News archive April 2003

The swift end to the Iraq conflict has helped to boost US consumer confidence. The Conference Board's consumer confidence index rose to 81 in April from 61.4 in March, the first monthly rise for four months. Hopes of a more favourable economic outlook in the US contrast with the situation in Japan, which has reported an unexpected fall in industrial output during March of 0.2%.

China's largest oil refiners, Sinopec and PetroChina have reduced estimates of sales for May by 15-25% because of SARS according to Reuters. Some economists estimate that Asian GDP (excluding Japan) could be cut by about $30 billion, or 1 percentage point, this year. China was Asia's fastest growing economy last year expanding by 8% in 2002.
The International Energy Agency has also warned it may cut its forecast for 2003 oil demand growth. They had forecast Asia to add 480,000 b/d to consumption with China assuming the largest share of 170,000b/d, or 3.4%. PIRA energy Group in New York estimate the total impact on global oil demand as a result of SARS could total 230,000b/d in the 2nd quarter and 100,000 for the balance of the year.
Demand for jet fuel is likely to be one of the main victims as airlines cut flights drastically in response to falling passenger numbers.

Japan's steam coal imports for the 1q03 totalled 21.5 Mt. This represents a year-on-year rise of 4.1 Mt and is a new quarterly record. During the 1q03 the use of thermal power generation by Japan's ten major utilities averaged 28% higher than in the 1q02 in order to make up the shortfall from unscheduled closures of nuclear capacity.

American refineries are taking advantage of the lower crude prices and importing far more clean and dirty cargoes than earlier 2003, and compared with the same period last year. Industry data suggests that crude imports are now well above 10 mb/d, compared with around 8 mb/d in early March. As US refineries prepare for the forthcoming US driving season, this is a trend we expect to continue, particularly as US crude stocks remain low. We would also expect demand for gasoline imports to remain fairly firm in the short term as gasoline inventories remain well below the normal range for this time of year.

Japan's exports of iron and steel products totalled 3.1 Mt in March, down 3.8% year-on-year, according to the Tex Report. Much of the fall was due to a slowdown in Chinese demand, with China importing 0.6 Mt last month, a 6.9% decrease. Asia as a whole accounted for 2.6 Mt, down 1.0% from one year ago.

The International Energy Agency has expressed concern that the pledged OPEC cuts of 2mb, as announced last week, may impede on economic growth. According to the IEA, the output cut will keep prices up, a move that would add further cost to industrial production and prevent stock building at a time of relatively low OECD inventories. Global economic growth expectations have already been significantly lowered by both the EU and IMF so far this year. Should oil prices rise once again, the outlook would suggest even lower rates of growth and would threaten to undermine oil demand and imports.

China's monthly crude steel production set a new monthly record in March, rising to 17 Mt for the first time. First quarter output of 48.2 Mt represents year-on-year growth of over 17%.

China's surging steel production has been key to the current strength of the dry bulk freight market - official customs statistics put the country's iron ore imports up by 44% year-on-year to reach a record 34.2 Mt in the 1q03. In addition, such has been China's demand for steel that SSY's Dry Bulk Forecaster estimates its 1q steel products imports totalled 8.3 Mt, up 37% on the 1q02. [Buy]

However, the price of imported steel has been falling over recent weeks. [more]

Colombian 1q03 coal exports increased by 10% year-on-year to 9.6 Mt, according to McCloskey's Coal Report. The growth was entirely due to a rise in volumes shipped to the Americas, which were up by 41% to 4.1 Mt. Last year, Colombia exported 11.9 Mt to the Americas, 34% of the 35.4 Mt annual export total.

An industry report today suggested that OPEC insiders expect Iraq to be relieved of its official OPEC quota requirements during its rebuilding phase. The oil reporting agency - Energy Intelligence Unit - estimates that it could take as much as two years for Iraq to return capacity to its pre-1990 level of 3.5 mb/d. This would be to the
benefit of tonnage loading crude at both Ceyhan and Mina al Bakr but could mean OPEC will have to compromise in its preferred price band policy of $22-$28/barrel. Yesterday OPEC decided to raise its production ceiling as of June 1st, to 25.4 million b/d but reduce 'over production' levels so that actual output would come down by 2mb/d.

China's monthly crude steel production set a new monthly record in March, rising to 17 Mt for the first time. First quarter output of 48.2 Mt represents year-on-year growth of over 17%. China's surging steel production has been key to the current strength of the dry bulk freight market -- official customs statistics put the country's iron ore imports up by 44% year-on-year to reach a record 34.2 Mt in the 1q03. In addition, such has been China's demand for steel that SSY's Dry Bulk Forecaster estimates its 1q steel products imports totalled 8.3 Mt, up 37% on the 1q02.

However, the price of imported steel has been falling over recent weeks. Latest reports from World Steel Dynamics indicate that, for example, foreign hot-rolled band has been selling at around $120/tonne less than its mid-February high. Some recent deliveries destined for China are reported to have been cancelled, with traders attempting to divert shipments elsewhere as the country has reached an apparent oversupply of foreign steel. China's steel import tariff quotas (which run from November to May) were approaching capacity towards the end of March, with inventory at some steel ports overstocked.

This implies a slowdown in steel imports during April and May until the new quotas begin, with the production of major suppliers to the Chinese steel market, including Japan, vulnerable. It is, however, important to stress that this latest weakening in prices does not mean China's own steel output (and, by implication, iron ore imports) is at risk, as any adjustment to oversupply is likely to be through imported steel products.

The relationship between steel prices and the dry bulk shipping market is discussed further in the April edition of the SSY Monthly Shipping Review. [Buy]

During the 1q03, Japan's rolling programme of unscheduled nuclear power plant shutdowns led to nuclear generation by the country's ten major utilities (which supply about 60% of Japan's electricity) running at an average of 28% lower year-on-year. In order to plug the shortfall, thermal generation (which includes coal, oil and gas) has averaged 28% higher over the same period. Coal consumption by the utilities has averaged almost 22% higher, with Jan-Feb imports into Japan up by 1.8 Mt year-on-year to reach 13.9 Mt.

OPEC has announced a cut in production of 2mb/d following a meeting today. The Group's official output ceiling will rise by 0.9 mb/d to 25.4 mb/d while it says that 'overproduction' will be "eliminated". OPEC said the move would essentially reduce the 'extra supplies' introduced before the Iraq war - in the expectation of renewed Iraqi supplies in the relatively near term. The move could put some downward pressure on large crude tanker rates - particularly if the MEG OPEC producers take the bulk of the cuts.

Meanwhile, according to the US Department of Energy, its commercial crude oil inventories are currently 41.6 mbbls below levels this time last year, and over 40 million barrels below the average for the last 5 years. This despite record imports of 10.6mb/day last week, and average imports of 9.8mb/day over the previous 4 weeks. With no exports as yet from Iraq and with the the announcement of 2mb/d in OPEC cuts, the task of replenishing low stock levels looks ever more lengthy. If stockbuilding becomes a priority over the coming months, at a time when refineries traditionally raise crude throughput, this could prompt more demand for imported refined products (to meet US domestic demand) and put some upward pressure on clean rates from NW Europe.

March global crude steel production increased on a year-on-year basis by 8% to 79.6 Mt, a new monthly record. China's monthly output rose above 17 Mt for the first time, an increase of nearly 2.7 Mt compared to March 2002. Japan's production was up 8% to 9.4 Mt, while South Korea posted an increase of over 4% to 3.9 Mt.
Steel output in the US grew by over 5% year-on-year in March to reach 7.9 Mt. EU production increased by 3% to 14.7 Mt, with German output up by 4% to 4.1 Mt.

Australia's coal exports were up by nearly 6% year-on-year in March at 18 Mt, according to preliminary port figures from McCloskey's Coal Report. Total 1q03 exports of 53.7 Mt represent a rise of over 3% compared to 1q02. The growth in March followed a flat February, with both the monthly and quarterly increases mainly coming from Queensland ports.

Iraqi crude exports may be out of sight, but as far as the oil markets are concerned they are certainly not out of mind. The political wrangling (between the US and UN) over which body will oversee a resumption in exports, is showing no signs of being resolved in the near term. The situation could become further entangled with the news of a former Iraqi general vowing to lead a delegation to this week's OPEC meeting.

Meanwhile, Turkey's energy minister said yesterday he was working to restart Iraqi crude oil loading at Turkey's Mediterranean port of Ceyhan, which would allow pumping to resume on a pipeline from northern Iraq to the port. Reports suggest that the pipeline from Kirkuk in northern Iraq to Ceyhan is in working order but as Ceyhan's
storage tanks are full, the pipeline throughput has dropped. Turkey has said that exports via the pipeline now depend on the arrival of
tankers to relieve the storage situation.

After yesterdays price falls, crude oil today crept higher on the back of expectations that OPEC will agree to cutbacks at their meeting next week.

Whilst Iran, Algeria, Qatar and Indonesia have all called for quota reductions, Saudi Arabia have yet to comment and Saudi Aramco (The State Oil Company) have stated they will ship the full volumes contracted for May. Earlier this week Venezuela had demonstrated hawkish sentiments, as they endeavour to replace lost revenues caused by the 3 month strike, and are currently producing 3.2mb/day according to government figures.

Oil prices moved lower today, despite increasing speculation that OPEC will lower its production following its forthcoming April meeting.
According to market reports today, OPEC is facing bearish fundamentals and a possible surge in Iraqi production if the country's oil output levels move outside of the group's activity once production is
restored. This would further undermine oil prices to well below OPEC's preferred range of between $22-$28/barrel. One investment bank oil report today suggested that 'overproduction' could average at about 3 mb/d in the second and third quarters for this year - which would lead to oil prices falling below the $20/barrel mark.

Latest US Department of Agriculture (USDA) forecasts put China's soyabean imports for the current October-September marketing year at a record 16.5 Mt, up by 0.5 Mt from last month's estimate. That would represent a year-on-year rise of almost 60%. The estimate for Brazil and Argentina's soyabean exports for the same period has been revised downwards by a combined 0.5 Mt to total 30 Mt, which would represent an increase of over 40%. US exports are now forecast at 27.1 Mt, 1 Mt higher than the previous estimate, representing a year-on-year fall of 6%.

China's economic growth of 9% during the 1q03 was the fastest rate in six years, although it will slow in the coming months due to weaker exports, according to the BBC. Official figures put last year's growth at 8%, with the 4q02 at 8.1%. Industrial output in the 1q03 rose by over 17%. GDP is expected to grow by more than 7% this year, although there are warnings that the effect of the outbreak of Severe Acute Respiratory Syndrome (SARS) on the country's economy could be substantial.

Official Chinese customs figures confirm that the country's imports of iron ore were up by 44% year-on-year during the 1q03, at 34.2 Mt, according to Metal Bulletin. The rate of increase slowed in March following a 67% year-on-year increase during Jan-Feb. One factor considered to have helped spur imports early in the year was rising freight rates at the end of 2002, which may have caused some buyers to delay their purchasing until low stocks forced them back into the market.

Having had its oil production reduced to less than 200kb/day during the three months general strike, Venezuela has now got crude production up to 3.2mb/day - according to official government statistics. This is 400kb/day in excess of its OPEC quota. The announcement comes only 2 days after Venezuelan President, Hugo Chavez, stated that his administration would support any OPEC call for reduced production quotas.
The Venezuelan Government is keen to keep prices high in order to replace lost revenues resulting from the prolonged strike, and have become one of the staunchest OPEC price hawks. If it is able to maintain this level of production it would support increased demand for aframax and panamax tonnage in the Caribbean market. Venezuela's true production level remains in doubt, with the US Department of Energy reporting output at just 2.5mb/d.

With the possibility of a quick resolution to the Iraqi conflict, and reports of relatively little damage caused to the oil production facilities, disruptions to oil supply could be kept to a minimum. Oil has continued to flow through the pipeline from Kirkuk to Ceyhan, albeit in very small quantities (4mb since the war started). Production in Nigeria is also now coming back on stream, with a lot of cargoes hitting the market today. The possibility of resumption of loadings at Ceyhan and in Nigeria in the short term will be a boost to owners as cargo availability increases in Nigeria and the Mediterranean, particularly for Aframax, Suezmax and Vlcc's.

The berthing at Kuwait of the bulk carrier Pearl of Fujairah three days ago carrying 50,860 tonnes of wheat supplied by the Australian Wheat Board (AWB) marks the first shipment of humanitarian aid destined for Iraq. A second AWB vessel carrying a further 50,000 tonnes of wheat is anchored near Oman, pending arrangements to proceed to another port which can provide rapid flour milling of the cargo. In recent years Iraq has imported approximately 3 Mt/year of wheat, with Australia the key supplier. Exporters are lining up more shipments, with the US having authorised the release of up to 600,000 tonnes of wheat from its reserves to provide food assistance. The first shipment was expected to begin moving in the week starting 24th March.

Demand for oil is likely to grow at a slower pace for the rest of 2003 according to the International Energy Agency. In its latest report, the IEA stands by its forecast for global demand growth of 1.1 mb/d in 2003 (over last year) but said that due to sluggish economic growth, the gain will be very heavily front-loaded - ie mainly in the first quarter. This would suggest less upside demand pressure on tanker rates for the rest of 2003 than we have seen so far this year.

The International Monetary Fund (IMF) has cut its 2003 global growth forecast by 0.5% from six months ago to just 3.2%, barely higher than last year's disappointing 3% expansion. According to the Financial Times, the IMF warned that even after the war in Iraq, the global economic recovery will remain slow and uncertain, heavily dependent on the US and with strong risks of renewed weakness. The forecast for US growth has been cut by 0.4% to 2.2%. East Asia, which of all the global economic regions has shown the most impressive growth, is forecast to expand by 6% this year. However, the region's performance is unlikely to be self-sustaining if the rest of the world suffers a slump.