News archive January 2003

The closure of a series of Japanese nuclear power plants led to a surge in crude oil imports last month -- a reversal of the trend seen for most of 2002 and one that could last well into the 1q03. Japan's crude oil imports fell to a 12-year low in the first six months of 2002 after a recession cut demand from power companies and automobile users. This started to turn around in the 2h02 and in December, Japan's crude oil imports rose by a sharp 19.6 percent, from year earlier levels. Japan's oil refineries processed 7.6% more crude oil in December than a year earlier -- rising to 4.53 mb/d from 4.29 mb/d a day in November.

Eight out of a total 17 nuclear plants were shut down over the 4q02 for checks, after admitting that employees falsified safety documents. Although the Japanese government has since decided to allow Tokyo Electric Power Co (Tepco) to run a nuclear reactor with cracks in shrouds left unrepaired, (saying the damage will not present a safety risk over the next five years), the utility must now gain the approval of local government before the reactor can be restarted. This process is expected to take at least several weeks leaving energy demands to be met by coal -- the cheapest alternative source, but also gas and oil.

The Ministry's decision to make the announcement before local approval has been given suggests that the government is keen to ensure that Japan's nuclear generation capacity is restored before the summer peak in demand. Therefore it would suggest that the current surge in oil (and coal) imports caused by the nuclear shortfall is unlikely to last beyond the beginning of summer. However, traditional demand patterns could sustain volumes until July before declining in the autumn.

Products
The production of fuel oil, used to fire power generators, jumped 21% in December from a year earlier, while domestic sales of those fuels rose 35% according to the Japanese Energy Ministry. The increased processing at local refiners wasn't enough to meet demand for fuel oil, forcing refiners, traders, and power companies to import excess requirements. This meant a surge in fuel oil volumes -- mainly from short haul sources -- particularly South Korea and Russia.

Because domestic refineries were used to produce more fuel oil last month, the production of other fuels fell, forcing much higher imports of jet fuel, naphtha, diesel and kerosene. Japan's product imports have also risen on account of some stockbuilding in fear of a disruption to trade in the event of Middle East conflict.

Preliminary figures from the American Iron and Steel Institute (AISI) reveal that US steel imports totalled 29.5 Mt last year, an increase of 8% on 2001. December steel imports of 2.5 Mt were up by 23% year-on-year. Finished steel imports during 2002 totalled 21.6 Mt, a rise of just 0.5%, indicating that last year's import growth was largely driven by increased shipments of semi-finished products used by US mills for steel production.
Finished steel imports from the EU, which have been subject to tariff quotas imposed by the Bush administration from March last year, fell by 18% to total 4.1 Mt in 2002. Asian exports have also been hit by the tariffs, with combined finished steel shipments from Korea, Japan and China down by 15% to 3.7 Mt. Canada, which is exempt from the tariffs, exported a total of 5.1 Mt of finished steel to the US last year, an increase of 25%.

Further draws on US crude and product stocks have raised expectations of higher domestic prices and more crude and product imports over the
coming weeks. Data released yesterday, for the week ending January 24, show that gasoline inventories fell. The US Dept of Energy says it
would be difficult to push down crude inventories further and says, "a significant increase in crude oil imports (perhaps to a level at or above 9 million barrels per day)" might be necessary. The Energy
Department says that as yet, there are no signs yet of a "significant further upward movement in shipments from either Iraq or Saudi Arabia." But this would appear the only course for the US to meet its demand without dramatically reducing stocks further and raising product prices sharply - with the only alternatives being much warmer
weather or a quick return of Venezuelan exports.

Latest estimates from the International Grains Council (IGC) put world wheat trade for the current marketing year (which runs from July to June) at 104 Mt, down from 107 Mt in 2001/02. The forecast has, however, been revised upwards by 3 Mt since the end of November largely due to purchases by the EU in advance of the January introduction of tariff rate quotas for low and medium quality wheat. Forecast imports by Africa are also up because of tight supplies in several countries. The five major exporters (Argentina, Australia, Canada, EU, US) are expected to ship 13 Mt less than in 2001/02 but Russia, Ukraine and India are set to export an extra 9 Mt, with Russia becoming the world's third largest supplier after the US and EU.

Fears that exports of Brazilian soya to China may be stalled over GM certification have eased following a temporary agreement between the two countries which lasts until September 20. China's insistence that each exporting country has to declare any GM soya as fit for human consumption had represented a potential obstacle for Brazil, which does not officially recognise commercial GM production. However, the US Department of Agriculture (USDA) has confirmed that agreement has been reached between the two countries, with Brazilian soya exports expected to begin arriving in China in early March. The US has already reached agreement with the Chinese enabling an extension of its own exports until September 20.
USDA forecasts Brazilian soyabean exports for the October 2002 -- September 2003 marketing year to reach 20.6 Mt, a year-on-year increase of 37%. Chinese imports are expected to rise by 40% to 14.5 Mt. When China's soyabean imports peaked at 13.2 Mt during 2000/01, it is estimated to have sourced over 3 Mt from Brazil. The green light from China should help to boost demand for Panamax and Handymax tonnage.

The latest Chinese trade figures suggest that last year overall oil imports reached record levels of 1.8mb/d - a rise of 10% on 2001.
Product imports - although were down on 2001, surpassed that seen in 2000 while crude imports in 2002 nearly matched that seen two years before. Crude imports totalled 1.391 mb/d in 2002 compared with 1.407 in 2000. With industrial growth measuring 14.9% year-on-year in December, the trend towards higher imports seems set to continue into 2003 as a better regional economic climate comes into view. Growth is expected to be concentrated for crude imports (predominantly on VLCC and Suezmax tonnage from the MEG and Red Sea) with an increasing volume of products refined locally.
Enquiry this week (including that East) is somewhat quiet however, as charterers find the run up to the lunar new year (which starts of February 1) as a timely point to hold off for lower freight rates or
to see what the US will do with regards to Iraq. One insight on what is to come perhaps can be found from a Chinese prediction for the
coming Year of the Ram. It says we can expect "confusion to arise, and this may lead to conflict."
Gong Xi Fa Cai

China's steel imports totalled 28.7 Mt in 2002, an increase of 13% compared to 2001. The annual import total, which includes semi-finished steel products, has risen substantially each year for the past four years, having declined from the 1993 peak of 35.8 Mt to 13.0 Mt in 1998. Due to the imposition of steel import tariffs running from May to November, China's October and November imports slowed. However, 2h02 steel imports were up by 13% year-on-year at 13.9 Mt. December imports rose by 7% year-on-year to reach 2.2 Mt.

US consumer confidence took a turn for the worse in January, according to a popular report released by the Conference Board in New York today. The 'index of consumer confidence' fell from December, and paints a cautious picture for any significant American economic recovery in 2003 if sustained. Any such slowdown has the potential to undermine oil demand growth for the world's largest oil consumer. In 2002 US oil demand rose by just 0.05 mb/d from the previous year and is expected to grow by a further 0.28 mb/d this year. The report cites lacklustre economic recovery and the threat of war with Iraq - both of which are also contributing to jittery stock markets this week -- as behind the consumer confidence slide

Latest predictions by leading analysts published in The Economist put 2003 GDP growth in Asia's emerging economies at strong levels. This is led by China, with a forecast increase in GDP this year of 7.4%, compared to last year's rise of 7.9%. South Korea is expected to show GDP growth of 5.0% (compared to 6.0% in 2002), Taiwan 3.4% (3.2%), Malaysia 4.7% (4.0%) and Indonesia 3.3% (3.4%). The current optimism concerning Asia is reassuring for shipowners, with the economic strength of the region crucial to freight market prospects.

The Venezuela public-sector strike entered its ninth week Monday, with some mixed signals emerging as to what we can expect in the near term. According to news reports today, President Chavez said Sunday that oil production has risen to 1.32 mb/d a day but oil workers put the figure at about 0.96 mb/d. Pre-strike production was about 3.2 million barrels, and fell as low as 150,000 barrels early in the strike. Another news report suggested that Venezuela's 120,000 b/d El Palito refinery (which produces gasoline for the domestic market) has been restarted by workers breaking the strike - it could be an indication of what is to come. PDVSA is reported to export 0.45 mb/d of crude this week according to port officials.

Upward pressure is likely to be maintained on tanker rates trading into the Untied States with low inventories (although up on last week)
continue to worry the US Department of Energy, as Venezuelan oil remains largely off the market and the threat of war in Iraq mounts.
Although longer haul imports would appear to be essential at this time, one oil analyst told SSY today, that US refineries with a view to forward crude prices (compared with current spot) were holding off on oil purchases and gambling on the already precarious crude stock levels to meet input needs.
A draw on product stocks to meet domestic demand is therefore, highly likely. At present the product (particularly gasoline) stocks are at a
fairly comfortable level, but in the light of crude run delays and scheduled refinery maintenance, will quickly be whittled away without import substitutes.

Latest data from China confirm that the 2001 boom in Pacific short haul coal shipments was not repeated last year. China exported 83.9 Mt of coal in 2002, down 8% year-on-year. Steam coal exports fell by 11% to 64 Mt while exports of coking coal increased by 16% to 13.3 Mt.
Combined steam coal exports to Taiwan and Korea were down by 14% to 35 Mt. Exports to Europe fell by 68% to just 0.9 Mt. By contrast, China's exports of coking coal to Japan increased by 21% to 8.6 Mt.
Coal exports from Poland, which experienced an unexpected 2001 increase in steam coal shipments, stabilised at over 22 Mt for the second consecutive year. Steam coal shipments were down by 0.2 Mt to 19 Mt while coking coal exports came to 3 Mt, equalling the 2001 performance.

China expects to produce a total of 215 Mt of crude steel during 2003, according to a survey of a selection of major producers conducted by the Japan Iron and Steel Federation. This would represent growth of 20% on the 2002 total, which was 24% higher than in 2001. As previously forecast by SSY, the survey reveals that a general upturn in global steel production appears to be in prospect this year. Both the EU (162 Mt) and the US (93.4 Mt) expect 2003 output growth of 2%, compared to just 0.2% in both regions during 2002.
However, according to the survey, China's continued burgeoning steel output will not be accompanied by growth in South Korea or Taiwan, whose forecasts for 2003 are for 2% and 4% less, respectively, than in 2002

OPEC has said it is ready to raise production further, in order to
lower prices, according to news reports today. The OPEC President said
that the Group is currently assessing the decision made earlier this
month to boost oil output by 6.5% and will then determine whether
another rise in production is necessary. Such a rise could put further
upward pressure on larger crude tanker rates from the Middle East
Gulf, particularly if Venezuelan oil remains off the market.

The Japanese government decided yesterday to allow Tokyo Electric Power Co (Tepco) and Chubu Electric Power Co to each run a nuclear reactor with cracks in shrouds left unrepaired, saying the damage will not present a safety risk over the next five years. The operations of No 3 reactor at Tepco's Kashiwazaki-Kariwa plant in Niigata Prefecture and the No 4 reactor at Chubu's Hamaoka Plant have been suspended for regular checks. The utilities must now gain the approval of local government before the reactors can be restarted, with the whole process expected to take at least several weeks.
The discovery of safety data falsification last August led to widespread closure of Japanese nuclear generating plant by several utilities as public confidence in nuclear power waned. Since then, Japan has had to maximise the use of alternative energy sources to meet its increasing needs for electricity. SSY estimates that 43 Mt of steam coal was imported into Japan during 2h02, a year-on-year increase of 14%, and a rise of 26% on 1h02. Yesterday's announcement is the first signal that the Japanese government is making efforts to ensure that Japan's nuclear generation capacity is restored before the summer peak in demand.

Mixed messages are emerging from Venezuela as to whether we will start to see any resumption in oil exports over the next few days.
Yesterday's news that port pilots were returning to work put a positive slant on the situation and prompted a slight rise in Caribbean freight rates. But reports today do not seem as solid, with
some describing the news as "premature" and at best, with only very limited pilotage (ie only in Maracaibo) available. Oil analysts have pointed out that even if the pilots in Maracaibo return to work,
whether the oil would reach the tankers is doubtful. Damage to the Venezuelan oil fields is now thought to be severe with the International Energy Agency predicting at least two months laytime before output is back to previous production levels.
If, by the end of the week some recovery to oil exports is realised, expect the return to be slow and erratic.

The news that the strike by Venezuela tanker pilots is over should help to ease cargo movements out of western Lake Maracaibo. Venezuelan shipping agents confirmed that the pilots' strike halted yesterday, bringing an end to a seven-week period of disruption which saw oil exports drop to one-sixth of normal levels. Only five or six individuals out of a total of 24 channel pilots and 20 docking pilots in Maracaibo have been available until now. Last month a group of Orinoco River pilots, who steer cargo ships past sandbanks and shallows, joined the protest, disrupting exports of coal, aluminum, steel and iron.
Despite the strike's end, it is unlikely that export levels will return to normal for some time yet. Coal loading from port stockyards has begun, but there is a shortage of gasoline to restart mining operations. Transport from the mines to the ports is also still disrupted.

The boom in Far East Asian crude steel production continued in December, according to the latest figures from the International Iron and Steel Institute (IISI). Asian steel output in December totalled 34.0 Mt, a year-on-year rise of almost 10%. China recorded its highest ever monthly total of 16.6 Mt, up 11% year-on-year, while Japan produced 9.3 Mt, a rise of over 12%.

The 65 countries monitored by IISI produced a total of 886.7 Mt of steel in 2002, over 6% more than in the previous year. This growth was largely due to record production levels in Asia. China's 2002 output of 181.6 Mt was over 20% higher than in 2001. Japan produced 107.7 Mt, a year-on-year rise of almost 5%. Asia's total of 381.7 Mt represented an increase of over 11% compared to 2001.

For 2003, SSY predicts growth of just over 2.5% in world crude steel production. As outlined in SSY's Dry Bulk Forecaster, increases in EU and North American output are expected to support further China-led gains in Far East Asia.

Oil prices jumped by $2/barrel today on the back of heightened tensions in the Middle East. The hike raises fears of oil prices dampening the slow recovery we are currently seeing in global oil demand and adds to the mixed economic messages coming from the US in early 2003. Press reports today describe American economic recovery as "uncomfortably weak". Industrial production levels are falling -- after some recovery in late 2002 -- and the trade deficit has risen to "record levels

Oil demand recovery will arrive sooner than expected, according to the International Energy Agency in its latest monthly report. Although the
Agency's overall assessment of demand growth for 2003 remains unchanged from last month, the expected timing of the recovery has shifted and could put upward pressures on tanker demand in the near term. More gains are now "front-loaded" in the first half, (and could lead to a slightly more subdued year-on-year growth later on). This
translates into a slightly higher absolute demand of 77.9mb/d for the year, an increase of 80kb/d from last month's report.

South Korea's five thermal generating companies expect to import a combined total of 42 Mt of steam coal during 2003, according to an unnamed industry source quoted in Platts Coal Trader International. This represents a 5% increase on the estimated 40 Mt imported by the generating companies in 2002. The rise is mainly due to Korea South-East Power beginning the test commissioning of two new 800-MW units at Yonghung power station, which are due to be phased in during 2004. South Korea imported an estimated total of 52.2 Mt of steam coal last year, a rise of almost 7% compared to 2001.

Latest figures from the US Department of Energy indicate that US crude stocks have fallen even further -- largely due to the disruption in Venezuelan exports over the last 6 weeks. Overall, US crude imports over the last 3 weeks are at least were 300Kb/d less than during the same period a year ago. The lower import volumes have led to a strong draw on stocks to what is now widely considered worrying levels -- particularly with possible conflict with Iraq on the cards. In order to keep refinery throughput and utilisation at current levels (and prevent a serious run on product inventories in the US) higher import volumes are essential -- and according to spot fixture activity this week appears fairly certain

The US Department of Agriculture (USDA) has revised its latest forecast for Brazilian soyabean exports for the October 2002 -- September 2003 marketing year down slightly, to 20.6 Mt. This represents a year-on-year increase of 37%. In addition, exports from Argentina for the same period are forecast to rise by 61% year-on-year to 9.7 Mt. The two countries' combined increase of over 9 Mt overshadows the projected US soyabean export fall of 3.6 Mt. South American soyabean exports traditionally peak during the 2q. This could put further pressure on demand for Panamax vessels in 2q03.

The OECD Composite Leading Indicator (CLI) rose slightly in November 2002 but its six-month rate of change continued to fall. Despite having risen by 0.3 points in November to 120.1 from 119.8 in October, the CLI's six-month rate of change has decreased for seven consecutive months. The CLI for the US rose by 0.6 points in November and its six-month rate of change also increased, following six consecutive months of decrease. There was no change to the CLI for the Euro area in November but its six-month rate of change has fallen for six consecutive months, intensifying concerns that Europe's recovery is running out of steam. In November, the CLI for Japan fell by 0.2 points and its six-month rate of change has fallen since May 2002.
Such data may serve to temper optimism in the dry bulk freight market.

Doubts as to the effectiveness of OPEC's announcement in lowering prices have been reflected by increases in crude prices today. However the additional announcement of support from non-OPEC Mexico, in the form of an increase of 120,000b/d, whilst small, may help market sentiment and also encourage other non-OPEC producers to raise supply and keep prices down. This should add further upward pressure to larger tanker rates.