News archive February 2003

After four months of decline, Japan's industrial production rose by 1.5% in January. However, other key economic indicators were far from positive, compounding fears that the latest rise is unlikely to herald a recovery. Japan's consumer price index fell for the 40th consecutive month in January, down 0.8% year-on-year. In the same month, unemployment reached a record high of 5.5% compared with 5.3% in December. Stagnant domestic demand has made the role of exports crucial to the country's economic health but the US, Japan's biggest market, has suffered from economic slowdown and is currently affected by concerns about the potential war in Iraq

Chinese crude oil imports rose by 8.4 m/tonnes in January from the previous month according to figures released by the Chinese General Administration of Customs -- the highest since August 2000 (7.3 m/tonnes). The January rise proved an increase of 62% from December 2002 and 78% year-on-year. Product imports also rose by a massive 83.2% to 2.4m/tonnes year-on-year in January. Exports of crude continued to shrink.

The sharp rise in imports is a likely reaction to concerns over a supply disruption from the Middle East -- particularly as refinery thoughputs were significantly lower than in December. Middle East producers are the main suppliers of crude to China.

Chinese oil imports have shown substantial growth over the last 12 months on the back of sustained industrial production (up 14% year-on-year) and GDP growth

Wheat production in both Australia and Canada is set to bounce back strongly this year following the severe droughts in 2002 which hit both countries' exports. Latest estimates from the International Grains Council (IGC) forecast Australia's 2003 wheat crop at 23.0 Mt, recovering from last year's disastrous production of just 9.4 Mt. Canada is set to produce 25.0 Mt this year, compared to 15.7 Mt in 2002. The US is forecast to increase wheat production by 14.0 Mt year-on-year, to 58.0 Mt. By contrast, production in the CIS & Baltic States is expected to fall by 12.4 Mt this year. Russian wheat production, which along with that of the Ukraine and Kazakhstan was responsible for a surge in exports from the Black Sea during the 4q02, is set to fall by 8.6 Mt year-on-year to 42.0 Mt.

Despite widespread expectations to the contrary, crude oil imports into the US fell over the last week -- by 0.4mb/day. Averaging 8.3mb/day crude imports were insufficient to prevent inventories from being drawn down by a further 1mb/day. Product inventories - particularly gasoline and distillate stocks -- also fell last week. "Without a sustained period in which US crude oil imports average 9 mb/d or more, we will likely continue to see low inventory levels across the board," reports the US Department of Energy.
With more severe winter weather hitting the US north-east this week, we would expect further draws on product stocks. More US imports of both products and crude are essential, if inventories are to be replenished over the coming weeks.

Gloomy US consumers have caused the consumer confidence index, which is compiled by the Conference Board, a private business group, to fall to its lowest level since 1993. An unexpectedly steep fall of 15 points during February, the third consecutive monthly decline and the largest since the September 2001 terrorist attacks on the US, put the index at 64 points and has prompted fears about prospects for economic recovery. Consumer spending makes up about two thirds of the US economy. Uncertainty over possible conflict in Iraq, terrorism, rising fuel costs and disappointing employment and financial markets are thought to be to blame for the current collapse in confidence. The expectations index, a measure of the six-month consumer outlook, fell to 65.6 points, the lowest level since February 1992.

Italy has signed a decree to ban single-hull tankers above 5,000 dwt carrying fuel oil and heavy crudes and older of more than 15 years of age from entering the country's ports. The ban is set to come into force from as early as May this year and could push more older tonnage out of European waters. The move comes on top of similar action taken by France Spain and Portugal earlier in the year.

The uni-lateral bans and the voluntary trend towards the chartering of modern tonnage has led to a fall in average age of tanker chartering in Europe and a determined preference for double-hulled tonnage over the last few months following the sinking of the Prestige in November.

For most European destinations the average age of tanker chartering on the spot market has fallen. SSY analysis of reported dirty spot fixtures indicates that for cargoes discharging in the UKCont between November 2001 and end February 2002, the average tanker age was 10.6 years, while for the same period a year later, this had dropped to 9.4 years. The share of double-hulled tonnage over the same period has grown from 34% to 72% for UKCont discharges. For reported fuel oil cargo fixtures, the difference was even more pronounced, with the average age of chartering for UKCont discharges falling from 16 years between Nov01- Feb02 period to 10 years over the past 4 months.

For EUMed ports the average chartering age fell from 14.1 to 13.7 years and share of double hulled tonnage grew from 40% to 48% of all reported dirty spot fixtures. There was little change, meanwhile, to the age or hull profile of tankers discharging dirty cargoes in East Med ports.

Elsewhere in the world there has been negligible change in the average age of vessel discharging dirty cargoes over the same period - even for the smaller tonnage sectors. The age of vessels discharging South East Asia and Japan rose slightly and those discharging in India fell slightly over this period.

Venezuelan grain imports have been hit by a total freeze on the sale of dollars, according to a report in Lloyd's List. Venezuelan president Hugo Chavez has reportedly refused to award licences allowing the purchase of dollars at a preferential rate to any companies that were involved in the general strike during December and January. Combined with price controls in the shops, the effect has been to make it impossible for major grain importers to sell products without incurring a loss. Thousands of tonnes of wheat, soya and coarse grains have reportedly been put into storage in leading export countries such as Canada and the US. Puerto Cabello's grain terminal, which usually handles 45 dry bulk vessels a month, handled just 15 in January. During the International Grains Council's July 2001- June 2002 marketing year, Venezuela imported an estimated 1.4 Mt of wheat and 0.7 Mt of coarse grains

US coal exports totalled 20.6 Mt during 2002, a fall from the previous year of 28% and the lowest export level for over 20 years. Coking coal exports fell by 23% year-on-year to 15.3 Mt, while steam coal shipments were down by 38% at 5.3 Mt. Steam coal exports ended 2002 on a record low, totalling just 0.3 Mt in December, a year-on-year decline of 95%. December coking coal exports of 1.4 Mt were up by 26% year-on-year.

The US Department of Energy has issued its most serious warning yet about the state of its oil inventories. In its weekly market report, the Energy Information Administration described stocks as "delicate" for refined products and crude. "Without a sustained infusion of crude oil into the United States oil market, matching supplies to demand at 20 million barrels per day will require the balance of a tightrope walker," said the report issued 20 February.

For the week ending February 14, crude oil imports surged - to 8.8 Mb/d - this as Venezuelan exports started to make some notable gains. As a result, crude inventories rose slightly - by an estimated 3.1 Mb/d. This rise, however, was at the expense of robust refinery throughput. Refineries processed 14.3 Mb/d - well short of the 20mb/d in US demand.

The short fall was met through further draws on product stocks and imports. The draw on product stocks (particularly at a time of another bout of severe winter weather in the US North East) meant huge falls in distillate and propane inventories and a significant drop in gasoline stocks. Domestic prices have soared as a result, with gasoline now hovering around the $2/gallon mark.

The high prices and lower availability of domestically produced products has led to a surge in demand for product tanker tonnage and soaring trans-Atlantic clean rates.

To meet US demand the EIA reports, "Either more refined product needs to come out of refineries, both domestic and foreign, or demand needs to fall closer to 19 million barrels per day." With the latter highly unlikely we expect the upward pressure on trans-Atlantic rates to continue in the near term.

The EIA describes the situation of how to not only meet current demand but also raise crude and product inventories as a "conundrum". It concludes that the most likely answer will be through far more crude oil and product imports. "Just as it took over nine months for oil markets to work off surplus inventories, it may take months, not weeks, to rebuild an inventory cushion."

The EIA warns that with the markets balanced so delicately, a strike similar to the Venezuelan stoppage in December and January, would put some severe pressure on the US oil market situation. "There is no room for sustained domestic infrastructure problems or reduced supplies from other countries," it reports. The barge and storage facility fire in New York on Friday served to emphasise how delicate the balance is, with product prices surging on the news.

Higher import volumes are almost a certainty for US refiners and SSY fixture data supports this. Spot fixture volumes imply a sharp rise in US discharge from the second week of February, while the volume of (long haul) spot cargoes fixed to discharge in March show a further rise. Considering the shortfall in inventories, we also expect more short-haul (Venezuelan) cargo deliveries to be fixed on the spot tanker market for March delivery.

German industrial production (IP) fell by --4.4% month-on-month in December, contributing to a fall of --1.5% in the Eurozone as a whole. The fall caused the IP index to finish 2002 at a level below that of the start of the year, almost reaching the low reached during November 2001. Germany's poor performance is at odds with the latest steel output figures, which reveal that the country's January production was up by 11% year-on-year. This apparent discrepancy suggests that EU steel production, and associated raw material trades, could be vulnerable.

China plans to return to the 2001 coal export level of 90 Mt during 2003, according to Dow Jones. This would represent year-on-year growth of 7%, following the decline in exports to 83 Mt during 2002. Annual coal imports are expected to reach a similar level to last year, at around 10 Mt. High domestic coal prices during last year reduced the Chinese incentive to export but the government is reportedly keen to ease high inventory levels during 2003. Any significant rise in China's exports is likely to have a negative impact on tonne-mile demand.

Weather-related delays on the Turkish Bosporus and Dardenelles Straits are showing little sign of reprieve with more than 50 tankers (mainly
Aframax tonnage) now waiting to transit north and south. Snow in the area has severely reduced visibility - this on top of the strict Turkish day-light restrictions in place for tankers whose overall
length exceeds 200m.
The build up of tonnage at the straits has added to loading delays for crude exports from Novorossiysk. With oil storage facilities nearly
full, production levels as well as loading programmes are likely to be delayed further. Broking sources suggest it could be at least a week
for traffic through the straits to resume to near 'normal' levels. The delays are contributing to upward pressure on Aframax rates in Med and
region.

Japan's Ministry of Economy Trade and Industry, stated today that it would not release oil from the Strategic Reserve even if crude prices were to hit $40/bbl.
The Government Strategic Reserve amounts to about 320m/bbls. In addition there are about 82 days worth of privately held reserves intended for domestic consumption. A ministry official said: "Since release of strategic reserve is an intervention into the market economy, we will make all effort not to do so." He added that they might release some portions of the reserve but it is not yet time to do so as "nothing special has occurred. . ... for instance, if Hormuz Strait is closed for two to three months . . . then we might consider releasing the governmentally held strategic reserve."
This would indicate that Japan will continue to charter in tonnage for supply of crude oil, which would have to come largely from the Atlantic Basin in the absence of supply from the Middle East Gulf, and mainly in VLCCs. Aframaxes would also be in greater demand for Indonesia and North West Australia loadings.

Dry bulk carrier owners are likely to be reassured by the latest figures from the International Iron and Steel Institute (IISI), which reveal that crude steel production got off to a brisk start in 2003. Total global January output was 76.6 Mt, up 11% year-on-year. Asian output continued at high levels, with production for the region at 33.9 Mt, a year-on-year rise of 13%. Chinese output rose by 21% to reach 16.6 Mt while Japan's production grew by 10% to 9.3 Mt. In the EU, a year-on-year rise of 3% to 13.0 Mt was helped by a surprisingly strong increase of 11% in Germany, where output reached 3.8 Mt. US January production also increased strongly, by 9% to reach 8.0 Mt, despite weak economic data.

Initial reports indicate that the oil strike currently underway in Nigeria is having little impact on crude oil exports. Oil majors report that they have had no interruption to terminal operations and do not expect any serious disruptions. Broker sources say VLCC liftings at the moment appear "normal", although there is only sparse enquiry at present for million barrel cargoes. Nigeria produces more than 2mb/day of crude oil, of which 1.7mb/day is exported

According to the South African Coal Report, Richards Bay Coal Terminal is expected to load in the region of 6.0 Mt during February, well above the target of 5.67 Mt per month. Vessels calling at Richards Bay are currently experiencing berthing delays of between 0 -- 48 hours, with the No.1 Shiploader having been down over the weekend for planned maintenance. Coal stocks at the port are around 3.3 Mt, equivalent to 18 days loading. The bullish forecast for February loading follows a disappointing performance in January, when just 4.7 Mt of coal was exported.

The fall in US crude stocks is having a knock on effect on oil and product prices, according to news reports today. Crude stocks have fallen to their lowest level in 28 years contributing to the price hike and opening an arbitrage window between Europe and the United States. Crude in New York closed on Friday for the Presidents Day weekend at $35.36/bbl, whereas Brent for April delivery this afternoon in London is around the $33 mark, leaving a significant margin -- even after considering the freight costs.
Given the severe weather conditions in the USA and the shortages of supply from Venezuela and possibly some disruption to exports Nigeria, this trend is set to continue in the short term, and could bring with it additional demand for Aframax tonnage trading from the North Sea to US ports.

Reports have been received today of a Nigerian Oil Workers strike starting tomorrow, that threatens to close some of the country's key export terminals. Nigeria produces 2.2mb/day of crude oil, of which 1.7mb/day is exported. As one of the geographically closest oil producing countries to the USA, this could have a serious impact on US imports at a time of unstable Venezuelan recovery and the lowest crude stock levels since 1975. The demand for alternative sources of similar sweet crude is a likely result -- possibly from North Sea -- which would raise tonne-mile demand.

Surprising news from Japan showed that its economy grew by 0.5% in 4q02 due to strong exports and an upturn in domestic demand. The general assumption was that Japan's economy would shrink, but the good news of a fourth consecutive economic expansion (although only minimal) prompted a 1.2% surge in the Nikkei. The yen also strengthened with monetary policy unchanged. Nevertheless, Japan is extremely unlikely to show any more than flat GDP growth even if it avoids a recession in 2003. Economists from some of the leading financial institutions saw this as little reason to be cheerful as the Japanese economy is still in line for a quarterly contraction at some point in 2003.

The outlook for 2q Panamax and Handymax dry bulk carrier demand has been boosted further following another upward revision of forecast soya exports from Latin America. Latest estimates by the US Department of Agriculture (USDA) for exports of soyabean meal from Brazil and Argentina during the current October-September marketing year have been increased since mid-January by a combined 1.3 Mt. The two countries are now expected to export a combined total of 62.8 Mt of soyabeans and meal in 2002/03, a rise of 28% over the 49.1 Mt exported during 2001/02.

US crude oil stocks moved even lower last week according to figures from the US Energy Information Administration's latest report, leaving
inventories at their lowest level since October 1975. The draw on stocks came as refiners saw widening refinery margins in the gasoline
market and boosted their production. According to the EIA, crude oil imports for the week ending February 10 averaged 7.2 mb/d - their lowest weekly average since the week ending January 28, 2000.

The EIA reports that the level of crude imports over the coming months as a "key barometer" towards US retail prices, "because crude supplies
need to increase significantly in order to pop the balloon and have product prices fall back to levels which customers are more accustomed to paying."

Given fairly stable domestic production levels and limited growth in pipeline imports, the prospect for higher sea-borne import volumes to meet US demand in 2003 (which is expected to grow slightly from 2002 levels) even without a stock build, is fairly positive. If stocks are to be rebuilt back to what the EIA calls a 'comfortable' range within
the 1h03 this would imply either more crude imports than seen in recent months and/or more product imports - and should put some
positive pressure on trans-Atlantic rates.

In its latest monthly report, the International Energy Agency has raised its global demand forecast by 0.08 mb/d to a total growth of
1.12 mb/d from 2002 levels. The IEA projects consumers to use 78.01 barrels of oil a day this year. The increase was made on the back of
severe winter weather in USA, fuel switching from Nuclear energy in Japan, and expected robust growth in the Chinese market. Oil demand
in China is forecast to rise by 2.7PCT this year - faster than in Europe, USA and the rest of Asia.

Press reports from Japan indicate that Tokyo Electric Power Company (Tepco) plans to reactivate at least six of its nuclear power plants, currently shut for safety inspections and any required repair work, in June. Tepco has 12 of its 17 reactors offline, with the other five due to close by April 15. Tepco will discuss the plan to reactivate the plants with officials from Fukushima and Niigata Prefectures, where the reactors are located, before the end of February. Their approval is required before any June restarts can go ahead. With the rolling programme of plant closures continuing, Japan continues to experience high demand for coal imports.

Press reports from Japan indicate that Tokyo Electric Power Company (Tepco) plans to reactivate at least six of its nuclear power plants, currently shut for safety inspections and any required repair work, in June. Tepco has 12 of its 17 reactors offline, with the other five due to close by April 15.

The utility hopes to open No. 2, 3, 4, 5 plants at the Fukushima power station, where repair works have been completed, and two more plants at the Kashiwazaki-Kariwa station in Niigata Prefecture, where the company is confident that no cracks are appearing on reactors. Tepco will discuss the plan to reactivate the plants with officials from Fukushima and Niigata Prefectures before the end of February. Their approval is required before any June restarts can go ahead.

Dependence on alternative fuel sources due to the closure of nuclear facilities has led to high demand for carbon fuels. During the 4q02, coal imports into Japan were up by 14% year-on-year, crude oil imports increased by 6% and products imports grew by 35%. There is potential for power cuts when Japanese demand for electricity peaks in July; hence Tepco's eagerness to restart nuclear capacity in June.

With the rolling programme of plant closures continuing, Japan's increased reliance on imported fuel sources is expected to continue at least into the 3q. The full implications for the dry bulk and tanker trades are discussed in the February edition of SSY's Monthly Shipping Review.

Senior representatives from a major Nigerian white collar oil union, have threatened to close down export terminals on Friday if agreement over working conditions and pay are not reached by then. This could affect more than 1.7mb/d in exports. The majority of Nigeria's production (about 60%), moves to the USA in VLCC and Suezmax tonnage. If the strike goes ahead it could put some downward pressure on freight rates as fewer cargoes become available.
As Venezuelan exports have only just started to show some recovery (latest estimates put this at 1.5 mb/d) a Nigerian strike would doubtless cause some concern for US buyers of medium haul crude.