Japan Automakers Seen Boosting Shipping Lines Amid Slump: Freight Markets

Toyota Motor Corp. (7203) and Nissan Motor Co.’s efforts to make up production lost after Japan’s March 11 earthquake will benefit local shipping lines suffering from lower rates for hauling commodities and containers.

Nippon Yusen K.K. and Mitsui O.S.K. Lines Ltd., Japan’s largest shipping lines and the world’s biggest operators of car- carrying vessels, expect to haul 3.8 million vehicles in the six months ending March, the highest half-year tally in at least five years. That may help them post annual profits even as they forecast declines for their cargo-box and dry-bulk units.

“The one thing that’s supporting their business is car carriers,” said Janet Lewis, a Hong-Kong based Macquarie Group Ltd. analyst. “Dry-bulk is at an abysmally low level and container ships are making a loss.”

Car shipments have avoided a rates plunge as new entrants have been shut out of the market by long-term contracts, the need for specialized ships and automakers’ concerns about damage to vessels. The world’s five biggest car-carrying lines, which also include Kawasaki Kisen Kaisha Ltd. (9107), Wilh. Wilhelmsen ASA and a Wilhelmsen-Hyundai Motor Group venture, control about 70 percent of the global market, according to Nomura Holdings Inc.

“It’s very difficult for lines to enter the Japanese and South Korean markets because local companies are so strong,” said Huang Xiaowen, managing director of China Shipping Container Lines Co., part of China’s second-largest sea-cargo group. The group operates car carriers in China, he said.

Exports Tumble

Japan’s auto exports tumbled following the March quake, which damaged plants and disrupted power supplies. Shipments plunged a record 68 percent in April, followed by a 41 percent drop in May and a 10 percent decline in June.

The fall in Japan production contributed to Nippon Yusen, Mitsui O.S.K. and K-Line all slumping to losses in the quarter ended June. It has also helped cause them to slide more than the Nikkei 225 Stock Average’s 14 percent drop in Tokyo trading this year. Nippon Yusen is down 38 percent, Mitsui O.S.K. has declined 43 percent and K-Line has fallen 48 percent.

Nippon Yusen rose 0.9 percent today to 225 yen. Mitsui O.S.K. gained 0.3 percent and K-Line fell 0.5 percent.

The shipping lines, all based in Tokyo, declined to give profit and sales figures for their car-shipping businesses. K- Line didn’t give a forecast for car shipments.

Toyota, the nation’s biggest carmaker, exported 47 percent of group domestic production this year through July, based on an Aug. 30 statement. Nissan sold 62 percent overseas in the period. The carmakers also ship vehicles made at plants in other countries including Thailand and India.

Production Increases

Japanese vehicle exports may rebound as automakers are returning domestic plants to full capacity. Toyota has said it intends to resume full global production by the end of next month.

The industry is boosting output “like we never have before,” Toshiyuki Shiga, the head of the Japan Automobile Manufacturers Association, said last month.

Toyota needs to increase domestic production 14 percent from a year earlier in the final five months of 2011 to hit its full-year production target, based on company statements. It raised its 2011 goal to 3.49 million on Aug. 2. Including affiliates Hino Motors Ltd. and Daihatsu Motor Co., the Toyota City, Japan-based company made 1.69 million vehicles in the first seven months.

Nissan similarly needs a 14 percent boost in the August- March period to meet its 1.2 million production target for the current fiscal year, according to Bloomberg calculations.

‘Strong Rebound’

Wilhelmsen, Europe’s biggest car-carrying line, saw a “strong rebound” in Japan shipments in June, Chief Financial Officer Benedicte Bakke Agerup said by e-mail. She didn’t give specific details.

“The Japanese car producers have shown an impressive performance in getting production and export back to almost pre- tsunami levels,” she said.

The shipping line expects “moderate growth” across its business in the six months ending December, she said. Shipments rose 12 percent to 18.8 million cubic meters in the second quarter. That includes Lysaker, Norway-based Wilhelmsen’s main fleet and Eukor Car Carriers Inc., a venture with Hyundai Motor.

Wilhelmsen, which operates ships for carrying cars and trucks, has dropped about 30 percent in Oslo trading this year.

The three big Japanese lines all expect to rebound from their fiscal first-quarter losses to post full-year profits. Nippon Yusen forecasts net income of 5 billion yen, Mitsui O.S.K. predicts 17 billion yen and K-Line expects 2 billion yen.

6,500-Vehicle Ship

Nippon Yusen’s operating profit will probably be 23 billion yen, with its car-unit contributing 12 billion yen, according to Macquarie’s Lewis. The company had 118 car ships in its fleet of 827 vessels at the end of March, the largest of which could carry about 6,500 vehicles. It plans to expand its car-carrier fleet to 130 ships by March 2017.

“The Japanese shipping lines’ car-carrier operations will provide bigger sales than expected earlier this year,” said Ryota Himeno, an Mitsubishi UFJ Morgan Stanley Securities Co. analyst. “That’s going to help offset declines at their bulk business.”

Dry-bulk rates have tumbled about 40 percent in a year, based on the benchmark Baltic Dry Index, as expansion in the global fleet outpaces China’s demand for shipments of iron ore and coal. Overcapacity has also hit container rates. The three Japanese lines were among shipping companies that delayed the introduction of peak-season surcharges on Asia-U.S. routes as economic concerns damped spending on flatscreen TVs and sneakers.

Earnings Declines

The car units will fail to completely offset the decline in earnings at the larger dry-bulk and container units this fiscal year. Nippon Yusen and K-Line are both forecasting 94 percent declines in net income in the period, while Mitsui O.S.K. is predicting a 71 percent slide.

Still, the lines are likely to retain their grip on the auto-shipping market over next few years. Only 89 new car carriers are on order worldwide and they have a capacity equal to 14 percent of the existing global fleet, according to Clarkson Plc. The dry-bulk backlog stands at 2,833 ships or 41 percent of current capacity, according to the shipbroker’s data.

“The operators in the car-carrying business have a lock on the market,” said Osuke Itazaki, an analyst in Tokyo at SMBC Nikko Securities Inc. “They’re sure to benefit as the number of vehicles carried increases.”

To contact the reporters on this story: Chris Cooper in Tokyo at ccooper1@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

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