Effects Of The Japanese Earthquake On The Tanker Market

Wednesday, March 16, 2011

Following the earthquake that struck on Friday 11th March, six Japanese refineries are reportedly closed. The plants in question, detailed in the table belo,have a combined capacity of 1.34m bbl/day, or around 28% of Japan’s total. The immediate effects of the earthquake are likely to cause a drop in oil demand, but it is likely that in the long‐run, oil and product demand could rebound to levels that surpass those seen pre‐quake as the country re‐builds. Furthermor with up to ten nuclear reactors shut down, Japan is likely to experience a shortfall in power generation capacity, and substitution with either fuel oil or coal will likely occur, increasing imports of these alternatives into the country.

Company                                    Location       Capacity (bbl/day)    Status

JX Nippon Oil & Energy            Sendai         145,000                      Closed
JX Nippon Oil & Energy            Negishi        270,000                      Closed
Kashima Oil                               Kashima      189,000                      Closed
TonenGeneral Sekiyu              Kawasaki     335,000                      Restart Planned
Kyokuto Petroleum                   Chiba            175,000                      Closed
Cosmo Oil                                 Chiba             228,000                      Closed
 
With five of the six closed refineries having no planned re‐start date, Japan’s refining capacity may be curbed for some time. This will impact on both the crude and product tanker markets; on the crude side because fewer imports will be required as refinery feedstock, and the product side as the demand to which the refineres would normally cater, whether it be domestic or international, will need to be  met by other sources.   
 
Refinery utilisation in Japan was running at 90% in the run up to the earthquake. This follows the figure plumetting to the mid 70’s in 2009, as Japan’s economy was hit particularly hard by the global economic crisis. The subsequent recouperation of utilisation rates was driven by ongoing recovery of the Japanese economy in addition to rationalisation of refining assets in the country, a phenomenon becoming increasingly apparent in more developed economies.  
 
The table above identifies five refineries with a total capacity of 862k bbl/day, which are currently closed with no planned restart. At a utilisation rate of 90%, this would indicate demand for 776,5k bbl/day of crude oil as a feedstock. With Japan’s heavy reliance on imported oil and limited domestic production, this equates to demand for seaborne crude of 38,6m tonnes per year, or approximately 143 VLCC cargoes.          
 
Approximately 90% of Japanese crude oil imports originate in the Middle East, so we will see this route impacted over the period of the closure. However, most of the shipments are on time chartered vessels and therefore it will be interesting to see what happens with these liftings. Of the crude on the water and destined for Japan at present, much of this may get resold, which may have a further effect on the crude price.
 
The scale of the effect of the closure will depend on the length of closure, and the location of the refineries that pick up the slack. If other Japanese refineries were to step up to the mark and increase utilisation rates, it is likely we would see little to no effect on crude tankers – the same amount of crude would be imported to Japan, albeit to different refineries. If, on the other hand, the compensatory response is in non‐domestic refineries, we will see fewer discharges in Japan, with a substitutory effect elsewhere. Quality specifications for gasoline and diesel in Japan mean that this subsitution is likely to occur by more complex refineries capable of producing such products.
 
Looking at the clean products story, assuming the closed refineries have a product yield of similar proportions to the Japanese refining industry as a whole a back-of-the-envelope calculation indicates that a three month closure would lead to curtailed production, quantifiable as follows;

•  19.6m bbl gasoline
•  19.6m bbl diesel
•  11.2m bbl jet/kerosene
•  7.7m bbl fuel oil
•  7.0m bbl naphtha
•  2.8m bbl LPG
•  2.8m bbl other products
 
The impact of these indicative figures on the product tanker market will depend on the extent to which domestic refinery utilisation is augmented to substitute production; and the trade balance of the product in question. The following analysis assumes that production substitution occurs internationally.
 
Japan is highly reliant on imports for LPG and naphtha, importing 409k bbl/day of Naphtha (53.5% domestic demand) and 371k bbl/day LPG (78.4% domestic demand). Combined with the fact that exports of these products are practically non‐existent, it can be deduced that virtually all domestically produced LPG and naphtha is utilised within Japan.   
 
Consequently, reduced production manifesting due to the refinery closure will need to be supplemented by increased seaborne imports of LPG and naphtha. Under our assumption of the closure lasting three months, were naphtha demand to remain constant we would expect to see an additional 7.0m bbl naphtha and 2.8m bbl LPG imports into Japan.  
 
Braemar Shipping Services expects the naphtha would be sourced from the Middle East, of benefit to LR1 and LR2 trade (TC2 and TC5). However, with the damage and closures stretching through to the petrochemicals industry, naphtha demand may falter and therefore these projected imports may not be realised. It has been reported that up to ten naphtha vessels were heading from Europe to Japan when the disaster happened, and it is likely that these cargoes will now be sold as distressed, into the already over‐supplied Asian market. Decreased naphtha demand in Japan is likely to exert downward pressure on crack spreads in the region.  

To the other extreme is diesel,  of which Japan is a net exporter, exporting almost a fifth (178k bbl/day) of the diesel produced by its refineries in 2010. Imports are marginal, at 5k bbl/day last year. As a consequence, impaired diesel production should result in fewer shipments out of Japan.  
 
Braemar Shipping Services fixture analysis suggests that in 2010, 44.2% of clean spot cargoes fixed out of Japan subsequently discharged in South East Asia, with 17.0% going to UK Cont and a further 16.5% to West Coast South America. Japanese diesel exports to these areas which are frozen due to the disaster will need to be substituted from elsewhere, likely to be refineries in India and the Middle East. In our scenario of a three month shut‐down, we would expect virtually all diesel exports from Japan to stop, with the country becoming a net importer, as the lost diesel production from the shut down would be greater (271k bbld/day) than that usually expected to be exported over such a period.
 
A slightly different scenario exists for gasoline and jet/kerosene, which are normally both imported and exported into Japan. For gasoline, imports and exports were equal in 2010, at 20k bbl/day. Exports of jet/kero exceeded imports, at 50k bbl/day compared to 20k bbl resulting in a net export of 30k bbl/day.  
 
Braemar Shipping Services calculations imply that gasoline imports to Japan will increase as a result of the refinery closure. This is due to the 19.6m bbl truncation being 17.8m bbl greater than the ‘normal’ exported volume over three months (based on average 2010 figures). Additional gasoline will need to be imported to meet domestic demand. With Japanese fuel specifications, this import is likely to come from Korean and Indian refineries.
 
For jet/kerosene our calculations suggest the opposite scenario, with a reduction in exports and swing to a net import position. The basis for this is that the 11.2 bbl curtailment in production is significantly more than the 4.5m bbl exports typically seen. The effect on fuel oil would be equivalent to the effect on jet/kerosene as the reduction in production (7.7m bbl) is less than expected exports over the period of 4.5m bbl. This import position will be bolstered by increased demand for fuel oil as a substitute for power generation while nuclear power stations are shut down.
 
In conclusion, the earthquake is likely to have a notable effect on the tanker market. The scale of the effect will depend on how oil demand in the country reacts – how quickly will it rebound, and to what extent, in addition to the length of time the refineries remain shut. There are immediate and longer term effects for both the crude and product tanker markets, the immediate effects manifesting right down to vessels due to discharge in Japan in the next few weeks and already on the water. In the longer term, decreased naphtha demand is likely to negatively impact on the LR1 and LR2 trades. Imports of diesel, gasoline, jet/kerosene and fuel oil on the other hand, are likely to increase, potentially to the benefit of the MR trades.

 

Source:Bremar Shipping Services

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