News archive May 2003

In its latest weekly report, the Energy Intelligence Group reports that globally, both oil demand and supply fell sharply in April from March - although demand fell at a faster rate. This meant some stock
building for OECD countries, although inventories remained well below average for this time of year. "Demand appears weak," according to the
EIG, "coming off the strong first quarter that accompanied a cold Northern Hemisphere winter." Overall the Group appears bearish for near-term demand fundamentals, and projects only "modest"
rise in global oil demand for 2003. The EIG reports that Chinese demand, the main driver of Asia-Pacific growth, to be seriously affected by the SARS epidemic and in Europe there has been little
evidence of a revival in economic or industrial growth. The EIG reports that the major uncertainty for oil supply is the timing and pace of Iraqi oil production and exports. The Group says
that if Iraqi production averages 1.5 million b/d over the summer oil prices could well come under downward pressure and stockbuilding would
rise.

Latest estimates from the International Grains Council indicate that Russia's wheat exports are set to drop dramatically in the June 2003-July 2004 trade year. Russia is expected to ship just 2 Mt of wheat compared to the record 13 Mt forecast for the current marketing period. Meanwhile wheat exports from Australia and Canada are expected to recover in 2003-04, reaching a combined total of 29 Mt. This compares with the current marketing year, in which the two countries' shipments were hit by drought and are forecast to total less than 19 Mt.

Reports from Platts indicate that Tokyo Electric Power Company (Tepco) aims to restart seven of its 17 nuclear reactors by the start of July. Tepco has previously stated that it requires at least 10 units to be operational in order to avoid power cuts in the Tokyo area during the summer peak in demand, but has faced continued resistance from the local authorities whose approval is required. Restart of No 6 reactor at Kashiwazaki-Kariwa nuclear complex took place earlier this month but the utility's remaining 16 reactors are currently shut down for safety inspections. Final tests on the Kashiwazaki-Kariwa No 7 and the Fukushima Daiichi No 6 reactors are due in the next few days.

State Oil Marketing Organisation of Iraq (Somo) intends to clear the oil currently stored at Ceyhan, by tender later this week.
The crude oil will initially be sold in stems of 1mb each, in order to test market demand for Iraqi crude. Somo emphasises that none of the oil to be offered for sale was already sold under the UN 'Oil for Food' programme. By the end of last week Iraqi production had risen from 250kb/d to 600kb/day and it aims to increase production up to 1.3-1.5mb/day by mid June, and to 2.5mb/day by September.

Oil prices fell today on speculation that the return of Iraqi barrels to world markets will reduce concerns over stock levels, particularly in the US.

Preliminary data from Japan's Ministry of Finance indicate that the country imported 10.2 Mt of iron ore in April, a year-on-year fall of 7%. That puts total ore imports for the first four months of 2003 at 43.6 Mt, a rise of 5%. Meanwhile, Japan's iron and steel exports of 2.7 Mt in April were down 2% from a year ago. Asia accounted for 2.3 Mt of the total, down 0.4% year-on-year. Growth in exports to newly industrialising economies (up 2% to 1.1 Mt) and ASEAN (up 13% to 0.7 Mt) was countered by a fall in exports to China of 17% to 0.5 Mt.

China's dry bulk imports for the first four months of 2003 totalled 83.5 Mt, a year-on-year increase of nearly 20 Mt. The increase was mainly due to the country's record levels of iron ore demand, with Jan-April imports rising by over 12 Mt to reach a record 47.2 Mt. Other cargoes recording hefty rises were steel products, which were up by 3.8 Mt to 12.9 Mt, and grain (chiefly soya), which rose by 3.3 Mt to 6.1 Mt. Minor bulks also contributed to the increase, with the combined imports of alumina and manganese, copper and chromium ores totalling 3.5 Mt, a year-on-year rise of 1 Mt.

An American advisor to the Iraqi Oil Ministry, has said there is no plan for Iraq to flood the market with oil, during the US presence in the country. The advisor said that Iraqi authorities need to balance oil supply with demand, in order to achieve the maximum revenues possible. In February 2003, Iraq was producing about 2.4 mb/d of oil.
There have been suggestions that Iraq may break away from OPEC to free themselves from the quota regulation and pump at will. However whether Iraq remains within OPEC or breaks away is a decision for a future Iraqi government, and not one that will be taken by the coalition advisors currently in place.

The US recorded a year-on-year fall of 0.4% in industrial production in April, the first month of negative growth since May last year. Since then growth had risen to peak in December at 2.1% before decelerating in subsequent months. However, American consumer confidence received an unexpectedly large boost in May. The University of Michigan's consumer confidence index rose from 86.0 in April to a preliminary estimate of 93.2 in May, thanks mostly to consumers' expectations of improvements during the next six months.

US coal imports during the 1q03 totalled 4.5 Mt, a year-on-year rise of 0.9 Mt. At 1.8 Mt, the March import total represented an increase over the same month last year of 51% and was the second consecutive monthly rise. Colombia's contribution of 3.0 Mt during the first quarter made it the leading exporter of coal to the US, followed by Venezuela (0.6 Mt) and Indonesia (0.5 Mt).

Crude oil prices have fallen on the news of the UN voting to remove sanctions on Iraq, raising expectations of more oil moving into the market in the medium term. Although oil exports have not resumed as yet, Iraq is reportedly producing about 0.6 mb/d of crude. General expectations are for exports to start from mid-July.

Economic news from Europe and Japan suggests weaker than previously expected conditions for two of the key industrial regions. The European Central Bank today said it was poised to cut its eurozone growth and inflation forecasts for the second time this year, whilst in Tokyo, the Bank of Japan has downgraded its outlook for the economy in its latest monthly report. The Bank reported that Japan's economy failed to grow in the 1q03, partly due to the weak US market and the SARS virus impact on Asian economies.
Overall global conditions, according to the BOJ, were "uncertain," and would continue to have a negative impact on the Japanese economy and the level of commodity imports.
The US, meanwhile, reports that inflation is at its lowest level in almost 40 years, indicating weak consumer demand. However, American consumer confidence is reportedly improving -- and could be a sign of a stronger economy in the second half of 2003.

Japan's 43% fall in nuclear power generation in April (year-on-year) led to a 40% rise in thermal generation last month, according to country's power companies. As of 15 April, 17 of Japan's nuclear reactors were shut down for safety checks and to date only one has been reactivated. The closure of the nuclear plants has led to a rise in alternative fuels -- particularly coal, but also oil and gas. The volume of crude and heating oil 'consumed' by Japan's 10 electricity generating companies rose by 21% last month compared with April last year. Should the rest of the nuclear plants fail to be brought on line before the start of the summer season (when electricity consumption is at its peak) we would expect to see similar year-on-year growth in oil consumption, which could raise pressure on East-bound tanker rates.

Oil markets have been digesting reports on the probable delay in the resumption of Iraqi exports, which are now only expected by mid-July -- a month later than predictions earlier this month. The US has said Iraq may only reach pre-war output levels (of about 2.5 mb/d) by September. The news has inflated oil prices as the delay will coincide with OPEC's plans to cut production.

Latest figures from the Japan Iron and Steel Federation (JISF) indicate that the country exported 9.1 Mt of steel during the 1q03, a fall of 0.3 Mt from the 4q02. Nevertheless this represented a year-on-year increase of 0.2 Mt. Japan's Jan-Feb 2003 order book for finished steel products of 12.3 Mt represents a year-on-year rise of 0.3 Mt. The marginal growth in the order book was entirely due to increased domestic demand. Having risen over the course of last year, orders for export in the first two months of this year were down slightly, by less than 0.1 Mt to 3.4 Mt.

According to reports today, Shell have extended the 'Force Majeure' at their Forcados Terminal, due to continued political unrest in the Niger Delta Region. Disruption to shipments is expected to last until at least the 4th June.
Nigerian crude having a low sulphur content is popular with USA refiners, as it gives a high yield of gasoline. As the 'Driving Season' is imminent disruptions are putting upward pressure on the price of crude, and also on gasoline prices in the USA.

China has moved to calm fears over the impact of SARS on its economy by releasing economic data for April earlier than usual, including a year-on-year rise in industrial production of 14.9%. China's continued strength contrasts with Germany's troubled economy, which shrank by 0.2% during the 1q03 following flat growth in the 4q02.

US gasoline inventories have built over recent weeks, but crude stocks have fallen once again to some of the lowest levels on record for this
time of year. According to the US Department of Energy, overall US crude oil imports dropped by 2.7 million barrels last week compared to
the previous week. This has created some concern in the US that without a significant rise in crude oil (and gasoline) imports, there could be a drain on the newly built gasoline stocks in the driving
season and product prices in the US could rise.

In its latest monthly reports the IEA has cut its global growth forecast for oil demand by 90 kb/d for 2003. This has been attributed to the impact of SARS on air travel and economic activity in non-OECD Asia.
Meanwhile, Korea's central bank has cut its main interest rate by

Rising freight rates have helped encourage South Korean coal consumers to buy more short-haul coal from Russia, according to the Tex Report. South Korea's imports of Russian coal totalled 1.1 Mt during the 1q03 compared to 0.5 Mt during the 1q02. Steam coal made up 0.9 Mt of the total, a year-on-year rise of 0.4 Mt. The 0.2 Mt of Russian coking coal represented more than double the volume imported during the same period last year.

A new terminal capable of handling 5.4milllion tonnes of crude a year has been opened at Murmansk. The terminal can handle up to max 150,000 dwt vessels. The FSU currently produces in the region of 9.9mb/d (of which 6.2 (mb/d) is exported). Most of the seaborne exports (5.02
mb/d) are through Black Sea ports (53%) although the share of Baltic exports has grown significantly this year.

China exported 21.9 Mt of coal during the 1q03, a year-on-year rise of 27%. According to the Tex Report, imports to Japan were up by 46% at 7.9 Mt while those to South Korea totalled 7.8 Mt, a rise of 11%. Taiwan imported 2.9 Mt, up 11%. Of the export total, coking coal accounted for 3.9 Mt, an increase of 75%. Japan's coking coal imports from China recovered during the 1q by over 99% to 2.6 Mt.

After being given the green light by local officials, Tokyo Electric Power Company (Tepco) began recommissioning the No 6 nuclear reactor at Kashiwazaki-Kariwa nuclear complex last week. Full operations should restart by early June following final checks. K-K 6 is the first of Tepco's'17 nuclear reactors to be allowed to restart following their unscheduled closures due to alleged safety data falsification by the company last year. Inspections revealed no evidence of cracks in its reactor shrouds. Tepco has warned that at least 10 reactors need to be restarted before summer in order to avoid power cuts.

Saudi customers in Japan and Taiwan have received notification that shipments in June will be reduced by about 7%. One trader advised that Saudi exports to Europe may drop by as much as 20%, according to press reports. These announcements are in line with OPEC's previously announced cut in production of 2mb/d from 1st June. Crude oil prices moved higher in response to the Saudi statement and if all OPEC members adhere to the new production quotas this will put downward pressure on freight rates as cargo availability tightens.

The Asian Development Bank (ADB) has warned that SARS could cost Asia $28bn in lost economic output, with a negative effect on consumer confidence and investment. ADB's projections are based on the disease remaining unchecked for six months. However, Deutsche Bank points out that, for the bulk commodities of iron ore, coal and alumina, between 25 and 45% of Chinese production is in affected areas, suggesting a greater supply than demand risk. Therefore, Deutsche Bank anticipates little negative effect on iron ore or alumina import volume or prices, while thermal coal exports are at risk if SARS is a protracted affair, suggesting some support for export prices.

Reports from Metal Bulletin indicate that Rio Tinto is planning to increase its iron ore production at subsidiary Hamersley Iron by 11 Mtpy. This would increase Hamersley's total production to around 85 Mtpy, with a timescale yet to be finalised. The expansion of capacity is dependent upon removing rail congestion inland and at the port of Dampier, as well as the successful development of an extra 30 Mtpy production at the Yandicoogina mine and the commissioning of the 10 Mtpy Eastern Range mine. The latter is situated 10 km east of Hamersley's existing Paraburdoo mine and is set to start production next year.