Japanese Shipping Lines Cash in on Weak Yen

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April 16, 2013

Image courtesy “K” Line

(Bloomberg) — Japanese shipping lines, buffeted by a decline in freight rates, are set to get a more than $500 million boost to their earnings from a weaker yen.

Nippon Yusen K.K., Mitsui O.S.K. Lines Ltd. and Kawasaki Kisen Kaisha Ltd., the nation’s three biggest carriers, may add a total of 51.6 billion yen ($527 million) to their pretax profit this fiscal year as a weaker yen raises the value of contracts, said Ryota Himeno, an analyst at Barclays Securities Japan Ltd. The forecast assumes a 95 yen average to the dollar.

Gains from the currency will help Japanese carriers offset a decline in shipping rates caused by overcapacity and a global economic downturn. The yen has tumbled about 11 percent this year, helping boost repatriated earnings from dollar-based contracts, as Japan stepped up its campaign to end 15 years of deflation that has depressed growth.

“The currency will be the biggest impact on profits this year,” said Tokyo-based Himeno. “There aren’t really any other drivers for profit: the shipping market isn’t likely to get much better this year.”
The yen fell to a four-year low of 99.95 on April 11. It traded at 97.85 versus the dollar as of 11:11 a.m in London.

Shipping charges priced in dollars account for more than 80 percent of domestic shipping companies’ international revenue, according to The Japanese Shipowners’ Association, a group of 100 vessel owners.

Unprecedented Stimulus

The currency’s declines have deepened as Japan’s central bank this month announced unprecedented stimulus aimed at doubling the monetary base by the end of 2014 through buying government bonds. The central bank has given itself a two-year horizon to meet a goal of 2 percent inflation.

Japan’s economy, the world’s third-biggest, expanded an annualized 0.2 percent in the fourth quarter of last year after two straight contractions. Prices excluding fresh food haven’t risen 2 percent in any year since 1997, when the sales tax was increased.

Nippon Yusen said in January that every 1 yen decline against the dollar would raise profit by 1.1 billion yen in the year ended March 31. Mitsui O.S.K. said a similar drop in the second half of the year would boost profit by 900 million yen, while Kawasaki Kisen said such a drop would increase profit by 500 million yen.

The shipping lines, all based in Tokyo, declined to comment on profit for the year started April 1 before their earnings announcement on April 30.

Annual Profit

Nippon Yusen may post a net income of 29 billion yen this fiscal year, according to the average of 13 analysts compiled by Bloomberg, compared with 8.9 billion yen predicted for the previous 12 months. Kawasaki Kisen may also boost its profit while Mitsui O.S.K., which has the world’s largest merchant fleet, may return to an annual profit.

“Profit will naturally increase,” said Rikard Vabo, an analyst with Oslo-based Fearnley Securities AS. “All the earnings are in U.S. dollars and when they get more yen from each dollar, they are able to pay off debt easier.”

Nippon Yusen fell 1.6 percent to 244 yen at close of trading in Tokyo. The stock has gained 21 percent this year. Mitsui O.S.K. has jumped 36 percent and Kawasaki Kisen soared 60 percent. In comparison, the Nikkei 225 Stock Average has risen 27 percent.

The weaker yen isn’t solving all the challenges facing shipping lines. An oversupply of vessels to carry commodities including iron-ore and coal is continuing to put pressure on freight rates. The Baltic Dry Index, a measure of prices for transporting commodities by sea, has dropped 10 percent in the past year to 876 in London yesterday.

‘Lot of Ships’

“They ordered a lot of ships in 2007 at the peak of the shipping cycle, when they were very expensive,” said Masayuki Kubota, who oversees the equivalent of $1.7 billion in assets in Tokyo at Daiwa SB Investments Ltd. “They are the beneficiaries of the strengthening world economy and weakening yen, but the demand-supply outlook is weak.”

Hire costs for the world’s fleet of 9,658 commodity ships will remain under pressure throughout this year and may “flatten at low levels” by the end of 2014, DVB Bank SE predicted in December.

Still, as the weaker yen spurs demand for Japanese goods, that may lead to increased transportation of products such as cars, Johnson Leung, Boyong Liu and Benjamin Wang, analysts at Jefferies Group LLC, wrote in a report in February.

Jefferies predicts the yen could slide to as low as 108 against the dollar, according to Leung. He didn’t give a timeframe.

– Chris Cooper and Kiyotaka Matsuda, Copyright 2013 Bloomberg.

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