Nippon Yusen Kabushiki Kaisha (9101) Earnings Call Transcript & Summary

Hi, everybody. I am Okada, General Manager of IR Group, and I'll be the host for today's webinar. Thanks for joining us, and we truly appreciate your time and interest. Today's webinar is all about next-generation marine fuel, business opportunities arising from this transition and NYK strategy in this transition. We hope you will find the session informative. First, I'd like to introduce our speaker, Mr. Rokuroda, General Manager of Next-Generation Fuel Business Group. This group is leading and exploring the creation of various business opportunities arising from the transition to next-generation marine fuel. Rokuroda-san is the head of this group. Before we get started, I would like to briefly go over some housekeeping matters. After the presentation, we will proceed with a Q&A session. Please note that the questions will only be accepted via the web chat. So you are welcome to submit your questions even during the presentation using this chat system. Also, please be aware that today falls within the quiet period before the second quarter earnings. So we will not be able to answer to any questions related to our financial results. Okay. Then let's begin the presentation. I will turn it over to Mr. Rokuroda. Rokuroda-san, over to you.

Thank you very much, Okada-san. Good morning or afternoon to everybody. My name is Takahiro Rokuroda, General Manager at NYK Line, handling Next-Generation Fuel Business development. And today, I am so glad that I am able to explain our activities we have been doing and we are committed to continue to do in relation to the new fuels. So first of all, let me explain, share a bit about the directions of the international shipping from the context of decarbonization. I understand, and I guess many of yourselves already know, that IMO has a net-zero goal by 2050, which has been agreed during the MEPC 80, which took place 2 years ago, July 2023. And this goal is still unchanged even after the recent MEPC 83, which took the postponement of the adoption of the new regulations. And prior to that, April this year, it was agreed that midterm GHG reduction measures to seriously consider for adopting, which again was not adopted this time, but probably 1 year later, and in which the 2 key pillars are most important elements when it comes to the decarbonization of the shipping industry. And one is the GHG and Fuel Intensity regulations, which we call GFI regulations, which basically is an emission pricing and contribution systems. And two, IMO net-zero funding, which is sort of a rewarding program. I am going to explain a bit later about what has happened during MEPC 83. Besides IMO, which is indicated on the right-hand side, we already have or we are expecting to have new regulations to govern GHG emissions, not only shipping but also various industries, which is indicated as EU ETS, CBAM, FuelEU Maritime. So now the regulators is running ahead to govern again the GHG emissions and probably new rules may come up. And we also hope the international regulations to be set up to further accelerate the decarbonization activities. And MEPC 83. Unfortunately, it has been postponed 1 year. But our recognition is it's a temporary delay, but the direction remains unchanged, totally unchanged. So the -- again, the adoption has been postponed, but the momentum to combat GHG will continue. And international shipping industry will require GHG regulations at IMO level in order to accelerate and realize decarbonization, because international shipping is a borderless industry and its emission is not attributed to any specific countries and regions. So it will make a very good sense that a globally consistent regulatory framework is set. It is indispensable for every single player in this industry to combat GHGs rather than going regionally fragmented. And supposing, assuming the new IMO rules to be implemented in the future, there will probably be multiple pathways to achieve the net-zero emissions to cope with -- comply with the IMO goal, which includes fuel-saving technologies. So NYK as many other shipping companies are working on to save the fuels by introducing new technologies such as wind propulsions and energy-saving devices. And NYK and others again have been working really hard to enhance the efficiency of the daily operations of their fleet, utilizing DX and digital tools. But fundamentally speaking, it is essential to convert the fuels from today's conventional ones to something with low carbon or carbon-free. So there will be multiple pathways, and fuel conversion is going to be very important. And what kind of fuels it is going to be? There will be multiple options again. As indicated, LNG, it's fossil fuel, but still relatively lower GHGs than conventional fuel oils. Methanol, hydrogen and ammonia were also supposed to play important roles in further combating the GHG emissions out of the ships. But in the case of NYK, we are working on all possible options, but with a little particular focus on ammonia. The reason behind is a lot. And first of all, the difference in the characteristics of the molecule itself. Ammonia does not contain carbon, so it's nonhydrocarbon fuels. So it doesn't emit CO2 when burned, combusted. And boiling point is relatively higher in comparison with LNG, which means relatively easier to handle as a fuel and, at the same time, as a cargo. The drawbacks are there. Ammonia is toxic and corrosive. So safety is essential. Safety comes first. We are not able to make any compromise in terms of safety. And ammonia has relatively lower energy density in comparison with fuel oils, LNG, which means we will need larger fuel tanks when we're going to adopt ammonia for marine fuels, which may potentially affect the economies of transport, which also we will need to carefully take into consideration. But still, again, we believe ammonia is going to be -- play an important role to reduce GHG emissions, as you can see at the bottom. This is a Tank-to-Wake basis GHG emissions from the tank to combustion and power output. Ammonia has very, very low GHG emission. It doesn't contain carbon, but it will require pilot fuel to ignite and assist the combustion because it has flame retardants. So for the use of the pilot fuel, as of today, which is basically fuel oils -- in the future, probably we'll be able to replace it with something derived from the bio or some synthetic. But as of today, we do have some small amount of GHG emissions from ammonia, but still it is very low. As long as Tank-to-Wake is concerned, the question is to which extent we're able to ensure low carbon footprint during the production, storage and transport process to the tanks. And we also consider ammonia as one of the most affordable fuel in the future. This is a graph indicating the price, cost of the fuel. And blue ammonia is ammonia derived from the natural gas with CCS. And e-ammonia is quite often said as a green ammonia based upon electrolysis to get the hydrogen and synthetize with nitrogen. As of this stage, there's no blue or green ammonia commercially produced. So this is sort of a hypothetic numbers, but still as the time goes by, we highly expect that prices will go down, especially in the case of green e-ammonia. And blue, natural gas-derived molecules, is set to be very cost-competitive at the beginning. So when we consider to adopt ammonia for marine fuels, it will probably make some sense to start from the blue ammonia and then after adopt the green ammonia, which is also supposed to be lower GHG emitting. And ammonia is also scalable, especially in production and, consequently, can become more available. As of today, the main purpose of the use of ammonia is for fertilizers. But today, power sector is working really hard, especially in the case of Japan, to drive the demand for ammonia for burning in the steam and coal power plants. And the shipping industry is also working really hard to adopt ammonia for propulsion fuels. And in some areas in the world, people are now working on to realize use of hydrogen, and ammonia is supposed to play an important role as a hydrogen carrier. If we're able to aggregate all those demands, so across the various sectors, industry sectors, it will realize economies of scale in terms of the supply chain, which I expect to further accelerate or enhance the availability. Why I suppose the scalability can be expected in the case of ammonia is the feedstock. The feedstock for ammonia -- producing ammonia is basically hydrogen and nitrogen which, again, basically is unlimitedly available on this Earth, whereas in the case of methanol or some other synthetic fuels, quite often CO2, clean CO2, is supposed to be a key component. And ironically, it is not that available. So we're able to most probably enjoy the economies of scale in case various industries can join force to aggregate the demand and also stimulate the productions. Plus we also have existing supply chain of ammonia for transportation of fuels and storage, and so production and so on, everything. So we can start from the existing supply chain and gradually grow at scale. That is another advantage of ammonia. And as of today, the total production of ammonia in the world, this is basically the gray ammonia, is around 200 million tonnes per annum. And 95% of them are for fertilizers today. And among the 200 million, 10%, so which is around 20 million tonnes per annum, are for seaborne transport. So we are now transporting ammonia with our ships. And on top of this, we expect new purpose of use will join, which is again power and marine fuels. And we expect that total demand and also production scale by 2050 is reaching 600 million tonnes, out of -- 400 million out of it is for the new demand. And in the case of marine fuel, as of today, we consume around 200 million tonnes of conventional fuel oils. And according to the prediction by IEA, International Energy Association, 44% of them are supposed to be converted into ammonia, which mathematically will be around 260 million tonnes. So it's a substantial amount of potential demand. And I believe you are able to imagine this is going to be a new market and business opportunities for everybody, including production, trading and storage and shipping. But there are, of course, difficulties because the new purpose of the use of ammonia is new and there's no new markets yet for the clean, low-carbon, carbon-free ammonia yet. So we'll need some support from the public sectors by encouragement with some economic measures. So we have various countries and regions who are supporting the adoptions of ammonia and also the new fuels. In the case of South Korea, unfortunately, the CHPS has been canceled just recently. But I understand IRA is still in strong force. The Japanese CfD is in progress of the selections and H2Global is working really hard to analyzing the successful bidder during their double auctions. And IMO, again, unfortunately, the MEPC 83 was postponed to adopt the new GFI regulations, but we strongly believe it will be enforced in the future. Even though it might take a little longer than originally expected, we will definitely need, as I mentioned, as an international shipping, have a uniform regulatory framework to govern GHG out of the ships. We have no clear pictures yet if this existing ideas of the GFI regulations will be adopted in the next year. This type of structures such as setting based on compliance targets and based on contributions in the case of going and emitting more GHG than these. So all these are the reasons why NYK deems ammonia to be more promising, and will play as a mainstream fuel for the decarbonization measures. And based upon this, we also drew strategies. The fuel conversion is essential, as I mentioned. And what we can do as of this today is stay with [Technical Difficulty].

The systems. Thank you.

I'm sorry for the inconvenience. So our fuel conversion road map. As of today, we use conventional fuel oils and now accelerating the use of biodiesels. This is an immediate action we can take, and the business opportunities for us is to work on the upstream. LNG is also set to be less GHG emitting fuels than conventional fuel oils. So we are now also expanding the use, adoption of LNG, which we kicked off around a decade ago, as well as establishing bunkering businesses. So we believe it is going to be a long-term source of conventional fuel oils. So we will need to work further on both upstream, mainstream, downstream to develop the businesses. This will probably drive -- continue to drive new business opportunities for us. And methanol ammonia or some other possible low-carbon, carbon-free fuels is something we also need to work on, with a relatively longer perspective. Especially ammonia, which I mentioned we are spending a lot of efforts, it is going to be 2026 when we're going to deliver the first ammonia-powered deepsea ship. And thereafter, gradually increase the fleet and expand its adoption to different type of ships, as well as developing ammonia bunkering systems, in line with the evolution of the new clean fuel ammonia supply chain. So I mentioned up, mid and downstream. So our approach is basically value chain, covering everything. And actually, this is a journey we have already done in LNG. We have investment into the gas field. We do have around hundreds of LNG carrier and we do LNG bunkering businesses in Europe and Japan. So up, mid and downstream, we do business in all aspects. So it's a sort of a replication for us in the case of new fuels, including ammonia. So it's not necessarily 100% new journey for us. But what is going to be different in the case of ammonia from LNG is that, clean fuel ammonia, there is no market yet. So we will need to establish that. But we're not able to do it alone, so we will need to join forces across the industry players. So long story short, we do upstream, we do midstream and we do downstream. And the value chain is expected to pick up globally, but Japan is playing a key role from the power sector. The CfD program is going to greatly support the power sector to introduce low-carbon ammonia and create new supply chains. So new supply chain will be triggered by the power sector, but there's no reason for us, shipping industry, to leverage that. So beyond power, we as shipping industry is further expand the supply chain, which consequently lead to more business opportunity in terms of shipping and bunkering. And the shipping, the midstream, the seaborne transport, as I mentioned, the scale is around 20 million tonnes per annum. But by 2050, we analyze, it's going to be around 160 million tonnes per annum. And our target is to secure around 10% of the market share with this. And we will need sufficient fleet to accommodate all this market share. So we want to be one of the largest ammonia carriers in the world, targeting a widespread adoption of ammonia both in the power sector and shipping sector, as well as existing demands. On downstream, the bunkering. LNG bunkering is something we have already deeply experienced. There has been a lot of lessons learned out of that. The most important element is to drive both demand and supply concurrently. It's a very big lesson for us. So in the case of ammonia or even some of the new fuels, we'll definitely need to pay attention to both establishing demand and supply. So in a sense, NYK as a shipping company, ship operator and owner, uniquely positioned to realize bunkering businesses. We do have sufficient capability to drive the demand. We also have a lot of expertise of handling the molecule itself, which will definitely benefit the bunkering operations. And in the case of ammonia, it has potential. But nobody knows as of this stage how to use it or how we're able to ensure safety. So back in 2021, we kicked off a development project to build 2 different ammonia-powered ships. One is a tugboat, small tugboat, and the other is deepsea ship, a medium-sized gas carrier, AFMGC. And we formed a consortium and we spent a lot of efforts in technical and operational developments. And tugboat has already been delivered successfully last year, August last year. And we confirmed it's a co-fire, it's a blending of ammonia and pilot fuel, which as of today is fuel oils. But on caloric basis, we use more than 90% of ammonia from various engine power load from 25% to 100%. And we do recognize some greenhouse gas emitted, and in consideration of that, our GHG reduction rate from Tank-to-Wake is again beyond 90%, which I believe this is a great achievement. And there has been a lot of lessons learned from both technical, operational and, again, safety management point of view, all of which are now incorporated in the development of this deepsea ship MGC, medium-sized gas carrier, which is supposed to be scheduled to be delivered November next year. The main engine and diesel power generation engine, both ammonia fueled, have already been developed. And not only making a technical development, we also need to expand our track record so that everybody can recognize NYK as a frontrunner and pioneer in the field of ammonia. We did have a lot of achievements. I'm not touching everything upon in details. But basically, how to optimally or efficiently, safely use ammonia, consume ammonia for fuels. How we are able to ensure safety. How we are able to commercialize all those activities or the track records we've been doing. So this is a conversion of fuel oil MGC, but we supported JERA who is driving the utilization of ammonia from the power sector and carried out a trial combustion in their power plant, and we transported ammonia for them. And ship-to-ship operation is another activity we recently did in Ceuta, Spain. We carried out around 23,000 tonnes of ship-to-ship transfer of ammonia. So the black ship is our ship, and orange ship is our partner's ship, transferred the ammonia offshore. So in the case we have some limitation, the put specification, this type of operation will be required. And as the scale of the trade grows, we expect this type of operation will be more needed. Just a brief video. [Presentation]

So this is the ship operations. And we also are in exploration of the new businesses or new values out of our activities. And this is a trial, but the tugboat, which today uses very clean, actually, ammonia, which is the source is waste plastic and dissolve it and get hydrogen and formulate ammonia. On the other side, we have CO2, but it is recycled food, beverages. So it's a sort of a circular type of ammonia. So we worked to create an environmental value out of the combustion of the clean ammonia. And we successfully registered a credit. So as we continue to drive the demand for ammonia and adoption of ammonia, this is another area of interest where we will continue to work on. The tugboat which, again, using ammonia for fuels. [Presentation]

Thank you for watching. And ammonia-powered MGC, we're going to deliver next November, November next year. We have already contracted with one of the leaders in ammonia trading, Yara, based in Oslo, Norway to charter this ship out. So we are like-minded partners to jointly drive the low-carbon clean ammonia for both industries and fuels. And while we are working seriously on carrying out the technical development and at the same time expanding our track record, we also want everybody to understand the benefits of using ammonia for fuels for the ships. So now we are also spending a lot of efforts for advocacy and rule-making activities. NYK is a private company, but we do this because we want a new market to be picked up. So we want to enhance the understanding, especially from the safety point of view because many player -- industry players, including shipowners, ammonia producers, shipbuilders, regulators, port terminals and everybody has concerns about that. We want to provide them with sufficient understanding and confidence that ammonia works safely as a fuel for the ships. And at the same time, we will need standardization, especially from the viewpoint of safety management. What is a safe ammonia-powered vessel? So we've been working really hard with the class societies and regulators to jointly establish the rules. All these efforts will definitely lead to the establishment of new markets and, consequently, new business opportunities for NYK. And we are -- we recognize ourselves as one of the frontrunner, first mover. So we -- our ambition is to be the party who knows most about the safety standards, regulations and so on, and obtain the reputation and also the trust from our customers. That way, we want to be the first mover and get the pole position in this segment. But still there are a variety of challenges in front of us. Supply chains are yet to be established in terms of the clean fuel ammonia. We will need the shipyards to be capable of building ammonia-powered ships with sufficient capacity. We need the ammonia-powered ships and, at the same time, ammonia fuels to be cost-effective. It cannot be widespread used unless it goes very affordable. Last but not least, we need the rules, both to govern, also both to encourage the adoption of ammonia and new fuels. That is the reason why we need internationally consistent regulatory framework, and we count very much upon IMO. So NYK, again, as a single company, we're not able to do everything all alone. In order to build up a new market, we always need collaborations, not only with the governing regulators, but also the NGOs and POs and also class society and academias as well. We have a lot of collaborations. This is just a tip of iceberg, but we have a -- we are a founding member of the Maersk Mc-Kinney Moller Center in Copenhagen. We are one of the Board members of CFAA, Clean Fuel Ammonia Associations. Again, we are one of the Board member of Global Centre for Maritime Decarbonization in Singapore. And last year, we signed a memorandum of understanding with Maritime Port Authority of Singapore, Singaporean government, to jointly work for decarbonization and DX as well. So the partnership is another strategy we will definitely need to take, we will definitely need to continue to take. So there are a lot of journeys in front of us, but our recognition is unchanged again. The decarbonization is unchanged target, and there will be a lot of business opportunities in front of us. Thank you very much.

Thank you very much, Rokuroda-san, for this very comprehensive presentation. So then let's move on to the Q&A session. [Operator Instructions] And I noticed that we already received a few questions. So let me read the very first question. The first question is a very straightforward question. When does this fuel transition business contribute to NYK's profit, and how much?

Thank you for the question. Very important. We don't do it for volunteer. But the specific timing cannot be stated at this moment, but it's anticipated that a certain amount of profit will be generated before 2030, irrespective of the movement of IMO.

Okay. So I'll move on to the next question. The next question is about MEPC 83. What will be NYK's next action in response to the result of last week MEPC decisioning?

Yes. It's truly disappointing that the adoption has been postponed for a year. But the direction of the decarbonization, as I mentioned, in the maritime sector is unchanged. So -- and I also understand the discussion among IMO is underway, continuing, towards the establishment of the rules. So we will steadily continue and carry out and advance our value chain approach, of course, carefully monitoring how the new rules to be formulated. So we will definitely -- our direction is unchanged, but carefully monitor and go flexible depending on the situations.

Thank you. Okay. Then let's go to the next question. The next question is, what are the main safety policies, critical points in the development of ammonia fuel vessels?

Yes. In developing ammonia-powered ships, safety comes first. Nothing come -- we are not able to make any compromise. And in order to ensure safety, there are basically 3 pillars. Reduce the probability of contact risk with ammonia, especially for the crew members. And two, but still, leakage may take place out of the engines and so on, so we will need to prepare for the potential leakage. And the ship might -- and in the worst case, ship may leak ammonia gases and at the same time blackout take place, so which we call double out, prepare for the double faults. So these are the 3 pillars and are very basic principle in developing ammonia-powered ships. We do a lot of elaboration into the ships based upon all these 3. First of all, we need to ensure the resilience of the ship and engine as a hardware,, not allow any leakage. But still leakage may take place, so we do, let's say, compartmentalizing each segment, such as engine room, maintenance room, accommodation rooms and so on. And still that is not enough. So in the case of blackouts, the leaking gas may diffuse into various areas. So we elaborated the ventilation routing as well. And at the same time, we established a remote-controlling system of the engine itself, as well as with sensoring systems, so in order to detect leakage as quickly as possible.

Thank you for the question. Let me read the next question. The next question is, I understand that NYK is focusing on ammonia. But what are the other alternative fuels that you are putting effort into?

Thank you. Yes. So we are working on multiple candidate next-generation fuels. Let's say, methanol, biodiesel, biomethane and so on. So our activity is not a simple procurement. We go beyond that to explore business opportunities. And basically what we will do and we're working on today is to basically move into upstream. And at the same time, pursue midstream, meaning transportation, ocean transportation opportunities. And if it materializes, and at the same time if we are able to drive further demand, we also look into the downstream, which is bunkering businesses. So basically all the same as ammonia.

Okay. Well, the next question. The next question is, what do you see as the most critical next step in making ammonia as a mainstream in marine fuel?

Yes. I think it's, again, an essential question. So I mentioned why ammonia, especially because it has a scalability in production. The price may go down, and we're able to aggregate the demand to have further large-scale supply chain to set up. And that is the advantage of ammonia over the rest of the candidates. But again, we would need to prove to the world that it works safely and efficiently, drive further understanding. This is one of the keys that ammonia will need to overcome in order to be the mainstream fuels. And at the same time, economies are still challenges. So we definitely need the new IMO level regulations to encourage the use of new fuels, including ammonia.

Thank you very much, Rokuroda-san. So the next question is about the challenges facing in ammonia. Is there any gaps or challenges that you found when comparing to the initial expectations in the development of ammonia [ tugs ], medium gas carrier and in the creation of value chain business?

To be honest, from technical and operational development phase, majority of the findings are within our expectation range when we kicked off the development. So that is the reason why we have more assurance than before, more confident than ever that ammonia really works for the marine fuels. One of the, let's say, gaps or new findings we gained, was actually ammonia works really good as a fuel for the ships. The engine response turned out to be very good, very, very good. As I said, it's a little technical element, so -- but probably not -- might not be that relevant to the participants today, but it has difficulties in ignition. It has flame retardants, burn slow. But that disadvantage can become advantage because we are able to compress all these ammonias without worrying about the engine knocking. So we are able to obtain sufficient amount of energy output out of ammonia. That is a new finding. But last but not least, it's not necessarily a gap, but we also recognize that, as of this stage, it is a little costly to have ammonia-powered ships. Engine is very new, the ship design is new. So it was a very expensive development activity. So we also recognized importance to further expand the fleet and push all those prices down.

[Operator Instructions] Okay. Then let's move to the next question. The next question is regarding ammonia fuel ships. "Are there any changes in the interest from potential customers and other shipping companies?" is the question.

Yes. Despite the recent unfortunate outcome of MEPC 83, we recognize the interest in ammonia, both from the shipping industry and also our customers are getting stronger. It's growing. One is because there are some support progress by this public sector, as I mentioned, especially in the case of CfD, IRA or H2Global. Logically speaking, they are driving hydrogen or hydrogen derivatives. So it is ideal for them to consider low-carbon intense transportation mode. So the interest into ammonia-powered transport mode is now attracting many, many players today.

Okay. And I think the next question will be the last question for the moment. The next question is what are the major impacts by the Trump administration in terms of fuel transition?

It's a little difficult question for me to answer because it covers a wide range of industries, not only ammonia or just the marine fuels. But in the short term, there remains a lot of uncertainties, so we don't know what he will say -- start to say next. So we will need to stay cautious. But in the long run, I believe the direction itself, especially the direction of decarbonization, will remain totally unchanged.

The next question is about -- the question is, how would you view the potential of importance for the Japanese government stepping up to help the industry to build or develop ammonia fuel or fuel alternative vessels? Do you see any change after the MEPC 83, is the questions.

After the MEPC 83, we haven't communicated with the government yet. But again, I don't find any significant change in the position of the government itself. They are strongly supporting the decarbonization and adoption of the new fuels and relevant technical developments in the maritime sector.

Thank you very much. We still have a few minutes and we still accept any questions. Do you -- has somebody has more questions? Well, it seems not. So now we will conclude this webinar. Again, thank you very much for your participation and your contribution. After the session, you have a survey screen, and we would greatly appreciate if you could take a moment to provide your feedback. Again, thank you very much for joining today's webinar. I hope it was very useful, and see you in our next seminar. Thank you very much.