News archive March 2003

A survey of 25,000 consumers by the European Commission revealed that Eurozone consumer confidence fell to a nine-year low in March, causing the consumer confidence index to slip from --19 in February to reach --21. The index reached a low of --29 in August 1993 and a high of 3 in April 2000. Uncertainty over the length and economic impact of the current conflict in Iraq has made consumers increasingly wary. According to the Commission, the Euro region's economy will not expand by more than 1% this year and may contract in the first quarter. This marks a significant downturn in expectations since last November, when the Commission was predicting Eurozone growth this year of 1.8%.

The UN Security Council has agreed to extend the Oil for Food programme by a further 45 days. Oil stocks are available at Ceyhan, where storage is currently at about 6.9mbbls, close to maximum capacity. Reports indicate that UN and SOMO officials are in place in Ceyhan, and that exports could start again within a few days. The pipeline to Ceyhan is still functioning but at a much reduced flow. If exports are to resume this will create demand for tonnage (particularly Suezmax and Aframax) in the Mediterranean.

EU transport ministers have agreed to proposals on prohibiting the carriage of heavy fuel oil in single-hull tonnage over 5,000 dwt in the European Union. The ban does not currently apply to transit vessels going through the Gulf of Finland (thereby leaving Russian trades & vessels out of the picture). Subject to approval by the European Parliament (which is set for mid-2003), these would enter force immediately. The EU proposals also accelerate the IMO schedule for the withdrawal of single-hulled oil tankers in bringing forward the phase-out age to 23 years and the phase-out date to 2005 for "pre-Marpol" tankers. Almost 500 tankers will thereby be barred from European trading as soon as the rules are put into place. The sectors most exposed to the EU proposals in the short term are the smaller carriers. Approximately one third of small (<27K dwt) tankers and 28% of the Handysize (27-37,999 dwt) fleet will be withdrawn from EU trading when the rules are implemented. About 50 Panamax tankers and 70 Aframaxes also fall into this category.

This subject is covered in more depth in the latest edition of the World Oil Tanker Trends (2003, Volume 1). [Buy]

Crude oil imports for the week ended 21 March averaged nearly 9.7mb/day for the first time since early December. This has been helped by a rise of production in Venezuela, and the arrival of long awaited 'oil on the water' from the Middle East. However crude oil inventories in the USA are still around 25mb below the lower end of the 'normal' range. In order for stocks to reach the middle of the normal range by September, the US Department of Energy reports that imports would have to average 10mb/day (approx 5 VLCC's a day) throughout the period. Over the last three years the average imports have been 9.4mb/day. If inventories are to be re-built in 2003 the move should fuel the demand for VLCC tonnage over the next few months

Increasing steel production in Japan has pushed up the countries iron ore imports over the first two months of the year. A 12.7% rise in iron ore imports was seen in the month of February compared to the same period a year ago. A total of 10.7 Mt of ore was imported over the course of the month. Increasing import figures are fuelling a bullish steel export market that is (according to the Tex report) expected to reach 109.7 Mt for the fiscal year (April 2002 -- March 2003). Total iron ore imports for the fiscal year are in line to reach 130 Mt.

A deterioration in the situation in Nigeria has caused further reductions in crude production and exports. The outage is now estimated to be about 900kb/day. Total production averaged 2.2mb/day in February, but is now reported to be down to 1.4mb/day. Reports suggest that the situation may last until after the elections set for 12th and 19th April.
The characteristics of Nigerian crudes, makes them popular with US refiners as they give high yields of gasoline and distillates. Any prolonged outage will affect US medium-haul crude supply at a time of slow recovery in Venezuelan production, a lack of Iraqi exports and very low domestic crude stock levels.
Lower availability of cargoes from West Africa could add downward pressure on the Suexmax and VLCC freight markets.

Reports from Metal Bulletin indicate that Brazil's CVRD will boost export capacity at Ponta da Madeira from 56Mtpy to 70Mtpy for both iron ore and general cargoes when its No3 pier comes on stream in early 2004. CVRD is adding a further 3Mtpy of new capacity next year at its Gongo Soco mine in Minas Gerais. CVRD intends to increase capacity at its Carajas iron ore mine by 14Mtpy for start-up in 2005, subject to the company's evaluation of demand growth. In the same year, extra mine capacity totalling 25 Mtpy in Minas Gerais will be introduced to replace near-exhausted reserves in locations that include Timbopeba and Corrego do Meio. The company's overall ore production this year is expected to increase by 3-4% over last year's total output of 163.9 Mt, including 28.7 Mt of pellet.

According to Platts International Coal Report, latest figures from the Spanish Ministry of Environment indicate that hydroelectric production accounted for 12,248 GWh in the first 11 weeks of 2003, over 3.5 times more than in the same period of 2002. However, despite the 11-week total being greater than that of the first seven months of 2002, it still fell short of the 14,048 GWh produced in the first 11 weeks of 2001. Large hydro reservoirs in Spain and France are thought to have helped keep coal import demand in southern Europe relatively light so far this year. Spanish hydro reserves have been above 15 Mm3 for the past three weeks, well above the five-year average of 12 Mm3. However, Platts reports that outages at two Spanish nuclear plants have kept up the pressure on hydro production so far this month.

Nigeria has cut its oil output by more than 30% according to reports today. In the run up to April's national elections, civil unrest has caused oil majors operating in the region to close some of its
production facilities The loss in output currently amounts to about 820kb/day, more than 1% of total global production. A force majeure has been declared for exports from Bonny, Forcados and Escravos terminals, partly because of the unrest.

At a time when Iraqi exports have ceased and Venezuela's output remains well below pre-strike levels, the Nigeria cuts will further tighten global oil supply. Oil prices have moved slightly higher
today, although remain well below last week's levels.

The lack of cargo availability from Nigeria could put some downward pressure on Suezmax and VLCC rates from West Africa in the short term.

In a sign that China's demand for steel may be weakening, reports from World Steel Dynamics indicate that steel sheet prices in China have fallen recently. The price of imported hot-rolled band is reported to have fallen by $55/tonne in the space of a week. Build-up of excess inventory at ports in southern China has also been reported, with WSD warning that this could result in sharply reduced steel import demand.

Oil prices fell at the end of the week, with Brent trading at under $25/barrel by late afternoon today. This marks a drop of about 25% over the course of one week. The fall in prices comes despite a step up of the war in Iraq and 7 Iraqi oil wells being set ablaze. Traders report that the plentiful crude supply is behind the fall in prices this week with most OPEC producers exceeding their quotas.

The current strength of the dry bulk freight market is reflected in the Baltic Dry Index (BDI) standing above 1,900 points for the first time since September 1995. On the basis of the four time-charter routes, even accounting for the larger Baltic-type vessel specifications introduced to the Capesize and Panamax Indices at the start of the year, average earnings for all the vessel size ranges now stand substantially above their 2000 highs.

The Asia-led boom in steel production, with global February output up 8% year-on-year, has continued to spur high levels of trade in iron ore and steel products. China's surging steel production (up 19% year-on-year in February) has caused the country's ore imports to remain strong, up 46% year-on-year to a record 11.5 Mt in January.

Panamax and Handymax earnings have been boosted by the start of the Latin American grain season, with record volumes of soya set to be exported from Argentina and Brazil. The two countries are forecast to export a combined total of over 63 Mt of soyabeans and meal during the current trade year, a year-on-year increase of almost 30%.

Significant 'non-fundamental' factors have also helped vessel earnings to rise in recent weeks. Increased coal import activity in the Pacific has resulted from Japan's nuclear power crisis, boosting demand for Panamax vessels. Thermal generation (which also includes oil and gas) in Japan is currently running at around 20% higher year-on-year to make up for the shortfall in nuclear capacity. In addition, congestion at key loading ports in Australia, Brazil and Canada has helped to tighten the availability of open tonnage.

Increasing cargo demand has coincided with a slowdown in fleet supply growth. During the 4q02, the estimated net growth of the dry bulk carrier fleet had slowed to just 0.6 Mdwt. By the end of February, SSY estimates that net fleet growth so far this year totalled 1.3 Mdwt, a year-on-year fall of almost 50%. As expected, the current strength of earnings has put a brake on the scrapping of older tonnage, with no Capesize, just two Panamax and no Handymax bulk carriers reported sold for scrap by mid-March 2003.

As war breaks out in Iraq, oil prices have fallen and lower prices are widely expected in the relatively near term. The prospect of falling crude prices and general nervousness regarding lifting cargoes in the Middle East Gulf has led to some charterers holding off from fixing spot tonnage this week. Tanker freight rates have fallen slightly as a result. As far as the American market is concerned, however, the US Department of Energy's expectation of higher crude import needs in the near term could add some upward pressure on freight rates over the next few months.

In its latest weekly report, the Department of Energy has once again stressed the very low crude and product stock situation and a greater dependence on imported oil to meet demand (particularly if a surge in gasoline prices is to be avoided in the run up to the American driving season). This, at a time, when 2mb/d of Iraqi crude (of which most is exported to the US) has already been removed from the market and Venezuelan crude exports remain below pre-strike levels. The low US inventories puts pressure on OPEC to maintain supplies at sufficient levels over the next few months to enable inventories to build at their normal rate. If stocks are to return to their "normal" levels, even higher volumes of crude are required.

At present US crude oil imports are close to 8 mb/d (as opposed to the seasonal norm of 9 mb/d). As such, the Energy Department stresses, "this implies a lot of crude oil imports will be needed over the spring and summer months." This year, the Department says, "the inventory build will need to be greater than normal as oil inventories are very low."

The option to release stocks from the Strategic Reserve still exists -- and will be critical to short term import patterns (and US domestic prices). From the 2q03 and, in particular in the 2h03, however, if refiners want to raise their stocks from the lower operational inventory level, higher import volumes are the only option. And this should raise tanker tonnage demand.

The current strength of the dry bulk freight market is reflected in the Baltic Dry Index (BDI) standing above 1,900 points for the first time since September 1995. On the basis of the four time-charter routes, even accounting for the larger Baltic-type vessel specifications introduced to the Capesize and Panamax Indices at the start of the year, average earnings for all the vessel size ranges now stand substantially above their 2000 highs.

The Asia-led boom in steel production, with global February output up 8% year-on-year, has continued to spur high levels of trade in iron ore and steel products. China's surging steel production (up 19% year-on-year in February) has caused the country's ore imports to remain strong, up 46% year-on-year to a record 11.5 Mt in January. [more]

Coal consumption by Japan's ten major utilities (which account for about 60% of coal consumed by the country's power sector) rose by 19% year-on-year in February. At 7.9 Mt, total coal burn by these utilities in the first two months of 2003 was up by 1.2 Mt on Jan/Feb 2002, boosting Panamax demand in the Pacific by the equivalent of 20 vessels. The rolling programme of unscheduled closures of nuclear reactors led to the ten utilities recording a 25% year-on-year fall in nuclear generation last month. Thermal generation (which includes coal, oil and gas) increased by 20% year-on-year in order to make up the shortfall.

Oil prices rose slightly this afternoon on the news of some Iraqi oil fields being set alight in the south of the country. Although official Iraqi exports have already ceased, the fires raise fears of the conflict spreading, with other fields in the region as possible targets. Oil prices also strengthened on the back of the US Energy Secretary's statement that a release from the Strategic Petroleum Reserve was not imminent due to the "adequate" world energy supplies. The International Energy Agency in Paris stated today there was no need for a release from emergency stocks at present as it was confident OPEC could cover any disruption to Iraqi supply.

Oil prices rose slightly this afternoon on the news of some Iraqi oil fields being set alight in the south of the country. Although official Iraqi exports have already ceased, the fires raise fears of the conflict spreading, with other fields in the region as possible
targets. Oil prices also strengthened on the back of the US Energy Secretary's statement that a release from the Strategic Petroleum Reserve was not imminent due to the "adequate" world energy supplies.
The International Energy Agency in Paris stated today there was no need for a release from emergency stocks at present as it was confident OPEC could cover any disruption to Iraqi supply.

The increase in global crude steel output slowed last month, with February production rising by 8% year-on-year to 71.2 Mt, according to the latest figures from the International Iron and Steel Institute (IISI). This compares with an 11% increase during the previous month. Production in Asia continued at a high level, up 13% to 31.2 Mt. China's output of 15.5 Mt was 19% higher than the same month last year, while the 8.4 Mt manufactured by Japan represented an increase of 6%. The recovery in US steel production continued, with output up 4% year-on-year to 7.2 Mt. EU output rose at a more modest pace, with 12.8 Mt amounting to an increase of 2%. Germany's February production increased by 3% year-on-year to 3.6 Mt.

News that Japan's Nuclear and Industrial Safety Agency (NISA) has sought government approval for the restart of 10 nuclear reactors may represent a significant step towards avoiding power shortages in the Tokyo area during the July-early September demand peak. In an interim report following inspections of 11 facilities controlled by Tokyo Electric Power Company (Tepco), Tohoku and Chubu, NISA found that 10 could resume operations safely for at least the next five years. However, more extensive tests are scheduled at the 10 reactors and any national approval would still have to be endorsed by the local authorities. Therefore a major increase in nuclear power generation is still likely to be several weeks away. Furthermore, the remaining three of Tepco's total of 17 reactors, which currently remain open, are due to close by mid-April. Japanese coal import demand has been boosted substantially during the crisis, with thermal power generation (which also includes oil and gas) levels running at around 20% higher year-on-year to compensate for the nuclear capacity shortfall.

Oil prices have fallen further today as traders bank on a short war in Iraq with no extensive damage to neighbouring oil fields. In the US, rumours that the 600 mb Strategic Petroleum Reserve will be tapped, was also behind the fall.
Meanwhile, disruption to Iraqi supplies are already starting to affect the tanker business. Iraqi exports have virtually ceased now that UN oil inspectors have left the country. Fixtures for vessels loading at Mina al Bakr have been cancelled, while unofficial information from sources in Turkey suggest that all activities at Ceyhan will be suspended from this evening due to the pipeline closure by Iraqi authorities.

Demand for coal imports into northern Europe could be boosted by water shortages in the Nordic region, which have reduced hydroelectric generating capacity. Low water levels have forced the shutdown of the first Norwegian hydroplant and, according to Argus Coal Daily International, Sweden's reservoir levels are close to all-time lows, at just 15.7% full. The country's hydro-reserves are now 22.3% below seasonal norms, threatening shortages or even power rationing in the months ahead. Norwegian reservoir levels are now 26.5% full, leaving them 22% lower than at the same time in 2002. This contrasts with the situation in southern Europe (and especially Spain), where a plentiful supply of rain and snowfall has boosted hydroelectric generating capacity and threatens to dampen demand for coal imports this year.

A series of VLCCs chartered last week have options for storage according to reports today. This in anticipation of some supply disruption to exports on the start of military conflict in Iraq. The tanker markets were fairly quiet meanwhile, with owners and charterers holding off for military action in the region to start before taking a position.
Oil prices fell today on the news that a second UN resolution will not be sought with traders expecting a short conflict and even a release of the US Strategic Petroleum Reserve. The US Energy Department has said that the SPR is "ready to release oil to counter a disruption in supplies", although the Bush Administration has yet to finalise its decision on tapping the reserve.

Prospects for Panamax and Handymax earnings have been boosted further by the latest estimates for Argentina's soya exports during the current trade year from the US Department of Agriculture (USDA). The USDA has revised its forecast for Argentina's October-September soyabean meal exports up by over 0.5 Mt from the February estimate to total 18.7 Mt, a year-on-year rise of 16%. The latest forecast for exports of soyabeans from Argentina now stands at 9.7 Mt, an upward revision of 0.4 Mt from February. This represents year-on-year growth of 61%. The upward revisions to Argentina's export estimates more than negate a slight downward revision for Brazilian soya exports.

The Baltic Dry Index (BDI) climbed to 1,802 points today, the first time it has stood above 1,800 points since October 1995. This is only the second market cycle in which the BDI has broken the 1,800-point threshold since the index's inception in 1985. After the first occasion, in October 1994, the BDI peaked at its record high of 2,352 points the following May. The index currently stands at 39% above its long-term average of 1,293 points.

A combination of soaring oil and gasoline prices, and concerns over possible war have dented consumer confidence in the USA and could signal a more muted economic outlook for the year than initially projected. This would have an impact on oil demand levels and, as a consequence, tanker demand.
Figures released today indicate retail sales in February were down by 1.6% (expected to be only 0.4%) while the labour market is showing
little sign of improvement. Despite stock markets registering gains in early trading today (after severe falls earlier in the week), economic
observers pointed out today that historically, recessions have followed on from significant falls in consumer confidence and rocketing oil prices. GDP in the USA is currently forecast at 2.5% for this year but with the manufacturing sector also under performing, this figure is looking to be optimistic.