TOKYO -- Japanese marine shipper Mitsui O.S.K. Lines is poised to report its best annual earnings in years thanks in part to low fuel prices. While costs are set to drop lower due to the crude oil crash, Mitsui's top brass are less than ecstatic.
"Why don't we have any extra tankers?" an executive bemoaned at Mitsui's Tokyo headquarters in mid-April.
During that juncture, prices for petroleum futures went negative for the first time in history. Conventional storage space has run low because of diminished demand.
Oil tankers are being enlisted to warehouse crude, and the vessels were making a killing on shipping fees.
Daily spot contracts for very large crude carriers traveling between the Mideast and Northeast Asia surged past $200,000, according to a source at a major shipper. That is eight times the average reported by Japan's three largest maritime transporters in fiscal 2018.
"If they were able to capitalize on this emergency demand for tankers, they may have brought in years' worth of earnings," said an insider at a major shipper. "But the ones likely reaping the benefits are the European rivals with extra vessels."
Having learned from the market woes of the recent past -- and the massive losses -- Japanese shippers are now putting out leaner fleets. Mitsui's vessel count at the end of fiscal 2018 was down 12% from the end of fiscal 2011. Kawasaki Kisen cut 7%. Nippon Yusen reduced the number of tankers and other oil carriers by 34%.
The trio also made a point of signing contracts lasting two years or more as a way to ensure steady income. Although that approach minimized the exposure to swings cargo fees afforded by short-term contracts, it also left the shippers unable to nimbly respond to sudden increases in demand.
Mitsui was particularly active in instituting reforms. Spot-ready tankers used to make roughly 30% of the fleet, but the share is now less than 10%. Instead, the company focused on transporting liquefied natural gas, a resource seen as less prone to market fluctuations.
"Although [Mitsui] earnings are in a poor position to bounce during good times, there is a lower risk of downswings due to booking large extraordinary losses," said a source close to the company.
Mitsui suffered losses of 179.2 billion yen ($1.67 billion) in fiscal 2015 stemming largely from descaling its fleet. The bleeding later dissipated to roughly 20 billion yen to as low as just billions of yen.
For the fiscal year that closed this March, Mitsui is expected to turn in a consolidated pretax profit exceeding 50 billion yen, a gain of 40% leading to the first such black ink in five years. The good fortune is credited to the successful turnaround of the shipping operation, as well as inexpensive fuel prices.
But the idea that Mitsui will continue to ride on lower fuel costs, thanks to the crude oil slump, is less straightforward than implied. Though the dynamic may lift profit in the short term, conventional wisdom holds that cheap fuel will become an adverse factor in the long run.
For one, the trend signals a decline in demand for automobile carriers, a specialty among Japanese shippers. On top of that, clients will start haggling for lower transport fees.
In Mitsui's case, the fuel cost per ton dropped $238 in fiscal 2015 compared with the previous year, which was directly responsible for a 70 billion-yen bump in pretax income. But the windfall was unable to offset the negative impacts, such as the market slump for container ships and dry bulk vessels, which squeezed profit by 109 billion yen.
Looking at the pretax earnings of the big three shippers over time, a slide in oil prices boosted profit for a time, but the black ink oftentimes underperformed from the following year.
The global pandemic is set to undercut cargo volumes for container ships, particularly for apparel and daily necessities.
"The benefits from the sharp drop in crude oil only lasts for the first year," said an executive from a major marine shipper. "This time around, logistics has stalled. The gains from lower fuel costs will soon be wiped out."
Worsening business conditions will put shipping efficiencies to the ultimate test in the eyes of the stock market. "The negative factors for fiscal 2020 are being priced into share valuations," said a source at an international brokerage.