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Port Report: Japan’s K Line plans review of its sprawling business lines as losses mount

Shipping conglomerate looking to find its focus as other shipping companies have already focused on core businesses.

Japan’s K Line is the latest of the shipping conglomerates that is reviewing whether it pays to be all things to all customers in ocean freight.

The country’s third largest maritime firm by market value, K Line’s (TSE: 9107) fleet covers a variety of markets including dry bulk shipping, crude oil and refined products, liquefied natural gas and liquefied petroleum gas, and even cars.

In that respect, K Line follows the pattern of its larger Japanese peers, Mitsui O.S.K. Lines (TSE: 9104) and Nippon Yusen Kaisha (TSE: 9101), which also own and charter ships covering most of those segments.

And the three, of course, have pooled their container ship assets together into the now one-year old Ocean Network Express, the sixth largest container operator in the world.

But the Japanese companies’ portfolio approach is growing out of favor with other major maritime companies which are skinnying down in order to focus on segments where they can dominate.

Maersk (Nasdaq OMX: MAER.B) is the prime example as it puts the wrap on its half-century in the oil and gas business with its new goal to be a leading provider of container transportation and logistics. Maersk subsidiary Hamburg Sud, likewise, is ending its dry bulk chartering business.

To that end, K Line is now reviewing its business lines, according to incoming Chief Executive Officer Yukikazu Myochin. The review comes after the company unveiled an estimated $181 million loss for fiscal 2018, along with over $500 million in charges expected from restructuring its business.

While not yet singling out any of its specific business lines, Myochin said last week in a public address to the company on its 100-year anniversary that “K Line’s fleets and business risks will be assessed systematically by market performance over many years.”

“Each investment will be evaluated by quantification by the same measure, and realistic investments will be implemented by controlling the total risk.”

Where Myochin’s scrutiny of the business turns is unclear, but its dry bulk business presents a ready target. Fleet analytics firm VesselsValue said K Line’s 94 dry bulk vessels account for just under half of the current market value of its fleet.

Its dry bulk business is expected to turn an operating profit this year of $50 million on $2.5 billion in charter and voyage revenue. But that 2 percent operating margin is a far cry from the 22 percent operating margin that Golden Ocean Group (Nasdaq: GOGL), which is Norwegian shipping magnate John Fredriksen, saw in 2018.

K Line said among the steps it plans to take are cancellation of uneconomical charters it has for small and medium-sized dry bulk vessels, along with some container ships.

But the real issue is K Line’s largest vessels, the capesize, which carry the bulk of the world’s iron ore and coal on the seas. The rates for those ships have been in a wide retreat this year amid slower demand in China and the tragic Vale mining accident, which shut down a portion of Brazil’s iron ore exports to the world.

Moreover, coal demand is in a secular decline as China and other countries aim to improve their air quality by using cleaner burning fuels. Stifel analyst Ben Nolan said the switch could happen even more quickly due to low prices for alternative fuels such as liquefied natural gas (LNG).

“While there had already been some expectation that Chinese imports may be down in 2019, the low LNG price could also drive fuel switching in Europe, and other growth markets in Asia such as India, and Pakistan all of whom conveniently are in the process bringing new LNG import terminals on line this year,” Nolan said.

Thus, in addition to iron ore trade contracting in 2019, we expect thermal coal trade which makes up about 19 percent of all dry bulk volume could also decline by 2 percent to 3 percent this year thanks to cheap gas making cleaner air more affordable.”

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