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“Rising Above Adversity”

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MOL's President Koichi Muto

On the occasion of Mitsui O.S.K. Lines (MOL) 128th anniversary, we are pleased to bring you a message from our President, Koichi Muto.

It is my pleasure to report to all officers and employees of the MOL Group that today marks the 128th founding anniversary of the company. On this auspicious day, I must first say a few words about the extremely challenging business environment surrounding the company at present. For fiscal 2011, we are projecting a consolidated ordinary loss of Y27.0 billion. To put this into perspective, we still generated consolidated ordinary income of Y24.2 billion in fiscal 2009, in the depths of the global recession following the Lehman Brothers bankruptcy. Indeed, we are forecasting the largest loss in our history, one that eclipses our previous record loss of Y5.7 billion in fiscal 1993. This deterioration in our operating performance reflects the fact that the marine transport industry has faced numerous negative factors on an unprecedented scale. Despite the highly stable profits accumulated by MOL and cost savings from our concerted Group-wide cost-cutting drive, we were unable to avoid falling into the red. Certainly, the confluence of factors such as the strong yen, high fuel prices, the impact of the earthquake and tsunami last year, and the economic slowdown in developed countries has weighed heavily on our performance. However, the most significant factor specific to the marine transport industry was lackluster market rates, which reflected the glut of vessels on the market in almost every vessel category. This year, we are forecasting mostly the same amount of deliveries of new vessels as last year. Therefore, the delivery of new vessels will continue to negatively impact our operating results for some time.

Looking at the numbers, the total number of vessels worldwide was approximately 21, 500 at the end of 2010. In 2011, around 1, 900 new vessels were delivered, whereas around 600 vessels were scrapped, resulting in a net increase of around 1, 300 vessels last year. Converting this to transport capacity to account for the larger size of vessels, this would equate to an increase in transport capacity of about 8% year on year. Market rates worsened in 2011 as the supply-demand gap widened. Notably, dry bulkers saw a 10% capacity increase while demand grew by only 3-4%, and crude oil carriers saw a 7% capacity increase while demand growth was only around 2-3%. New vessel deliveries planned for 2012 are projected to see a net increase of around 6% on a transport capacity basis, factoring in the actual achievement rate for deliveries and assuming some progress with scrapping vessels. Unless cargo demand increases by an equivalent or greater amount, market conditions in 2012 could be just as challenging, if not worse, as 2011, from the standpoint of the supply-demand dynamics for vessels.

Orders for new vessels plummeted in the wake of the collapse of Lehman Brothers, and have stagnated further since 2011 due to anemic market rates. Therefore, the number of deliveries of new vessels in 2013 is projected to decrease from 2012. The actual number of deliveries should be held to a relatively small decline because delayed deliveries in 2012 will carry over to 2013. However, we could see a change in market sentiment—i.e., hopes for a more favorable supply-demand balance in vessels—in 2013. We can expect this change to have an appreciable impact on the market.

In the course of our 128-year history, we have faced our fair share of crises, including the devastation of World War II. However, over the past few years, we have faced a challenging business environment unlike anything our generation has previously experienced. We must now steel ourselves to rise above this adversity.

To ride out the crisis, we must first relentlessly cut costs. In the previous fiscal year, we pared costs by more than Y20 billion mainly through slow steaming. You might feel that everything that can be done has already been done. However, I’m convinced that there is much more room to cut costs, including cases where costs may have crept back up after previously being lowered. I want the entire MOL Group to be determined to exercise ingenuity in trimming costs and coming up with fresh ideas. Please continue to strip out costs by scrutinizing all costs, without leaving any stone unturned.

That being said, even in these tough times, it is imperative that we maintain customer confidence in our services. It is precisely because the entire industry is facing a crisis of unprecedented proportions that we must answer the trust of customers by continuing to consistently deliver safe and high-quality services. Doing so will set us apart in the industry and give us a decisive competitive edge in the marine transport business in the years to come.

Needless to say, the MOL Group must adhere to the key principle behind winning the trust of customers: safe shipping operations. MOL is currently executing Phase 4 of its action plans for the reinforcement of operational safety, with the aim of becoming the world leader in safe operations. So far, we have implemented a host of initiatives, made tireless efforts and invested significant sums in safety. As a result, we have visibly improved key performance indicators (KPIs) such as the accident rate. However, last year, we regret that we were unable to achieve our “four zeroes”—that is, to prevent fatal accidents, oil pollution, serious marine incidents and cargo damage—due to a fatal accident involving a seafarer during elevator maintenance. Since the start of 2012, it is also extremely regrettable that an MOL containership was involved in a collision that could have developed into a serious marine incident. We will thoroughly investigate the root cause of the incident, including any indirect factors, as we continue to do our utmost to ensure the safety of seafarers, cargo and ships. To this end, safety measures must be rigorously enforced over and over again.

Maintaining a robust financial position is also of paramount importance to ensuring that MOL remains chosen by customers, particularly in the prevailing business environment. We must maintain financial soundness by controlling what goes out while measuring what comes in. Naturally, we now have no choice but to become more cautious and selective about investments. But we will continue to make investments that will enhance MOL’s strengths in the future by taking a close look at profitability and risks.

Our long-term vision for the MOL Group—To make the MOL Group an excellent and resilient organization that leads the world shipping industry—remains an unwavering polestar for navigating the tumultuous business environment. The shipping sector is a growth industry. Our core competence lies in shipping, i.e., providing marine transport services through the operation of ships. Now is the time for us to lead the industry by demonstrating the expertise we have developed in fleet maintenance, vessel management, sales and shipping operations.

In fiscal 2012, we will draw up a new mid-term management plan. Compared with when we formulated our “GEAR UP! MOL” mid-term management plan, the world’s shipbuilding capacity has increased tremendously and we now operate in a business environment that is constantly under pressure from the supply of new vessels. Therefore, we must take on the challenge of developing an earnings model unlike our traditional model—one that is resilient to drops in market rates. In this business environment, we must change our thinking with respect to the timing and position for buying and selling. Other effective approaches in this environment will be to reap economies of scale and raise the efficiency of shipping operations by expanding alliances in containerships and through pooling arrangements we have arranged for tankers. Furthermore, I believe that business models leveraging high-quality vessel management and our expertise in safe shipping operations also have abundant feasibility. Efforts will also be focused on the LNG carrier business, and energy-related marine business derived from the LNG carrier business, such as Floating Storage and Regasification Units (FSRUs). In this manner, we must gradually transform MOL’s ocean shipping business portfolio into one that is optimal for the prevailing business environment. These initiatives are just a few examples. We plan to incorporate a range of specific measures to transform our business models into the new mid-term management plan.

To craft new business models and make a success of them, we must identify the first signs of change in the business environment before other companies. In the short term, we have started to see clear signs of an upturn in U.S. economic conditions, along with a precipitous correction in the abnormally strong yen since February. In the euro zone, we are seeing a sharp rebound in freight rates on the back of a recovery in trade volume, given the increased likelihood of a solution to the Greek sovereign debt crisis.

Economic activity is constantly shifting directions in response to the complex interplay of various factors, with market rates for marine transport services moving in kind. Therefore, we must refine our business intelligence by keeping our finger on the pulse of the markets and grasping the latest information, particularly data leading to cargo demand, as we seek to drive further growth in the marine transport industry in terms of both quality and quantity.

We must also be prepared for the current challenging business environment to continue for some time. However, this difficult environment has only made us relatively more competitive. If we seize this prime opportunity to expand our markets, and consistently devote our efforts to this end, I am convinced that the MOL Group will once again advance to the next phase of substantial growth. The MOL Group has the power to make this vision a reality

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