MOL at a Glance

The following is a summary of MOL’s business activities based on the busi- ness segments that were adopted beginning in the fiscal year that ended in March 2005. Performance (¥ billions)

Bulkships 800 160

600 120

400 80

200 40

0 05/3 06/3 07/3 0 Revenues (left scale) Operating income (right scale)

Containerships 600 60 500 50

400 40

300 30

200 20

100 10

0 0

05/3 06/3 07/3 –10 Revenues (left scale) Operating income (loss) (right scale)

Logistics 80 2.0

60 1.5

40 1.0

20 0.5

0 05/3 06/3 07/3 0.0 Revenues (left scale) Operating income (right scale)

Ferry & 60 1.5 Domestic 40 1.0

20 0.5

0 05/3 06/3 07/3 0.0

Revenues (left scale) Operating income (right scale)

Associated 100 20

Businesses 75 15

50 10

25 5

0 05/3 06/3 07/3 0

Revenues (left scale) Operating income (right scale)

Others 8 8

6 6

4 4

2 2

0 05/3 06/3 07/3 0

Revenues (left scale) Operating income (right scale)

Please see page 73 for sales and operating income figures.

26 Annual Report 2007 Business Description Sales Breakdown by Segments

With a fleet of 336 vessels, MOL is the world’s largest operator of dry bulkers, which transport iron ore, coking and steaming coal, wood chips, grain, and other cargo. MOL is also a leader in energy transport markets. A total of 162 tankers carry crude oil, refined products, chemicals, 50% and LPG, and MOL plays a central role in the LNG carrier market, participating in projects with Dry Bulkers 23% a total of 58 vessels. In addition, operating a core fleet of 95 car carriers, MOL provides vehicle Tankers 11% transport services of the highest quality and has earned a reputation for reliability. This segment, LNG Carriers 4% which maintains a balance between medium- to long-term contracts and short-term contracts, Car Carriers 12% is playing a major role in MOL’s earnings growth.

MOL has a fleet of 109 containerships and a well-balanced service network that links all of the world’s major regions, including east-west routes as well as north-south and intra-Asia routes. With this global network, MOL can meet transportation needs anywhere in the world. In addi- 36% tion, MOL, APL, and Hyundai Merchant Marine make up The New World Alliance (TNWA), which covers 101 containerships. The combination of an extensive global network and a highly competitive cost structure has reinforced MOL’s position as one of the world’s leading containership operators. This segment also includes container terminal operations in Japan, the U.S., and Thailand.

The primary goal of this segment is to maximize synergies with other MOL business segments. To that end, logistics operations use a “market-in” approach to offer services that precisely match the needs of customers. Backed by the MOL brand, the segment is recording steady 4% growth. With core operations comprising strategic investments in China and the ocean consoli- dation business, the segment is providing optimal logistics solutions to meet customer needs for high-value-added services. An alliance with Kintetsu World Express, Inc., strengthens MOL’s ability to be a one-stop source of sea and air freight services.

With an extensive domestic service network, this segment offers a variety of high-quality transpor- tation services. In recent years, a solid earnings structure has been established through unified operating and sales activities among Group companies as well as through optimized scheduling. In 3% addition, MOL services are attracting attention as a model for the Japanese government’s modal shift policy, which is aimed at protecting the environment. As Japan’s largest ferry operator, the MOL Group is positioned to reap significant benefits from anticipated growth in demand. This segment also includes domestic transport of bulk cargoes, such as coal, steel, and salt.

The main activities in this segment are the office and residential building leasing operations of Daibiru Corporation and one of the largest tugboat businesses in Japan. Other businesses include marine consulting, maritime engineering, trading, and temporary staffing. Almost all of the 6% segment’s activities are in fields related to ocean transport. The segment also operates a cruise ship business that includes the Nippon Maru.

The activities of this segment include ship operations, chartering, ship management, and finance. Most of these activities involve the provision of administrative functions for the MOL Group. 1%

Annual Report 2007 27 Overview of Operations —Progress in MOL STEP and Strategies of MOL ADVANCE

Bulkships Dry Bulkers Saburo Koide Executive Vice President

Substantial Contribution to December 2003, we had ordered 30 Cape- Earnings under MOL STEP size bulkers to be delivered from 2004 to the In the fiscal year ended March 2004, which first half of 2007. Shortly thereafter, demand was the first year of MOL STEP, the bulkships began to grow at a pace exceeding expecta- segment* recorded ordinary income of ¥61.6 tions, and with vessels incurring demurrage, billion, and by the final year of the plan, a temporary capacity shortage developed. We ended March 2007, the segment’s ordinary moved aggressively to meet customer demand, income had risen to ¥163.5 billion. Dry bulk- taking steps to procure about 20 vessels on er operations contributed a substantial por- medium-term contracts of three to five years. tion of that increase—which exceeded ¥100.0 As a result, with a series of newbuilds joining billion. The dry bulker division also registered our fleet, we were able to conclude new The coal and iron ore carrier strong growth in revenues, which increased medium-to-long-term contracts with custom- Baosteel Elevation more than 1.7-fold over the three years cov- ers in Japan, China, Europe and other mar- In general cargo bulker operations, we ered by MOL STEP. kets while operating highly cost-competitive carry a wide range of cargo in Panamax and

* The bulkships segment has four divisions: dry bulkers, vessels on the spot market in areas with strong Handy vessels. This field has also recently tankers, LNG carriers, and car carriers. demand. In this way, we were able to take full seen notable growth in demand and strong, As is well known, a key factor behind this advantage of the favorable market conditions. stable market conditions. Over the course of performance was strong demand for iron ore By expanding our fleet of iron ore and MOL STEP, we worked to procure newly built in China. With infrastructure projects actively coking coal carriers from about 110 vessels box-shaped Handy bulkers designed for trans- under way throughout the country, China’s at the end of March 2004 to about 130 at the porting steel products. Consequently, we were crude steel production has increased, and, end of March 2007, we have further increased able to create highly profitable around-the- as a result, imports of iron ore have soared, the flexibility of our fleet of these vessels, world routes that follow shipments of steel rising from 146 million tons in 2003 to 326 which is the largest in the world. Currently, products from Asia and then Europe with million tons in 2006. At 60 million tons, the about 40% of our iron ore and coking coal shipments of copper ore and other products average annual increase in imports over this carriers operate on long-term contracts, 30% from South America to Asia. This is, however, period was enough to require 50 to 60 new on medium-term contracts, and 30% on spot simply one of many vessel allocation patterns. Capesize bulkers each year. rates. This balanced portfolio enables us to In the fiscal year ended March 2007, Nonetheless, those benefits of meeting control the influence of short-term market market conditions declined at one point, and that demand were only available to those who fluctuations and generate a high level of sta- we took that opportunity to use vessels on moved aggressively. Initially, many consid- ble earnings year after year. medium-term charters to meet rising demand ered the increase in demand to be nothing more than a temporary spike. And in fact, market conditions did undergo fluctuations. Consolidated However, looking back over the past three Revenues Breakdown Subsidiary (Mitsui O.S.K. Kinkai Ltd.) (Results in FY2006) years, market conditions never returned to 5% Iron Ore and Coal % their pre-2003 levels, and recent trends in Steaming Coal 53 9% the futures market indicate a strong consen- Wood Chip sus that market conditions will remain stable 8% at a high level at least through 2010. General Bulk MOL was the first company to anticipate 25% the strong growth in demand for the raw materials used in steel production, and by

28 Annual Report 2007 Masafumi Yasuoka Managing Executive Officer

in other areas, such as coal for China, which Import area-wise (million tons) has become a coal-importing country, and World Iron Ore 800 cement for the U.S. These initiatives made a Seaborne Trade contribution to the higher earnings in the dry 600 bulker division. MOL equity method affiliate Gearbulk 400 Holding Ltd. has the world’s largest fleet of Others China open-hatch gantry-craned bulkers, which are Korea 200 Taiwan used for transporting such cargo as pulp and Japan 0 aluminum ingots. Gearbulk Holding has Source: Clarkson 9596 97 98 99 00 01 02 03 04 05 06 recorded higher profits accompanying growth of long-distance transport, such as shipments vessels to 100 by March 2010. As shown in developing country typically records growth in of pulp from Chile to China. In dedicated bulk- the accompanying table, the distinctive fea- demand for iron ore and coal, followed by ers, which carry steaming coal and wood chips, tures of our fleet include not only its scale but foodstuffs and feed, and then by minor bulk we have expanded our fleet and generated also the range of bulker types that it includes. cargoes, such as nonferrous metals and con- stable earnings through long-term contracts. Our fleet expansion plans are based on struction materials. One example of that pat- At the same time, we have placed orders for thorough market research. We look carefully tern is the rapid growth in the long-distance additional vessels to meet future demand. at such factors as where cargo will originate shipment of soybeans from Brazil to China. In and where it will be carried, what types of addition to the BRICs, the so-called Next 11, Ready for Further Growth ships will be needed to carry it, and what types including Vietnam and Turkey, will also have under MOL ADVANCE of vessels will be in short supply. Because the an influence on global ocean shipping. Coinciding with the release of MOL ADVANCE, expansion of our fleet is based on this type of The second key trend is the influence of we also announced plans to expand our fleet thorough research, we have the ability to pro- domestic shipping. Currently, international of iron ore and coking coal carriers and other vide large numbers of various types of ships. shipments of dry bulk cargoes total about 2.7 bulkers. We will increase the number of iron Along with safe operation, that ability is the billion tons a year, but according to MOL ore and coking coal carriers from the current aspect of service quality for which customers research, domestic shipments in China alone level of 130 vessels to 150 by March 2010, have the greatest need, and under MOL total about 300 million tons a year, and that and by March 2012 the fleet will have reached ADVANCE it will be the key focus of our efforts amount is expected to reach 1.0 billion tons 160 to 170 ships. We will expand our fleet of to achieve growth with enhanced quality. a year by 2012. A similar trend can be seen other bulkers from the current level of 80 The dry bulker division is carefully track- in India and . In newly industrializing ing three key trends. First, newly industrializ- ing economies continue to record strong growth. In 2007, there are no signs of a slowdown in China’s imports of iron ore, while India has begun to cut back on exports of iron ore on account of its own economic growth. As a result, there is growing reliance on shipments from distant markets, such as Brazil. Also, the increase in shipments is not limited to steel- related products. As was the case with Japan in its period of rapid economic growth, a The coal carrier The handy bulker Hanabusa Pacific Elfin

Annual Report 2007 29 However, customers want shipping compa- Dry Bulkers Age Profile (As of March 2007) Age No. of ships nies that can meet high levels of demand, Portion and they are prepared to pay reasonable prices Handy-bulker Handymax (10-39,000dwt 2,754 ships) (40-59,000dwt 1,464 ships) for vessel types that enable efficient transport. We have already signed long-term contracts

0-14 25+ 0-14 25+ for half of the 44 iron ore and coking coal 849 1,112 961 122 carriers that we will introduce from April 2007 31% 41% 66% 8% to the first half of 2012, and we expect that 15-19 figure to eventually increase to 60%. General 121 20-24 20-24 15-19 270 cargo bulkers are typically operated on the 4% 672 111 18% spot market. For this category, we charter 24% 8% vessels on contracts of about five years with options to extend, and sometimes with the Panamax Capesize condition that charter fees decrease in later (60-99,000dwt 1,365 ships) (100,000dwt 688 ships) years. In this way, we stabilize profits in prep- aration for market rate fluctuations. 0-14 0-14 25+ 25+ 906 452 58 By implementing these types of aggres- 179 67% 66% 8% sive yet carefully thought-out measures, MOL’s 13% 20-24 dry bulker operations will be able to make a 20-24 89 substantial contribution to higher revenues 15-19 15-19 178 102 89 13% and profits in the bulkships segment in the 13% 7% 13% current fiscal year, ending March 2008, and to continue to generate a high level of profits Source: Clarkson in subsequent years, even if market condi- tions weaken to some extent. countries with domestic markets extending fleet, will be more than 25 years old. In over vast geographic areas, demand for addition, of about 2,750 Handy bulkers cur- domestic shipping has the potential to tighten rently in operation, more than 1,100 are more the demand-supply balance for dry bulker than 25 years old. This is one reason why operations in the years ahead. MOL believes that the tight demand-supply The third key trend is restrictions on the situation will not be significantly alleviated use of ships. Since April 2006, Australian and that there will likely be a shortage of mining companies have refused to use ships capacity, especially for Handy bulkers, even more than 25 years old, and this factor has if the construction of dry bulkers increases. contributed to the ongoing tight market con- On the other hand, high ship prices are ditions. This trend has spread to other coun- often mentioned as a risk factor. Capesize tries, with China setting an upper limit of 33 bulkers, which cost about $35 million for years. Within five years, about 150 Capesize orders placed in 2001, would cost about $80 The woodchip carrier Chuetsu Spirit bulkers, or more than 21% of the worldwide million if ordered today for delivery in 2012.

Fleet Expansion Plan Launching period April 2007 to early 2012 Iron Ore and Type No. of Coking Coal Carriers/ (1,000 dwt) vessels Uses/special features Iron ore and Capesize 300 5 General Bulk Carriers Ore carriers for use on long-term contracts. Efficient transport over long distances. coking coal 230 6 carriers 200 6 Large-scale Capesize bulker for long-term contract. 170 15 Standard Capesize vessels. Strong demand for spot market operation. 110 8Vessels operated on long-term contracts. Meet specifications of destination ports 80 4 Standard Over-Panamax vessels. COA and spot market demand. Total 44

General bulk Panamax 78-82 5 Transport of grain, etc. carriers The following vessel types have cranes. They can be used in ports without unloading facilities.

Handy max 52-58 23 Transport of a wide range of cargo, such as coal, salt, cement, and grain 50 12 Box-shaped vessels. Excellent design for transport of steel products.

Small handy 32-37 15 Box-shaped vessels. Transport of steel products, cement, grain, ore, etc. 24-35 5 Transport of cement, grain, ore, etc. Total 60

30 Annual Report 2007 Bulkships Tankers Masashi Seki of MOL STEP, despite the fact that VLCC Managing Executive Officer worldscale rates were about the same. This result demonstrates the success of the fleet expansion and diversification initiatives that we implemented over the course of MOL STEP.

Targeting Sustained Growth under MOL ADVANCE To achieve growth with enhanced quality, we will begin the three years of MOL ADVANCE by Well-Timed Fleet under long-term contracts, namely 11 crude further bolstering our measures for safe oper- Expansion Supports oil tankers, 3 methanol carriers, and an LPG ation. We recognize that to obtain orders, we Strong Profit Growth carrier. As a result, we achieved the portfolio need to maintain a position of leadership in Under MOL STEP composition outlined in MOL STEP, realizing ship management and to meet the specific We made strong progress over the course of a fifty-fifty balance between long-term, sta- needs of each individual customer. In addition, the MOL STEP plan, with the cumulative total ble earnings and attractive profit opportuni- we plan to replace single-hull ships with new of our recurring profit over the past three ties on the short-term market. Subsidiary vessels and complete the transition to double- years exceeding the plan’s original target level Tokyo Marine, which added 16 new ships to hull tankers in advance of the 2010 deadline by more than 100%. This performance is the its fleet of chemical tankers, was another that has been determined by international result of an early lead MOL took in making source of earnings growth. These vessels, agreement. This accelerated transition will have aggressive investments in tankers since 2002, which require advanced operational tech- a temporary adverse effect on our profits, but which we were able to use to meet soaring nology and a high level of expertise, are a we believe it is an indispensable step in build- demand. Today, MOL has one of the largest sector in which the MOL Group maintains a ing a foundation for further growth. and most diversified tanker fleets in the world. strong competitive advantage. On this foundation, we will continue to During the three years covered by MOL In the fiscal year ended March 2007, bolster our fleet, increasing both its scope and STEP, we added 53 vessels to our fleet, MOL continued to enhance its tanker fleet. its size. We plan to add 60 vessels over the including 22 product tankers that we use to We took delivery of 19 vessels, including 8 course of MOL ADVANCE, for a total of 200 take advantage of growing demand in the product tankers, all of which were ordered at tankers by March 2010. In the VLCC category, spot market. We also added vessels operated favorable prices, and 3 new VLCC tankers. As the customer preference for double-hull ves- of March 31, 2007, 91% of our tankers fea- sels has strengthened, and due to the retire- tured double-hull construction. ment of single-hull vessels, supply should In the second half of the past fiscal year, remain tight and market conditions will likely market conditions turned sluggish due to warm be strong. With 8 newly built vessels that we winter weather. For the full year, the average will operate on long-term contracts, our VLCC market rates for crude oil and refined petro- operations will continue to provide stable earn- leum product tankers were down year on ings. Also, with refineries coming on-line in year. As a result, our profits in the fiscal year Middle Eastern oil-producing countries, we ended March 2007 were down slightly from anticipate higher demand for the long-distance the previous fiscal year. However, our profits transport of refined products and chemicals in the past year were nearly double the level from these markets. Accordingly, we will build recorded in the fiscal year prior to the start 21 new product tankers and 19 chemical tank- VLCC Kasagisan ers. Moreover, 7 new VLGCs will be used to meet new demand for LPG transport, as Consolidated described in the feature section (page 34–35) Revenues Breakdown of this annual report. These will be the first (Results in FY2006) Chemical (Tokyo Marine Co., Ltd.) VLGCs that MOL operates on the spot market. 28% Crude Oil With the stronger fleet that will result from 33% these measures, the tanker division will be Methanol/LPG 11% able to contribute to MOL’s earnings growth, and, by the conclusion of MOL ADVANCE, we Product 28% expect the division’s profits to substantially exceed the level achieved under MOL STEP.

Annual Report 2007 31 Bulkships LNG Carriers Yoichi Aoki MOL is a pioneer in LNG transport, and one Senior Managing Executive Officer of our key competitive advantages is the num- ber of vessels in our fleet that will be completing 20 to 25 year contracts in the years ahead. LNG carriers can be used for up to 40 years if they are properly maintained, and a specialized survey by a ship classification society, known as the condition assessment program (CAP), has re- cently been developed. We can have the clients continue to use the vessels that have completed Steady Expansion Under signing of long-term contracts with SUEZ LNG the long-term contracts, and we can also use MOL STEP Trading for two shuttle & regasification ves- them in combination with new vessels to serve Since MOL commenced operation of its first sels (SRVs) that will be specially designed to new projects. In this way, we can provide the LNG tanker in 1983, the company has steadily deliver LNG to a terminal located offshore clients with the solution to alleviate the burden expanded its LNG business. Today, MOL has Boston, in the U.S. state of Massachusetts. of initial investments. Also, the spot market is the largest LNG transport business in the world. expected to take on a growing role, reaching The LNG transport business is based to a Maintaining Our Leading about 20% of the total market and recording large extent on long-term contracts, and as a Position under MOL solid growth in fiscal 2010 and thereafter. result we enjoy a high degree of certainty in ADVANCE In the bidding process used for new con- our medium-term planning. Under MOL STEP, The global LNG market holds substantial po- tracts, there has been a renewed emphasis on we achieved our objectives and fulfilled our tential for MOL. Demand is expected to grow not just price but also quality of service, especial- key role in MOL’s strategy for achieving stable further, with global LNG consumption rising ly in ship management. LNG markets are char- growth. MOL has an interest in 17 of the 70 to 250 million tons by 2010 and 400 million acterized by ongoing technological progress, LNG carriers that have been launched world- tons by 2020. such as the onboard regasification of LNG in the wide since April 2004, and we had a fleet of With the world’s largest LNG carrier fleet open ocean. As we take steps to meet the 58 vessels in operation at the end of March and a proven record for safety, reliability, and growing demand for LNG in the years ahead, 2007. Profits were up year on year. efficiency, MOL stands ready to meet rising we will strive to secure growth with enhanced Over the three years of MOL STEP, we demand for marine transport of LNG. Over the quality by offering value-added service based signed contracts for 11 projects and 23 ves- course of MOL ADVANCE, we will expand our on an unyielding commitment to safety. sels. In both 2004 and 2005, orders were fleet from 58 LNG carriers to 80, maintaining placed for 50 to 60 LNG carriers worldwide. our share of about one quarter of the worldwide A substantial portion of those were specula- fleet, which is expected to total 350 vessels. tive orders placed by new market entrants, Overall, we anticipate growth in shipments and as a result competition to secure con- to North America and Europe via the Atlantic tracts intensified. In 2006, speculative orders Ocean and Mediterranean Sea. In North decreased, and the total number of vessels America, LNG’s advantages will drive growth ordered declined to about 30. in its market share, and we foresee strong During the past fiscal year, we concluded demand. In the Pacific, and Sakhalin an agreement for the project that will employ will be key points of origin for shipments to the a revolutionary new technology. In March west coast of North America, and Asia will LNG carrier 2007, MOL and Hoegh LNG confirmed the maintain its position as a major destination. IBRI LNG

LNG Demand MOL LNG Fleet “One-quarter Forecast Japan Korea Taiwan India China Belgium France Greece (1/4) of the World LNG fleet” (million tons) Portugal Spain Turkey UK USA Others MOL 80 2006 vessels

2010

2015 Others 270 2020 vessels Source: The Institute of Energy 050100 150 200 250 300 350 400 Economics, Japan, etc.

World LNG fleet as of April 2007; 350 vessels including the newbuildings to be delivered through early 2010. 32 Annual Report 2007 Bulkships Car Carriers Toshitaka Shishido include such countries as South America, Managing Executive Officer South , Thailand, and India. Exports from China are also likely to surge. In 2005, MOL handled the first export ship- ment of cars produced in China by a Japa- nese automaker. In addition, the market for domestic car transport is expanding, and through joint ventures with local companies, MOL is already handling car shipments on domestic coastal routes. With this strong, Solid Growth in Cargo Our continued focus on improving quality comprehensive market presence, MOL is well Volumes Under MOL STEP and efficiency—and our commitment to pro- positioned to meet growth in demand for MOL is one of the world’s premier operators viding service that is reliable as well as rapid exports from China. of car carriers. In the three-year period cov- and smooth—paid off with steady gains in ered by the MOL STEP plan, we continued to performance. In addition to services that all make steady gains in car carrier operations. customers require—such as the provision of Shipments from Asian markets, principally shipping capacity to meet demand and pre- Japan and South Korea, recorded especially venting any damage to cargo—we also offer strong growth. Over the past three years, distinctive value-added services, such as exports from Japan and South Korea rose so-called “hot delivery,” which leverages our 34%, while the number of vehicles carried by ability to provide detailed information about MOL increased 38%. In 2006, global exports where vehicles are loaded on a car carrier. totaled 12 million completed vehicles, of which Over the course of MOL STEP, the company’s exports from Japan and South Korea account- car carrier operations recorded steady The Car carrier Bravery Ace ed for 70%. Shipments from emerging auto- increases in cargo volumes and sales. mobile production regions, such as Latin We expect global shipping volumes to America and South Africa, were also strong. Positioned to Achieve remain strong and the shortage of capacity MOL ADVANCE Targets to continue. We therefore plan to add 25 car To achieve growth with enhanced quality in carriers during MOL ADVANCE, including terms of safety and added value, we will high-capacity ships that can accommodate take steps under MOL ADVANCE to further 6,400 vehicles. Our large fleet enables us to improve our service so as to secure the provide the flexibility and reliability that ongoing support of customers. automakers demand, and our commitment The cost of manufacturing cars in indus- to environmentally friendly shipping opera- trialized countries will continue to increase, tions is an added advantage in securing while the cost of ocean shipping for cars will business. Overall, throughout the course of remain low in comparison. As a result, we MOL ADVANCE we will focus on continually anticipate growing demand for car carrier enhancing quality and customer service on The car carrier Liberty Ace services on routes extending outward from a foundation of safety in both ship opera- cost-competitive production hubs, which will tions and cargo handling. A key factor behind the higher shipment volumes was substantial growth in exports of -efficient Japanese cars in an environ- World Car (thousand units) ment characterized by rising gasoline prices. Carrier Trade 12,000 In addition, Middle Eastern countries, where economies were buoyed by higher oil prices, 9,000 were a source of growing demand for cars. In a market characterized by an ongoing 6,000 shortage of shipping capacity, MOL contin- Others ex Korea 3,000 ued to bolster its fleet. We introduced 13 ex Japan high-capacity car carriers over the past three (MOL internal calculation: excluding CKD) 0 years, including 3 in the past fiscal year. 9596 97 98 99 00 01 02 03 04 05 06

Annual Report 2007 33 Special Feature in Overview of Operations MOL’s Tanker Operations— Leading the Way Toward Growth with Enhanced Quality

Under MOL ADVANCE, we use four key words to summarize our approach to achieving growth with enhanced quality— Safety, Growth, Global, and Group. In this section, we will use the Tanker Division as an example of those key words in action.

Safety— this type of management system to further markets. Moreover, in the case of Reinforce and Ensure enhance its ability to meet the high standards products, the optimal production site—as Safe Operation of the oil companies. Four months later, the measured by cost—changes frequently, and The international oil majors apply their own VLCC Bright Artemis was involved in an accident. for that reason, we also anticipated demand standards for the approval of vessels and MOL has responded to the accidents that for the two-way transport of cargo. We believed operators in a process known as vetting. occurred in the past year by further tightening that if global oil consumption expanded at a Captain Naoki Kamono, of MOL Tankship its safety standard specifications on a rate of 2% a year, then the ocean transport Management Ltd., described the background. companywide basis. These specifications of oil would record growth of 3%, and the “Tankers carry liquid cargo, so spills pollute incorporate every conceivable standard for ocean transport of petroleum products would the marine environment. And at the discharge the safe operation of tankers, and through the grow at an even higher rate. And with envi- port, the ship’s power is used to transfer the implementation of these standards, our tanker ronmental considerations taking on a growing cargo to the onshore storage tanks. That operations will be clearly differentiated from prominence—there have been no new refin- means that safe transport and delivery de- those of our competitors. eries built in the United States since 1976— mand meticulous ship management capabili- Through these types of safety policies and we anticipated ongoing growth in U.S. imports ties and seafarers with advanced skills, both initiatives, we will gain a strong competitive of petroleum products. at levels that satisfy the requirements of the advantage and reinforce our position as a consignee. The ship inspection checklist from first-rate company that can meet the needs the OCIMF1 includes 800 items. And in 2004, of the world’s oil companies. the international oil majors introduced a 1. Oil Companies International Marine Forum scheme known as TMSA2 and clarified their 2. Tanker Management and Self-Assessment policy of only signing long-term contracts with highly rated companies. Under this scheme, Growth— Kazunori Nakai General Manager, Tanker Division ship management companies answer ques- Identify Growth Fields and However, product tankers are operated tions regarding 250 items. This process shines Build the Optimal Portfolio almost exclusively on the spot market, while a spotlight on the level of their ship manage- to Serve Them MOL emphasizes sustained growth. Nonethe- ment knowledge and the extent to which they Currently, product tankers are playing the lead less, we took several major steps to expand have translated that knowledge into action.” role in supporting growth in MOL’s Tanker our fleet of product tankers. The reason was Division. In 2002, we decided to make a major explained by Kazunori Nakai, the current head increase in our fleet, which has grown from of the Tanker Division and a person who played its previous size of about 15 vessels to its a key role in the growth of MOL’s product current scale of 43. We plan to have 70 tankers tanker business. “As we accumulated mar- in operation by 2011. keting and operational experience with prod- The factors behind the decision to expand uct tankers, we discovered ways to generate our product tanker fleet extend back to the higher revenues than other companies and to Inspection of the crude oil tanker Pacific Alliance end of the cold war. As borders began to fall, stabilize profits, even in the spot market. By In April 2006, MOL established MOL the division of labor extended across the world expanding our fleet and extending our opera- Tankship Management to centralize the man- and the production of a growing range of tions around the world, we can utilize those agement of tanker operations and facilitate goods was shifted accordingly. MOL antici- techniques even more effectively.” close communication with the Tanker Division. pated the emergence of a similar trend in the In addition to these market-sensitive Under the new ship management structure, markets for petroleum and petroleum prod- operations, the Tanker Division also gener- policies are directly formulated and imple- ucts, with production facilities situated in the ates stable earnings through the transport of mented with head office authority. The Tanker optimal locations, from which the products crude oil, principally with VLCCs. By offering Division took the initiative in implementing would be transported to their destination complete services, including high-level ship

34 Annual Report 2007 See next page for continuation of overview of operations management, we have built strong, long-term In newly industrializing economies, China- The commencement of a single project will relationships with oil companies not only in related business will continue to play an im- result in the shipment of a variety of cargo, Japan but also in many other countries around portant role in our operations. For example, including crude oil, petroleum products, the world. By 2009, we plan to raise the VLCC MOL was the first foreign company to con- chemical products, LNG, and LPG, all of which long-term contract percentage from the cur- clude a middle term time charter contract in MOL can transport. Among energy shipping rent level of 80% to more than 90%, thereby China. Also, together with a major Chinese companies, MOL has staked out the best further strengthening the base of stable earn- shipping company, we have established a market position in the .” ings in our tanker operations. Moreover, joint venture VLCC operating company, which methanol carriers, which are operated exclu- has three vessels in operation. Moreover, sively on long-term contracts, provide another through another joint venture, MOL subsid- source of stable earnings. MOL was the first iary Tokyo Marine is playing a role in meeting company to identify the demand for these the growing demand for coastal transport of specialized vessels, and we currently have a chemical products in China. 50% share of the market. Yoshinori Shimizu (left), Senior Representative of In October 2006, MOL made an invest- MOL Middle East Headquarters in Dubai, U.A.E. ment in a new growth field. We placed orders for VLGCs, with capacities of around 80,000 Group— cubic meters, to transport LPG. We have Growth Driven by decided to expand the number of VLGCs that Groupwide Strengths we operate on the spot market to 10 by 2009. MOL owns 87% of consolidated subsidiary London team for product tanker operation Methanol and LPG Tanker Group Leader Tokyo Marine Co., Ltd, which is responsible Masahiko Okubo, who took the lead in driving In Latin America, Brazil has especially for the MOL Group’s chemical tanker opera- this project forward, said “currently, the scale strong potential for both import and export tions. Chemical tankers handle about 300 of the LPG market is about 50 million tons, trade, and as the first Japanese vessel opera- kinds of chemical products, and, like liners, but in the future, as new LNG projects in tor to conclude long-term VLCC contracts with they carry more than one type of cargo at a Qatar and other countries come onstream, Brazilian oil company , MOL is well time. As a result, the operation of chemical they will also produce LPG, which is an positioned to meet that demand. tankers requires an advanced level of special- associated gas, in quantities of at least 16 Together with Oman Shipping Company ized know-how. In entering this field, MOL million tons. As the scope of exporters diver- S.A.O.C, with which MOL has cultivated an chose to acquire Tokyo Marine—one of the sifies beyond Saudi Arabia to include other especially close relationship through LNG world’s big four chemical carrier operators— countries, the price will decline and demand transport operations, we have established joint in 1996. With support from MOL, Tokyo Marine will increase. At the same time, the structure venture companies that own LR1 and LR2 has aggressively expanded its fleet and in- of the market will likely shift from a reliance product tankers, a VLCC, and a VLGC. creased its earnings as the shift of production on transport on medium-to-long-term con- In April 2006, we opened the MOL Middle to the most competitive locations has spurred tracts to an emphasis on the spot market.” East Headquarters. The headquarters’ first growth in the transport of chemical products. In this way, MOL accurately forecasts senior representative, Yoshinori Shimizu, dis- We anticipate that Tokyo Marine will make an trends, identifies growth fields, and then care- cussed the presence of the MOL Group in the even stronger contribution to MOL’s consoli- fully assesses total risk, emphasizing a balance region. “As Middle Eastern nations launch a dated results in the future. on stable earnings and market-sensitive profits range of projects, they are becoming not only Growth driven by the expertise of Group as it expands its fleet. That is our strategy for producers of oil but also points of origin for companies—this is also a key part of MOL’s strat- achieving growth with enhanced quality. a variety of other products carried by tankers. egy for achieving growth with enhanced quality.

Global— Tanker Fleet (No. of ships) Accelerate Globalization Composition of 200 and Enhance Capabilities Major Companies in Emerging Markets 150 The Tanker Division has actively developed its operations in global markets for many years. Chemical tanker 100 LPG tanker We began to operate VLCCs to the United Methanol tanker States at an early stage. In product tanker Product tanker 50 Crude oil tanker operations, it is the broad scope of our net- Source: MOL internal calculation based on each company’s Home work, which extends around the world, that 0

Page (as of May 31, 2007) BW orm Iino OSG NYK MOL MOL T MISC eekay K Line supports our high earnings capacity. T Frontline Shipping Shipping (2010.3) (2007.3)

Annual Report 2007 35 Containerships Masakazu Yakushiji Executive Vice President

Proactively Dealing with performance is a result of the measures that Market Trends Under we have implemented since the 1990s to boost MOL STEP our cost competitiveness. One of the keys to Under MOL STEP, our original profit objective profitability in this market is container inven- in containership operations was a three-year tory control, in which MOL boasts distinctive cumulative total of ¥50.0 billion in ordinary expertise. When setting freight rates, we can income. We got off to an excellent start, and effectively use yield management techniques we reached that goal in the first year of the to make detailed estimates, helping us to plan. Accordingly, we established new MOL maintain our profitability and competitiveness. STEP Review objectives in 2005. Subsequent- As we anticipated, the market environ- The containership ly, however, our profits were adversely affect- ment was characterized by continued growth MOL Express ed by lower freight rates on European routes in global shipments. There had been concern and higher crude oil prices. about the so-called “2006 issue,” where the Demand was supported by the shift of produc- Freight rates on European routes declined launch of many large vessels—8,000TEU and tion to China, India, and other Asian markets by about 20% in the second half of the fiscal larger—would lead to excess capacity on as well as by the strong economic growth year ended March 2006, due principally to European routes in 2006. In the end, howev- recorded in former Eastern Bloc countries. the effects of industry mergers and acquisi- er, this problem did not materialize; the sup- Also, a “cascade down” effect resulted in many tions. This trend also led to lower rates on ply-demand balance was exceptionally tight, vessels being reallocated to North American North American routes. Moreover, with the and containerships were operating at full routes and to routes where demand was strong, price of crude oil spiraling upward, bunker capacity on European routes throughout 2006. including shipments to South America, the prices and the cost of inland transport in the United States reached unprecedented levels. Asia-North America (thousand TEU) (%) These conditions underscored the difficulty Container Trade: 25,000 100 of consistently achieving a high level of profits Supply-Demand Forecast 20,000 90 in the containership business. [Eastbound] Nonetheless, the cumulative total of 15,000 80 ordinary income generated under MOL STEP— ¥96.2 billion—substantially exceed- 10,000 70 ed the plan’s original objectives. In addition, Demand Supply 5,000 60 the ordinary income margin, at about 7%, Utilization Source: MOL estimate marked an important step forward. 0 0203 04 05 06 07e 08e 09e 50 It is important to note that in the past fiscal year, the market conditions were so Asia-Europe (thousand TEU) (%) difficult that nearly half of the world’s contain- Container Trade: 25,000 100 ership operators suffered losses. Despite these Supply-Demand Forecast 20,000 90 challenging conditions, however, we recorded [Westbound] an ordinary income of ¥3.2 billion, an indi- 15,000 80 cation of the underlying strength and flexibility 10,000 70 of our containership operations. Moreover, as Demand we expected, market conditions bottomed out Supply 5,000 60 and turned upward before our containership Utilization Source: MOL estimate 0 50 operations began to record losses overall. This 0203 04 05 06 07e 08e 09e

36 Annual Report 2007 Middle East and local routes in Asia. As a sales of ¥910 billion and ordinary income of MOL Containerships’ Capacity result, capacity did not increase as much as ¥30 billion in the final year of the plan. by Trades (Results in FY2006) some forecasters had anticipated. For the fiscal year ending March 2013, Intra-Asia Trade North America Over the past three years, we have we have set objectives of revenues of 23% Trade aggressively developed new routes, reinforc- ¥1,200.0 billion and ordinary income of ¥50.0 36% ing our service structure to meet needs stem- billion. This is not a projection of the level South America/ ming from the globalization of our customers of profits that we believe we can generate in Africa Trade and taking steps to diversify risk. In this way, peak market conditions. Rather, these are 15% Europe Trade we have established a position as a leading our objectives for profits on average that we 26% global containership operator. can record even in the face of ongoing fluc- In 2005, for example, we acquired rights tuations in market conditions and costs. to certain Europe-South Africa routes. We Global trade is expected to continue grow- have worked aggressively to expand other ing at about 10% a year, with the north-south vessels shifted to other routes. We will also north-south routes as well. In addition, intra- trades recording expansion of about 15% to expand medium-term charters. In this way, we Asia routes, centered on Vietnam, have also 20%. Because there is a strong market trend will continue to build a closely interwoven net- been a focus of our efforts. As a result, the toward fewer numbers of customers shipping work of routes linking various countries. As a number of loops in intra-Asia/Oceania ser- larger amounts of cargo, a large-scale fleet will result, our total capacity on all routes will vices has nearly doubled, from 19 three years be essential for us to provide reliable services increase by 67%. ago to 36. to those customers and enhance our cost Over the three years of MOL STEP, the competitiveness in the years ahead. Under market environment in containership opera- Positioned for Solid Gains MOL ADVANCE, we will add 22 large contain- tions changed at a dramatic pace, and at under MOL ADVANCE erships with capacities ranging from 5,100TEU times those changes exceeded our expecta- Under MOL ADVANCE, we will strive to steadily to 8,100TEU. The largest of these will be used tions. Nonetheless, container cargo has shown improve our earnings capacity through metic- on east-west routes, with certain medium-sized the highest rate of growth of any type of cargo. ulous customer service. We will aim to increase Our experience has demonstrated that exces- our market share on the east-west trades from sive declines in freight rates will be corrected 3.5% to 5% and to further expand our net- and that if we maintain a high level of com- work of north-south services and Asia servic- petitiveness, we can earn an appropriate return es. We anticipate a solid contribution to over periods of several years. Under MOL earnings from these routes, especially the ADVANCE, we will strive to further improve north-south trades. Natural resource export- the quality of our services and increase the ing regions, such as South America, are competitiveness of our cost structure in order benefiting from higher resource prices, and to continue to validate this approach to the Brazil will be an especially promising market. containership market. Our MOL ADVANCE objectives include net TraPac container terminal on the west coast of the U.S.A.

Logistics Masakazu Yakushiji the start of MOL STEP, we faced ongoing a solid understanding of customer needs and Executive Vice President challenges in establishing a profitable foun- then provide the optimal solutions to meet dation in logistics. We have made strong those needs, working together with the best progress under MOL STEP, however, turning partners if necessary. profitable in the year ended March 2005 and Our primary target is the ocean consol- earning ordinary income of ¥2.3 billion in the idation business (OCB), which is commonly past fiscal year. known as buyer’s consolidation. Our OCB This achievement reflects the success of operations have now reached an annual vol- the steps that we have taken to restructure ume of about 50,000 TEU, and we will con- unprofitable businesses and unify our logis- tinue working to expand the scale of these Continued Progress under tics activities under the MOL brand. It also operations to the level of the major logistics MOL STEP validates our approach to the logistics busi- companies. We are nearing the point where MOL’s logistics operations have the primary ness. Rather than making upfront capital these operations will start making a solid role of generating synergies with the compa- investments in logistics facilities and then pro- contribution to MOL’s earnings, and OCB is ny’s core marine transport businesses. Before viding them to customers, we seek to achieve generating substantial synergies with MOL’s

Annual Report 2007 37 container operations. Buyer’s consolidation at the point of origin and Cal Cartage providing cargo is said to account for about 60% to domestic services in the U.S. 70% of transpacific eastbound cargo, and Under MOL STEP, the development of air the information obtained through OCB oper- forwarding operations was assigned a top ations makes it easier to accurately forecast priority, on a par with OCB, as another means trends in the container business. of enhancing the synergies between our We made continued progress in the past logistics operations and our core marine fiscal year, including the start of consolida- transport operations. While we continue to MOL Logistics Group’s warehouse in Singapore tion services in China for the IKEA Group, grow MOL Logistics Co., Ltd. as a global lo- Europe’s leading mass merchandiser of fur- gistics provider in our group, we need to keep scale of our operations to an annual volume niture and interior goods. In addition to our up with the fast-growing airfreight market even of 200,000 TEU by 2009. One key to that know-how and our track record in China, our more steadily. For that purpose, in 2005, we growth will be the STARLINK cargo informa- ability to provide customers with detailed cargo forged a successful strategic alliance in air tion system, among the most advanced in the information services is highly regarded. forwarding with Kintetsu World Express, Inc. industry. STARLINK is an original MOL sys- MOL Consolidation Service Limited was (KWE). Through this alliance, we can offer tem for providing customers with real-time established in October 2006 as MOL’s first our customers the benefits of the global cargo information—at the stock-keeping unit wholly owned logistics subsidiary in China. network of KWE, which is the eighth largest (SKU) level—from production line to display This new company will be the linchpin of our air forwarder in the world. window. Linking STARLINK with customers’ services in China, which is posting substan- warehouse management systems enables tial growth as a point of origin for OCB cargo. Pursuing Synergies Under complete transfer inventory control. As a key step in that direction, in Novem- MOL ADVANCE Another key to growth in the scale of our ber 2006, we entered a tie-up with California Under MOL ADVANCE, logistics is positioned operations will be an expanded network in Cartage Company LLC (Cal Cartage), one of as a growth field, and we are targeting an China. To enhance our domestic network in the leading providers of logistics services in ordinary income margin of 5% and ordinary that market, we will build up the network of the U.S. Cal Cartage offers a wide range of income of ¥5.0 billion. For the first time, MOL Consolidation Services while bolstering services, including import trucking, warehous- logistics will be included in MOL’s base of our alliance with KWE. ing, deconsolidation, and regional delivery. Our stable earnings. Nonetheless, the key objec- To achieve quality with enhanced growth, tie-up enables us to provide seamless door-to- tive of our logistics operations will remain the we will maintain our focus on providing the door logistics solutions from Asia to the United same—generating synergies with MOL’s core highest-quality logistics solutions and will strive States, with MOL Consolidation Service and marine transport businesses. to meet the needs of customers by offering other regional companies handling operations In OCB, we are aiming to expand the the best service at competitive prices.

Ferry and Domestic Transport Takehiko Yamamoto Managing Executive Officer

Solid Progress Under restructuring measures. As a result, following Key factors in our turnaround included MOL STEP three years of losses, we have been consis- an overall increase in cargo volume—which Over the three years covered by MOL STEP, tently profitable since the fiscal year ended was partially attributable to the Japanese gov- ferry and domestic transport operations made March 2005, despite the fact that in the past ernment’s modal shift policy favoring environ- solid progress. Although we were adversely fiscal year, our annual bunker expenditures mentally friendly modes of transport—and affected by the unexpected rise in bunker pric- for ferry operations were up by ¥6.5 billion in customer acceptance of bunker surcharges. es, we successfully implemented a number of comparison with five years earlier.

38 Annual Report 2007 We have also had excellent results in high-speed ferry services on the Tokyo-To- season. The key to attracting more passen- consolidating unprofitable routes, merging op- makomai route due to declining profitability gers will be ongoing improvements in erations, and offering joint service. For exam- stemming from increased bunker costs. We customer service and improved fare manage- ple, we acquired the Oarai-Tomakomai expect these two measures to contribute nearly ment. Over the past two years, we replaced service, which we had operated jointly, and ¥1.0 billion to our bottom line. three of the existing ferries with well-equipped integrated it into the operations of MOL Ferry Over the three years of MOL STEP, a and modern ones, and in the fiscal year Co., Ltd. As a consequence, we have been strong performance was turned in by MOL ending March 2008 we will introduce two able to make major schedule changes, such Naiko, Ltd., which handles domestic trans- more new ferries. These ferries will also help as the late-night operation of so-called casual port of such cargo as coal, heavy oil, steel, us to attract more passengers. ferry services, where the only passengers are and salt. We believe that by drawing on syn- In 2007, we will basically complete the truck drivers who board the ferries with their ergies with MOL’s international marine trans- rebuilding of our route network with the vehicles. In addition, in March 2007 we ended port services, MOL Naiko will be able to expand implementation of two mergers among ferry its businesses to the other areas like domes- companies. As a result, we will consolidate tic transport of LNG. ferry operations, marketing, and management. MOL Ferry Co., Ltd., will be responsible for On Track to Achieve eastern Japan, and Ferry Sunflower—the sales MOL ADVANCE Targets organization jointly operated by The Diamond We are on track to achieve our profit goals Ferry Co., Ltd., and Kansai Kisen Kaisha—will under MOL ADVANCE, and we are confident be responsible for western Japan. With an that we will meet our objective of increasing emphasis on an optimal mix of roll-on/roll-off profits from ¥2.0 billion in the fiscal year (RO/RO), regular ferry, and casual ferry ser- ending March 2008 to ¥3.6 billion in the vices, we will continue striving to maintain fiscal year ending March 2010. consistent earnings and to achieve growth A major challenge will be increasing pas- with enhanced quality in ferry and domestic The ferry Sunflower Shiretoko senger numbers, which vary considerably by transport operations.

Associated Businesses Takehiko Yamamoto generating stable earnings. In Japan, a dra- In cruise ship operations, we have turned Managing Executive Officer matic increase in the number of ships enter- in strong performances for the past several ing ports is no longer anticipated. However, years. These results were attributable to cost we have focused on LNG ships, which are reductions, rationalization measures, and fa- increasing, and we are expanding our fleet vorable domestic economic conditions, as well of high-speed, powerful tugboats of leading- as an increase in affluent customers with time edge ship’s design equipped with fire-pre- for leisure activities, such as retired baby vention apparatus. boomers. With a focus on enhanced custom- er service, the Nippon Maru has had good Poised to Achieve results and recorded strong passenger num- Transformation to a MOL ADVANCE Targets bers. Under MOL ADVANCE, we will focus on Source of Stable Earnings In real estate, conditions in the office building further enhancing the position of our brand Under MOL STEP sector have been favorable in recent years. in the cruise ship market. In real estate operations, MOL made Daibiru Under MOL ADVANCE we will move forward Corporation a consolidated subsidiary in the with proactive rebuilding measures so that first year of MOL STEP. Acquiring a company Daibiru will keep a position of vantage in the with revenues of ¥26 billion and recurring profit market by rebuilding key properties. During of ¥9 billion in fiscal 2006 was a significant this period of rebuilding, profits will not record move for MOL, and Daibiru’s business model, substantial growth, but rather it will be a period which is not susceptible to fluctuations in oil of preparation for the next phase of growth. prices or foreign exchange rates, is making a Daibiru will take steps to become a compre- major contribution to MOL’s stable profits. hensive real estate company, including mov- MOL is one of the largest tugboat oper- ing into fee-based businesses, such as The cruise ship Nippon Maru ators in Japan, and our tugboat business is property and facility management.

Annual Report 2007 39