Taiwan Canada 800 Korea South Africa 2,035 vessels at the end of the year. How- Japan India ever, because the types of cargo trans- 600 Brazil Australia ported and routes are more diverse for this 400 type of bulker than Capesize bulkers, 200 demand was comparatively stable and the Source: Clarkson, Tex Report 0 drop in charter rates was smaller. 111009080706 (estimated) 11 (estimated) (Import) (Export) Freight rates for Handymax bulkers and Small Handy-size bulkers at one time fell to China & India Import of Coal close to US$6,000 a day in February 2012. (million tons) The drop reflected regulations on iron ore 200 China exports in India, lower timber imports in India China due to financial restraint, a fall in steel 150 product transportation due to the flooding in Thailand, and the impact of the European 100 economic downturn, among other factors. Source: China Customs. MOL internal calculation based 50 Since then, the daily rate has returned to on statistics of 5 major export countries (Indonesia, Australia, around US$10,000. South Africa, USA, Russia) 0 08 09 10 11

Annual Report 2012 RISING ABOVE ADVERSITY 35 A Capesize bulker being loaded

contracts for transporting soybean meal and Looking Ahead million tons recorded in 2011; coal imports other cargoes were hard hit by soft freight n Steadily Growing Transportation in the first 4 months of 2012 were 70 rates and saw their profitability worsen in Demand million tons, suggesting annual imports of fiscal 2011. To counter the soft market Dry bulk transportation demand continues around 210 million tons. rates, we scrapped 2 old ships in fiscal to increase from China and other emerging With its economy growing, India has 2011. Most of the wood chips we transport markets. While imports of iron ore to China moved to regulate exports of iron ore, giving are destined for Japan at present. But we are growing at a slower rate, absolute vol- priority to the national consumption of expect to expand our business as demand umes in the period from January to April domestically produced iron ore. However, grows in China for imported wood chips. 2012 were 245 million tons (735 million since Japan, China and other importing tons on an annualized basis). This is a pace countries cannot help but secure alternative that would exceed 2011 imports, as The sources from remote locations such as China Iron & Steel Association has forecast Australia and Brazil to make up for the imports of 720 million tons for 2012. Coal shortfall in supplies, this should lead to an imports as well look set to surpass the 183 increase in ton-miles. Furthermore, to

World Dry Bulkers Age Profile Age No. of ships (as of March 2012) Portion

Capesize 25+ Panamax 25+ (100,000dwt– 42 (60–99,000dwt 207 1,408 ships) 3% 2,095 ships) 10% 20–24 20–24 120 125 % 9 0–14 6% 0–14 1,034 1,487 15–19 15–19 212 73% 276 71% 15% 13%

Handymax 25+ Smal Handysize (40–59,000dwt 274 (10–39,000dwt 25+ 2,525 ships) 3,047 ships) 11% 1,047 20–24 34% 111 20–24 4% 0–14 128 0–14 1,831 4% 1,544 15–19 73% 51% 309 15–19 328 % 12 11% Source: Clarkson

36 RISING ABOVE ADVERSITY Mitsui O.S.K. Lines The wood chip carrier STRELITZIA (Muroran, Hokkaido) satisfy rapidly increasing coal imports, these scrapped from 23 years to 15 years, and At present, approximately 70% of our countries are beginning to look at other have already decided to scrap 5 vessels by Capesize bulkers and approximately 30% of distant locations such as Colombia, Canada the end of March 2013. We will also con- our general cargo bulkers have medium- to and the U.S. to source coal. These trends sider scrapping additional vessels*2. long-term contracts, as mentioned earlier. should support freight rates going forward. *2 In order to control the market risk of spot vessels, we We aim to raise the proportion of these plan to scrap more vessels from all of the four types types of contracts slightly for Capesize of bulkers where the ship price is higher than the n Vessel Supply Outlook and market price, as well as return vessels to their owners bulkers and to 40% to 50% for general Countermeasures by terminating time charters. cargo bulkers as a way of reducing freight The main issue we are grappling with at rate fluctuation risk. That said, we will In 2012, a record 300 or more Panamax present in the dry bulkers business is that respond flexibly to meet customer needs no bulkers are expected to be delivered, sug- the supply of vessels continues to far matter what the length of contract as a way gesting market rates will soften further. exceed transportation demand. With Cape- of ultimately winning more advantageous However, there are close to 200 vessels on size bulkers, we do not expect a substantial long-term contracts. We must not forget the market aged 25 years or older. improvement in the supply-demand equa- that this is our greatest strength. For this, Therefore, as with Capesize bulkers, there tion in 2012 from 2011 because a large we must maintain a certain number of free remains the possibility that more vessels number of new vessels are expected to be vessels, so our policy in this regard will not will be scrapped than in a typical year due delivered. We believe, however, that the change in the future. Since our response to the market malaise. While there are market will recover from 2013 since the now when market rates are soft will deter- outstanding orders for Handymax bulkers number of new vessel deliveries will drop mine the size of our profits when market and Small Handy-size bulkers, many ves- considerably. At the same time, the scrap- conditions recover, we will continue to care- sels will be scrapped*3 going forward, ping of old ships is accelerating for many fully re-shape our fleet, taking into consider- because there is a large number of old reasons. These include stricter regulations ation freight rates for each type of vessel, vessels, as with Panamax bulkers. This on the age of ships entering loading ports, ship prices, trade volume, the order book suggests that any possible increase in the increasing obsolescence of old ships for vessels and other factors. supply-side pressure is limited. due to rapid advances in fuel performance, In the dry bulker business, we are seeing and the high price for scrapped or sold *3 It has been confirmed that 123 Small Handy-size a trend for customers to select shipping bulkers were scrapped in the first half of 2012 and vessels. Furthermore, because it has about the same number (161) were delivered. companies based on their ship manage- become increasingly difficult to recover the ment, environmental initiatives and other large costs of repairs amid the soft market, MOL’s dry bulker divisions have consis- qualities. For instance, RightShip, which is some companies are moving to scrap ves- tently implemented a strategy of expanding run by Australian resource majors and other sels under 25 years old. Our voluntary their dry bulker fleets. For the time being, parties, rates the safety risk of dry bulkers initiatives to combat excessive supply pres- however, we will restrict any increase in new on a scale of one to five stars after inspect- sures include laying up vessels and making vessels, excluding vessels where they have ing vessels. Our fleet of bulkers is highly greater use of slow steaming. In fiscal long-term contracts in place. ranked as a whole, which has increased our 2012, we have decided to scrap or lay up Our policy going forward is to put priority competitive edge further. between 10 and 20 Capesize bulkers. We on securing medium- to long-term contracts will widen the target age for ships to be that are the source of highly stable profits.

Annual Report 2012 RISING ABOVE ADVERSITY 37 BULKSHIPS Tankers

TSUNEO WATANABE The VLCC KAZUSA Senior Managing Executive Officer (Keiyo Sea Berth, Chiba)

Fiscal 2011 in Review Middle East cargoes as China imported exports from Qatar and Abu Dhabi. As a The tanker business operates five types of more oil, and China and India went further result, freight rates shot upwards, after lan- vessel: crude oil tankers, product tankers, afield to find supply sources to avoid Iranian guishing for several years. At present, around chemical tankers, LPG tankers, and metha- cargo risk. For these and other reasons, 130 VLGCs are in operation around the nol tankers. In fiscal 2011, most of these market rates began turning upward from world. There is unlikely to be a supply glut in tanker types endured depressed markets, February 2012, which resulted in compara- this market, because there are comparatively which resulted in the tanker division continu- tively firm volume in March and April in spite few scheduled deliveries of new vessels and ing to record a loss as a whole. The Lehman of a low demand period every year. there are only three shipyards in the world Shock in 2008 caused a drop in oil demand Product tanker rates spiked temporarily that build VLGCs. For this reason, the supply- while many new vessels were delivered onto on routes west of the Suez Canal on the demand balance looks set to remain stable the market. The gap between supply and back of increased gas oil exports from the going forward. demand deteriorated as a result and with U.S. to Europe and South America. MOL began operating methanol tankers as this gap remaining unresolved, the market Conversely, market conditions remained a specialized vessel before any other shipping has been stagnant for the past three years. challenging on routes east of the Suez company. It has 17 vessels operating on long- The number of Very Large Crude Oil Canal. One reason was a slight drop in time charter contracts and commands a Carriers (VLCCs), the largest class of crude demand for naphtha for Asia because some market share of approximately 40%. In addi- oil tanker, stood at 540 vessels worldwide at refineries in Taiwan halted operations and tion, MOL transports UAN (liquid fertilizer) and the beginning of 2011. By the end of 2011, demand fell in China for ethylene. Another ETBE (a gasoline additive) on consecutive the number had risen 7% to 578 vessels, reason was that long-distance transport voyage charter contracts. with 63 new vessels delivered and 25 demand (from Asia to South America, and scrapped during the year. On the other Asia to Europe) almost dried up. Looking Ahead hand, the seaborne trade volume of crude oil As for chemical tankers, the supply- The oil tanker market is undergoing dramatic was largely unchanged from the previous demand balance for stainless steel cargo change. The emergence of shale oil is expected year in 2011, widening the gap between tank vessels came close to the level of to result in a drop in transportation of crude oil supply and demand. Shipowners have tried 2007 when the chemical tanker market was to the U.S., which has been a long-distance to curb supply through slow steaming and at a record high. However, as chemical transportation route. On the other hand, the layups. However, these actions have failed tankers with coated tanks compete for decline should be eclipsed by increased trans- to absorb the overall increase in ship supply. some of the same cargo as product tank- port demand from emerging markets, namely This temporarily created extremely challeng- ers, the chemical tanker market overall has China and India. It is almost certain that oil ing conditions, highlighted by operating not fully recovered. tanker ton-miles will increase. With petroleum profit, the net result of freight revenues Regarding Very Large Gas Carriers products, there is a strong regional flavor to minus operational expenses, falling close to (VLGC), which have a cargo tank capacity demand. In Asia, demand is high for naphtha zero from July through the middle of October of over 70,000 m3 and are the main class and heavy oil, whereas in Europe and the U.S. 2011. There was a slight change in market of LPG carrier, we operate these vessels in demand is high for diesel and gasoline, respec- conditions from the beginning of winter a pool with a Qatar shipping company tively. If the U.S. becomes an exporter due to when demand tends to increase. Although through an MOL subsidiary. In 2011, the increased production of shale oil, this would oil imports by the U.S., Japan and other supply-demand balance for VLGCs spawn new demand for transporting naphtha to countries declined, there was an increase in improved on the back of higher LPG Asia and gas oil to Europe.

38 RISING ABOVE ADVERSITY Mitsui O.S.K. Lines The product tanker HAIMA (Off the coast of Chiba)

In terms of vessel supply, more than 60 we ultimately chose to scrap them, conclud- customer needs in close proximity to them and VLCCs are scheduled for delivery in 2012, ing that withdrawing them from the crude oil drive growth in business for spot vessels. In a followed by more than 40 in 2013. However, transportation market would help to create a related move, in May 2011 we jointly estab- deliveries are expected to drop to 30 to 39 sustainable market in the future. lished Straits Tankers Pte Ltd, a ship pool vessels in 2014. Furthermore, the 60 With product tankers, the market lan- management company for LR1 product tank- VLCCs aged 15 years or older around the guished in 2008 and 2009 because of the ers (approx. 75,000 DWT). This company world are expected to exit the market large supply of ships. However, vessel operates more than 30 LR1 vessels at pres- sooner or later. deliveries have now declined. The net ent. In a move related to VLGCs, since August In fiscal 2011, MOL scrapped 5 double- increase of product tankers is forecast to 2011 we have been operating VLGCs in a hulled oil tankers (4 VLCCs and 1 decline further in 2012 when the removal of pool through our Singaporean subsidiary. In Suezmax), the first in the world to do so. vessels by scrapping is taken into consider- another move, in January 2012 we established We did this because we have begun to see ation, so we believe that a market recovery Nova Tankers A/S as a VLCC pool manage- a gap opening up in freight rates around the is taking shape. There is also positive news ment company together with four other com- 15-year mark, as oil majors and other char- for growth in ton-mile in the form of refinery panies, including Maersk Tankers. Nova terers begin to avoid old vessels, reflecting closures in Europe and the U.S. and the Tankers began operations in February 2012 increasing environmental consciousness. construction of new refineries in the Middle and all of our spot operations have been trans- Safe operation standards are strict for oil East and elsewhere. MOL expects these ferred to this company. Nova Tankers plans to tankers, meaning it becomes unprofitable to factors to contribute to product tanker earn- expand the number of vessels in the pool to operate old vessels due to the high mainte- ings going forward. approximately 50 by the end of 2012. Young nance costs and costs related to vessel As mentioned previously, ocean transport vessels, sophisticated vessel management inspections. Another reason for scrapping is growing most of all to Asia. The main hub capabilities and the sound financial bases of vessels is that the scrap price remained for this is Singapore. That’s why MOL has the partner companies will be the source of high. Initially, we thought about selling these moved its sales and operation bases to this VLCC pool’s competitiveness. As with vessels as second-hand vessels. However, Singapore, so that we can pick up on other pools, it will leverage economies of scale to provide high-quality services in all sea areas to garner more support from customers. At the Consolidated Revenues Breakdown same time, it is expected to support mutual (Results in FY2011) development of the partners by raising effi- Chemical (Tokyo Marine Co., Ltd.) Crude Oil 28% 36% ciency in vessel allocation through reductions in ballast voyages and by sharing vessel alloca- tion knowhow within the pool. Boosted by the projects and strategies above, MOL will cement its solid position in the oil tanker market, which is expected to Product Methanol/LPG grow over the medium and long terms, as the 9% 27% tanker operator boasting the largest fleet in the world.

Annual Report 2012 RISING ABOVE ADVERSITY 39 BULKSHIPS LNG Carriers

KAZUHIRO SATO The LNG carrier BEN BADIS Senior Managing Executive Officer (off the coast of Cape Town, South Africa)

Fiscal 2011 in Review has had a major impact on increasing ton- MOL is also actively targeting offshore The LNG carrier business supports MOL’s mile and spurring market conditions. businesses. We have already decided to highly stable profits. Almost all of our We are steadily building up long-term invest in two projects for providing FPSOs*2 roughly 70 vessels operate on long-term contracts with power and gas utilities in to Petrobras. The first project began opera- contracts. In fiscal 2011, while both sales Japan and are fielding more and more tions in October 2010. The second project and earnings declined compared with fiscal inquiries. Furthermore, steady progress is plans to commence operations in the 2010, this result was in line with our expec- being made with the ExxonMobil-led joint summer of 2014. At the same time, we tations because the long-term contracts of China LNG transportation project. MOL has have begun Japan’s first STS*3 operation in some vessels expired. sent six engineers to Hudong-Zhonghua Hokkaido, as part of measures to ensure The spot charter rate for LNG carriers in Shipbuilding (Group) Co., Ltd. and they are stable supplies of natural gas during the fiscal 2011 remained high at US$100,000 working well with the team there, making winter. This is one example of the utilization per day. There were three main reasons for steady progress toward the start of actual of old vessels. We will continue to explore this. First was higher LNG imports to shipbuilding in the summer of 2012. As the use of vessels as storage vessels.

Japan. Since the stoppage of operations at LNG demand is expected to increase in *1 FSRU (Floating Storage and Regasification Unit): A the Fukushima Nuclear Power Station in China going forward, MOL believes that this facility for storing LNG offshore, where it is returned to its gaseous form for distribution by pipeline to land. 2011, Japan has imported 78.5 million tons forging of relationships with local ocean *2 FPSO (Floating Production, Storage and Offloading of LNG, with 8.5 million tons procured on transport companies and shipbuilders to system): A facility for producing oil and gas offshore. The oil is stored in tanks in the facility and directly the spot market, as fuel for thermal power enter the Chinese market will give it a major offloaded to tankers for direct transport to the destination. generation, the equivalent of approximately advantage in securing future projects. *3 STS (Ship to Ship) A ship-to-ship (STS) transfer 120 cargoes (for a standard size of vessel). In fiscal 2011, we won an order to trans- operation is the transfer of cargo between seagoing ships positioned alongside each other, either while In addition, supply sources are diversified port LNG within the coastal waters of stationary or underway. Where facilities at the receiving and some LNG is now being transported Indonesia. This project involves the trans- port are small, a large vessel carries its cargo to an area offshore at which point it is offloaded onto small and over long distances from countries like portation of LNG from production sites in medium-sized vessels for transport to the receiving Nigeria. The second reason is that South Indonesia to a floating storage and regasifi- facilities. Conversely, at loading ports where large vessels cannot enter port, small and medium-sized Korea procured 6 million to 7 million tons of cation unit (FSRU*1) off Jakarta. Ordinarily, vessels ferry cargo to the waiting large vessel offshore, where it is offloaded for transportation to its destination. LNG on the spot market in 2011 to meet countries impose strict regulations on higher demand during the winter months, as foreign-owned shipping companies entering it did in the previous year. Thirdly, winter the domestic coastal shipping business. Looking Ahead demand also increased in South America. However, this contract stems from the At present, there are still speculative orders While the volume was only 2 million tons, it long-standing relationship of trust and track for LNG carriers due to the high charter helped in terms of ship allocation efficiency, record in LNG transport with Indonesia rates for spot vessels. More than 70 LNG because the period of strong demand in since 1986. This new business model carriers will be delivered between 2013 and South America is opposite to the Northern established together with a local partner in around 2015. As a result of this, the Hemisphere. With LNG also being trans- Indonesia, where LNG demand is expected number of LNG carriers worldwide is ported over long distances from Qatar and to grow, will be a source of momentum for expected to increase from approximately other places in the Middle East, this factor capturing demand in the future. 370 at present to around 440 in 2015,

40 RISING ABOVE ADVERSITY Mitsui O.S.K. Lines The LNG carrier LNG AQUARIUS (left) offloading to an FSRU (Jakarta, Indonesia) suggesting that spot charter rates will be but also the process of building new ves- certification level. More and more custom- soft after 2013. sels. These trends play to our strengths. ers are evaluating not only costs but also However, we believe that the vessel Our advantage lies in the fact that we have quality when they select a shipping com- supply-demand balance will tighten again an extensive track record of developing and pany. This will only serve to bolster our due to the full-scale start of operations at building vessels with high levels of safety market standing. projects currently under development in together with shipyards since the earliest *4 A management system of ship management compa- Australia and elsewhere in 2015. We esti- days of the LNG business in the 1980s. nies, which is called TMSA (Tanker Management and Self Assessment), of the Oil Companies International mate that between 90 and 100 vessels will MOL is also aware of the high-level opera- Marine Forum (OCIMF) be needed to meet this additional demand tional safety standards*4 required by the in the future by 2020. Increased supply industry group of oil majors, which exceed from the new vessels to be delivered from the International Safety Management (ISM) 2013 will be absorbed by the start of opera- tions at new projects. We therefore believe that there will once again be a shortage of LNG Carrier Spot Market vessels from around 2016. (US$/day) We also see offshore businesses as 200,000 attractive businesses because of prospects for demand growth. Looking ahead, oil, 150,000 gas and other resource development proj- ects will probably involve exploration at 100,000 even deeper levels below the earth and the sea floor as surface resources are 50,000 Source: MOL internal calculations depleted. This spells higher demand for based on Gibson LNG Report FSPO, which can operate for deepwater 0 09/1 10/1 11/1 12/1 12/7 projects of more than 1,500 m. And demand for FSRUs for major cities where Japan’s LNG Imports by Country Crude Oil large-scale LNG receiving terminals cannot (%) 36% easily be constructed on land will also Others Malaysia increase. We will therefore continue proac- 7% 19% tively to develop offshore businesses. Oman 5% We believe that our safe operation skill UAE Australia and expertise will be a source of competi- 7% 18% tiveness in our LNG business going for- Brunei Qatar ward. At present, the safety standards 8% 15% Indonesia demanded by customers are rising year Russian Federation 9% 12% after year not only in terms of operations Source: BP Statistical review of World Energy 2012

Annual Report 2012 RISING ABOVE ADVERSITY 41 BULKSHIPS Car Carriers

TAKASHI KURAUCHI The Hybrid Car Carrier EMERALD ACE Senior Managing Executive Officer (Off the coast of Tomogashima, Wakayama Prefecture)

Fiscal 2011 in Review to effectively utilize our vessels by expand- stable service network, which starts with the Worldwide vehicle sales in 2011 reached ing cross trade and rigorously implementing export of cargoes from South Africa, and 75 million, bettering the record level set in slow steaming. then the collection of additional cargoes 2007. The number of vehicles transported We saw further expansion of trade in from Europe, North America and South by sea worldwide reached approximately fiscal 2011 in terms of cross trade and America to minimize voyages with empty 12.5 million, closing in on the record of 13 inbound trade. With regard to the latter, vessels where possible. We endeavor to million. Supported by this growth, we trans- trade volume to China of luxury European- maintain regular services by making full use ported a record 3.65 million vehicles as we made cars increased on the tailwind of the of our worldwide network, which enables us overcame the impacts of the Great East weak euro. In cross trade, meanwhile, in to arrange alternate vessels if there is a Japan Earthquake and the flooding in addition to the core Europe-North America scheduling conflict due to bad weather, port Thailand to post a profit. route, we saw increased exports from congestion or other circumstances. In the first half of fiscal 2011, vehicle Thailand and India in Asia, as well as brisk shipments from Japan, which average trade from Mexico and Brazil in the Atlantic Looking Ahead approximately 0.4 million units a month, sea area, where we have long had a pres- The number of automobiles sold worldwide almost stopped in April 2011 because of ence. In the Atlantic sea area, the key to is projected to grow to 80 million in 2012, supply chain disruptions at automakers being the shipping company of choice for 90 million in 2015 and 100 million in 2020, caused by the Great East Japan customers is having the capability of creat- driven by India, Brazil, Russia, China and Earthquake. Shipments in May and June ing and operating routes at will in response other emerging markets. In industrialized 2011 were down 60% and 35% year on to diversifying transportation needs, and a nations, there are no prospects for an year, respectively. This caused us to fall into fleet of a certain size for that. For example, immediate recovery in sales in Europe, the red on a monthly basis due to a dra- MOL’s mainstay “4 Continents Express because of the impact of the debt crisis. matic decline in operating efficiency of the Service” provides regular services with But sales of compact cars and hybrids are car carriers we operate. Thereafter, we saw dedicated vessels, resembling the contain- increasing in the U.S., as the price of gaso- a recovery in units produced in and exported ership business. We have established a line rises. The peak level of 17 million units from Japan at an astonishing speed as automakers worked hard to restore opera- Car Export from Japan tions. But the speed of the recovery was (Thousand units) slowed by a decline in plant capacity utiliza- 8,000 Others Oceania tion resulting from electricity usage restric- Central/South America tions during the summer, stagnation in 6,000 Africa Middle/Near East shipments from Thailand in the wake of the Asia Europe 4,000 November 2011 floods, the sluggish North America European economy stemming from the debt crisis, and the yen’s appreciation undermin- 2,000 ing the competitiveness of vehicles made in Source: MOL internal calculation; destination-wise/excluding CKD Japan. However, we were able to stay in 0 111009080706 the black for the full year, due to our efforts

42 RISING ABOVE ADVERSITY Mitsui O.S.K. Lines The car carrier SUNRISE ACE (Zeebrugge, Belgium) a year is probably unattainable, but we present, are the basic standard. Of course, by strengthening cooperation with the believe that car sales in the U.S. will range we will also keep an eye on the develop- round-the-clock Safety Operation from 13 million to 15 million. ment of larger vessels. Supporting Center (SOSC). At the same The number of vehicles transported by In emerging markets, the infrastructure time as ensuring safe operation as our top sea is projected to recover to the 13 to 14 on land has a huge impact on the increase priority, we aim to achieve a cargo damage million level around 2013 in line with this in automobile exports. For this reason, MOL incident rate of zero, and will work on initia- projected increase in vehicle sales. is participating in a terminal business, for tives in terms of vessels and equipment, Transportation patterns will probably diver- example, at Ennore Port in India, as well as services, management structures and other sify further as well. Thailand and South inland transport and other businesses within aspects of our operations to achieve this. Africa have already emerged as major car the country. However, when investing in Specifically, our dedicated marine technical exporters, with India likely to join their ranks land vehicle distribution, we believe it is staff inspect vessels and ensure close com- as an export nation. India exported 0.5 important to ensure that we can generate munication with sales staff, as well as look million vehicles in 2011, but this number is synergies with our core ocean transport to innovate in terms of making stowage set to grow to over 1 million vehicles in the business. In addition to Ennore Port, we are plans for cargoes and preventing damage to future. In addition, seaborne trade is also involved in terminal businesses in vehicles during transport. expected to diversify, with vehicles shipped Australia and Turkey. All these businesses In March 2012, we launched the Emerald from production bases around the world have helped strengthen relationships with Ace, a hybrid car carrier that aims for zero such as Mexico, Brazil, Turkey and Morocco customers that have made inroads in these emissions while at berth. This is the first to a multitude of broadly scattered con- local markets. vessel built under our Senpaku ISHIN proj- sumption regions. And naturally if there is a Safe operation is imperative to deliver the ect for developing eco-ships. Going forward, correction in the yen, Japan-made vehicles cargo, which has been entrusted with us by we will continue working to reduce the envi- will regain competitiveness, raising pros- customers, safely to its destination. We are ronmental impact of our ships in accordance pects of a return to shipments of around working to prevent serious marine incidents with the Group Corporate Principles. 4.5 million units from Japan. As seaborne trade diversifies, MOL will align its fleet with priority put on standard- Car Export from Emerging Countries izing vessel size. In recent years, compa- (Thousand units) nies in the industry have looked at 2,500 ex. South Africa ex. India increasing the size of car carriers. But in ex. China 2,000 the transport of vehicles by sea, where ex. Thailand there are dizzying changes in route pat- 1,500 terns, we believe that we can raise the competitiveness of our services by working 1,000 on efficient ship allocation and operations, 500 with an emphasis on improving fuel effi- Source: MOL internal calculation based on FORIN data etc. ciency. For this we have decided that 6400 0 111009080706 RT-type car carriers, the largest vessels at

Annual Report 2012 RISING ABOVE ADVERSITY 43 CONTAINERSHIPS

JUNICHIRO IKEDA The containership MOL MAXIM Managing Executive Officer (Cai Mep Port, Vietnam)

Fiscal 2011 in Review Consequently, our containership opera- South America routes. However, the con- In fiscal 2010, our containership operations tions fell heavily into the red on Europe tinual opening of new routes has increased posted ordinary income of ¥38.8 billion, routes, where the drop in freight rates was supply as a whole, negatively affecting rates. surmounting the market turmoil following most pronounced. Even U.S. routes, where In our terminal business, which comple- the Lehman Shock of 2008. However, the freight rate drop was smaller than ments our containership business, our basic fiscal 2011 saw competition based on Europe routes, fell into the red due to slug- strategy is to run our own terminals, with freight rates reignite among containership gish cargo growth. the aim of strengthening our containership

companies due to a large number of new *1 2011 calendar basis. Source: Drewry business and improving its competitiveness. vessel deliveries. The much higher bunker Although terminal business earnings price exacerbated the difficult market condi- In fiscal 2011, the much higher bunker fluctuate depending on the volume of cargo tions. As a result, our performance deterio- price weighed heavily on our performance. handled, this business can expect a certain rated sharply in fiscal 2011, as we recorded The average bunker price rose to US$667/ level of earnings consistently compared with an ordinary loss of ¥29.9 billion. MT in fiscal 2011 from US$490/MT in the high-volatility containership business. World containership trade volume in 2011 fiscal 2010, negatively impacting our earn- True to this, the domestic terminal business rose 7.4%, while supply increased 8.8%*1. ings by more than ¥10 billion. posted consistent profits in fiscal 2011. Looking at the market as a whole, there Intra-Asia routes registered the most Overseas, TraPac, Inc., which runs our was no marked deterioration in the supply- growth in cargo. But here too the supply of North American terminal business, saw the demand balance. However, vessel supply vessels increased, as many companies volume of cargo handled fall more than increased 8.8% on the core East-West entered the routes. Market trends were not expected at the Jacksonville Container routes, despite demand growing by only bad, however, freight rates did not rise Terminal, despite volume being firm overall. 0.5%. This increase in supply was enough to cover the higher bunker price. The terminal business at Cai Mep Port, prompted by signs of economic recovery in On North-South routes, cargo movement which began operations in January 2011, is Europe and the U.S. in 2010. Shipping was strong particularly on East Coast of performing well, and the terminal in companies introduced large vessels onto the East-West routes and reopened some loops based on bullish forecasts of 5–6% Containership Seaborne Trade growth in demand. However, cargo volume (1995=100) failed to grow even after the summer due to 400 the impact of the European sovereign debt

crisis, excessive stock buildup in North 300 America, and other factors. As a result, the supply-demand balance worsened, trigger- 200 ing a large drop in freight rates, particularly 100 on Europe routes. Companies eventually Source: MOL internal calculations moved to slash cargo capacity from around based on Clarkson Shipping Review & Outlook Spring 2012 the fall of 2011, but the much lower freight 0 95 00 05 10 11(estimated) rates did not recover significantly.

44 RISING ABOVE ADVERSITY Mitsui O.S.K. Lines Rotterdam Port is making steady progress In 2012, demand is only expected to New World Alliance (MOL, APL (Singapore) with preparations for our starting operations grow around 5%, versus a 7–8% increase and Hyundai Merchant Marine (South in 2014. in the supply of vessels across the world. Korea)) and The Grand Alliance (Nippon MOL Logistics (MLG), the MOL Group’s Judging from vessel supply and demand Yusen Kaisha, Hapag-Lloyd AG (Germany) core forwarder operator, posted higher- alone, we cannot expect a marked recovery and Orient Overseas Container Line (Hong than-expected earnings, due to cost reduc- in freight rates. However, a critical differ- Kong)). This alliance is providing high- tions as well as increased volume spurred ence from 2011 is that all containership quality services by jointly operating 6 loops by the global economic recovery. companies probably share a sense of crisis between Asia and North Europe, and 2 Furthermore, MOL Consolidation Service*2 about the business environment having loops between Asia and the Mediterranean, handled more individual units of cargo. In posted huge losses. In fiscal 2011, contain- for a total of 8 loops covering more than 25 addition to the network provided by MLG, ership companies tried to grab greater countries and 40 ports. The establishment an MOL local subsidiary is developing a market share. However, they seem to no of The G6 Alliance will enable us to fashion direct logistics business in Thailand, which longer be doing the same thing. In fiscal a lineup of large vessels that can match the has raised convenience for customers and 2012, they have a stronger resolve than top-ranking containership companies and translated into improved sales. In these and ever to restore freight rates, which should slash costs. We will also be able to make other ways, we are capturing greater syner- support an upturn in rates. direct port calls to ports we were unable to gies with the containership business. We In order to provide stable services to cover with services up to now, dramatically view our local subsidiary network as an address the high volatility characteristic of expanding our coverage. G6 can provide a important asset that we plan to leverage to the containership business, we formed a service comparable with that of the sector’s seize business opportunities, especially in new alliance, The G6 Alliance, in March largest players in terms of cargo capacity, emerging markets in Asia. 2012. The alliance members are now coop- ports and port call frequency. That has

*2 MOL Consolidation Service provides a service for erating on the allocation of vessels on the added up to much greater satisfaction for supporting so-called buyer’s consolidation, whereby it Europe routes. The G6 Alliance is made up our customers. packs containers for individual buyers with small cargoes from many different sellers. of companies that formerly belonged to The

Looking Ahead Revenue by Trades Capacity by Trades Market conditions for containerships in (Results in FY2011) (Results in FY2011) fiscal 2011 were extremely difficult. Nev- Intra-Asia Trade Intra-Asia Trade ertheless, we have seen a rapid recovery 18% North America 29% North America since the end of fiscal 2011, with freight Trade Trade 36% 31% rates rising on the East-West routes. This should contribute considerably to an earn- South America/ Africa Trade ings recovery in our containership busi- 13% South America/ ness in fiscal 2012, although it is Europe Trade Europe Trade Africa Trade uncertain how much freight rates can be 33% 13% 27% restored and maintained.

Annual Report 2012 RISING ABOVE ADVERSITY 45 The containership MOL PREMIUM (Los Angeles, USA)

We will push ahead with our strategy to demonstrated this public service commit- regularly announce our performance in differentiate MOL’s containership opera- ment to customers in March 2012 by terms of these KPIs on a special website tions, namely establishing the “MOL Liner” announcing the “Count on MOL” project. (http://www.CountOnMOL.com/). brand. In a fiercely competitive environment, We set targets for three KPIs common one of our key strategies is to create points throughout the world for our containership of difference from other companies, rather service. Specifically, for operations the KPI than merely trying to survive by offering low is the vessel on-time performance percent- freight rates and holding down costs. age, while for the environment it is the

Indeed, we want to distinguish MOL in reduction ratio of CO2, NOx and SOx, and terms of the high quality of the services, for safety it is the number of long-time Over the past several years, each com- offering more and better customer services operational stoppages per year for 3 or pany has been working to improve cost and providing on-time vessel arrival. We more consecutive days. What’s more, we competitiveness in the containership indus- try. However, those actions have also Asia-North America Container Trade Cargo Movements brought about noticeably lower on-time (million TEU) performance and lower quality of customer 15 Outbound voyage Inbound voyage service. By improving our performance in terms of the 3 KPIs above as a competitive

10 advantage, we believe we will capture more business opportunities. At the same time, publicizing the KPIs should stimulate and 5 test our organization internally. And we plan to gradually increase the number of these Source: Piers/JoC etc., excluding Canada cargo KPIs. For example, we announce the per- 0 07 08 09 10 11 centage of calls lost in our contact center and truck waiting times at terminals only for the North American region at present. We, Asia-Europe Container Trade Cargo Movements however, plan to proactively disclose these (million TEU) 15 Outbound voyage and other quantifi- Inbound voyage able measures of service performance 10 in our containership operations as KPIs

5 common all over the world. This shows Source: Drewry, including how committed we Mediterranean cargo 0 07 08 09 10 11 are to improving our service quality.

46 RISING ABOVE ADVERSITY Mitsui O.S.K. Lines FERRY & DOMESTIC TRANSPORT

MASAHIRO TANABE The ferry SUNFLOWER PEARL Managing Executive Officer (Kobe)

Fiscal 2011 in Review spots. This service was well received. We also ferries are partly used, driving through the Over the past few years, the ferry division has implemented a plan to promote the conve- night will not be necessary, lessening the cut costs and rationalized operations on the nience of ferries, called “Dangan Ferry.” This physical burden on truck drivers. If we can Western Japan route (Kansai–Kyushu). As a included a service whereby passengers stayed promote the safety, convenience and reliability culmination of these actions, we integrated two nights on the ferry but no nights on land. of ferry services again to land transportation two companies in October 2011, The The round trip was made while passengers companies, we can raise the presence of Diamond Ferry Co., Ltd. and Kansai Kisen were sleeping, allowing them to use the day- ferries as a domestic transport mode. Kaisha, to form Ferry Sunflower Ltd. Mean- light hours for business or pleasure. Various factors create concerns about the while, on the Eastern Japan route (Kita-kanto– Our domestic transport businesses per- outlook for passenger numbers. These include Hokkaido), where profitability has been good, formed strongly on the back of increased the slow return of overseas tour groups, the we had to call into Tokyo Port as an alternative demand for heavy-oil tankers, the result of start of the Kyushu Shinkansen (Bullet train), port for roughly three months due to damage power companies diversifying fuel supply and the arrival of low-cost carriers (LCCs) in to Oarai Port, the mother port on the Kita- sources after the Great East Japan Japan’s airline industry. Nevertheless, we will Kanto side of this route, sustained in the Earthquake caused the stoppage of opera- continue working on increasing passenger March 2011 Great East Japan Earthquake. tions at nuclear power plants. On the other numbers by raising customer satisfaction, which This resulted in higher fuel and other addi- hand, mainstay steel product cargo dwin- will entail refurbishing ferry interiors, improving tional costs since the distance of a voyage dled, reflecting a lackluster domestic steel- the quality of food services, and enhancing became longer and the number of voyages making industry. service staff training. In regard to service per- dropped. Profitability took a hit because we sonnel in particular, we will train staff on MOL were unable to charge additional fares. Looking Ahead Group cruise ships, so as to provide sophisti- Cargo temporarily increased in the imme- The Great East Japan Earthquake has cated services of that level on ferries as well. diate aftermath of the Great East Japan focused attention on the importance of ferry In the domestic coastal shipping business, Earthquake as relief supplies such as food transport in an emergency. But we believe we project firm earnings growth, based on and water were moved from western to we must widely communicate to the public forecasts for increased heavy-oil transport to eastern Japan. Overall, however, cargo the high productivity of ferries as a mode of power companies and a recovery in crude declined slightly. We believe that we will transport. In the case of truck transport, if steel production in Japan. begin to see an increase in seaborne trans- port volume in line with recovery and recon- struction in fiscal 2012. Passenger numbers remained sluggish, with the disaster negatively affecting domestic consumer sentiment and foreign passengers on group tours dropping. In fiscal 2011, in the hope that people would rediscover the beauty of the Seto Inland Sea route, we offered “Revival of Daytime Seto Inland Sea Route,” daytime services for cruising scenic tourist The ferry SUNFLOWER COBALT passes under Akashi Ohashi Bridge

Annual Report 2012 RISING ABOVE ADVERSITY 47 ASSOCIATED BUSINESSES

MASAHIRO TANABE The tugboat KAMIYA at work for the containership MOL MARVEL The cruise ship NIPPON MARU Managing Executive Officer (Cai Mep Port, Vietnam)

Fiscal 2011 in Review Daibiru also announced “Daibiru-3D” Proj- Looking Ahead The leased office market in Japan in fiscal ect Phase-II, a new medium-term manage- In the real estate business, Daibiru 2011 saw increased demand for buildings ment plan as a growth strategy. As part of Honkan and New Shin Daibiru (provisional with strong aseismic performance and this plan, Daibiru acquired “SAIGON name) will be completed in February 2013 emergency facilities in the aftermath of the TOWER” in Ho Chi Minh City, Vietnam, in and in the spring of 2015, respectively. Great East Japan Earthquake. Notwithstand- January 2012. This is the first instance of Daibiru will continue to attract new tenants ing, vacancy levels remained high and rents the acquisition of an existing office building to maintain stable earnings. It will also also remained weak. Daibiru Corporation, our by a Japanese company in Vietnam. Mean- actively invest in prime properties in its core company in the real estate business, while, Daibiru acquired “CLARA overseas business, where it has built a operates a large number of high-quality SAGINUMA,” a nursing home property, in beachhead in Vietnam. properties in prime locations, which enabled Japan in December 2011, beginning a In our cruise ship business, regular it to once again deliver solid earnings. While business to accommodate new demand customers are returning as the mood of no new buildings were opened in fiscal spawned by Japan’s aging society. self-restraint evident after the Great East 2011, Daibiru focused on attracting tenants In the cruise ship business, we faced an Japan Earthquake dissipates. We expect to buildings that began operations in fiscal extremely challenging environment created people to re-discover the value of cruises 2010 and did splendidly in this respect. by the psychological impact of the Great as a meaningful use of time and money. East Japan Earthquake, which caused We have been working to further improve people to give up luxury travel. cruises and on-board event planning and Our tugboat business operates 39 boats design, based on deeper analysis of regu- in Japan and 15 boats overseas. In 2010, lar customers’ needs and requirements at we launched a business with two high- each calling port. For example, we have powered tugboats in Vietnam. In the first held concerts on-board cruise ships by half of fiscal 2011, we faced a decline in inviting famous artists for a certain cross port calls by car carriers. The second half of section of passenger since fiscal 2011. fiscal 2011, however, saw a recovery of car In the tugboat business, we will leverage carriers’ port calls and increased port calls our world-class skills and expertise to by oil tankers and LNG carriers as power develop this business overseas, focusing companies in Japan procured fuel for power on Asia. generation. This second-half upturn drove a large increase in tugboat call-outs, which led to higher earnings.

SAIGON TOWER (Ho Chi Minh City, Vietnam)

48 RISING ABOVE ADVERSITY Mitsui O.S.K. Lines