We all feel shocked and entirely devastated by the terrible disasters that have hit Japan and the escalation in their effects on the Japanese society. We are deeply saddened by the ongoing tragedies and our thoughts and sympathy go to all those families, who have been so greatly impacted by the catastrophe.
Assessment of the situation is still ongoing and is subject to many uncertainties including the possible far-reaching consequences of the explosions at the nuclear plants. In the below assessment we have taken the freedom to assume that the situation will not escalate in terms of life-threatening radioactive fall-out and wide-spread contamination.
One thing is absolute certain: The natural disaster will have an impact on shipping, whether this concerns port infrastructure and the flow of traditional import and export cargoes or whether this eventually will relate to increased imports of both energy and material for the rebuilding of the cities and areas extensively damaged by the earth¬quakes and the tsunami.
How does this affect shipping?
Three are basically three trends to watch out for: 1) acute shortfalls due to refinery closures and large-scale shut-downs of utilities, 2) medium-term solutions to restore power generation and distribution 3) potentially a permanent change in the energy mix going forward.
Japan is the world’s third largest oil importer and the world’s largest buyer of thermal coal and LNG. Depending on the energy mix that Japan eventually selects - should they decide to substitute nuclear power going forward - bulkers and tankers will be needed to cater for this likely increased demand. Seaborne imports of the main three energy commodities are already short-term impacted by the event and long-term impacts could spell out accordingly:
A lot of factors come into play when trying to assess the effect on tanker shipping. Acute shortfalls in refinery output could spur product demand to make up for the reduced production of gasoline and fuel oil. Both clean and dirty product demand may go up as imports have to make up for the shortfall and thus create an increased demand for product tankers. Lower refinery throughput will on the other hand discou¬rage crude tanker demand as crude oil for feedstock decline. But crude tankers may also see a positive effect once refineries are up and running again and assuming the older fuel oil-fired power plants step in to partly bridge the shortfall of electricity supply. This may support crude tanker demand both short- and long-term. However, it is worthwhile to note that Japanese oil stocks held some 590 million barrels of oil (crude oil and products) in December 2010. The amount is equivalent to 169 days of net imports. Seen in this perspective emphasis should probably be on the long-term effects rather than the short-term.
Dry bulk shipping is expected to be impacted by changing demand for thermal coal, coking coal, iron ore and grains (e.g. rice, wheat and corn). Disruptions to grain imports is expected to be small and short-termed, while demand for thermal coal may be stronger overall to the extent that coal-fired power plants are able to increase cur¬rent production levels and to the extent that coal will gain a larger share of the energy mix in the longer term.
The effects on coking coal and iron ore will in nature be similar as they are both inputs to the large Japanese steel industry. Japan is second only to China when it comes to steel production. Most of the large steel mills are located outside the disaster area and the full impact on the production is still unknown but their location suggests that im¬pact remains limited. Shipping demand may be negatively affected to the extent that production is slowed down in the short-term, while it may be positively affected to the extent that the extensive rebuilding of damaged infrastructure requires steel products for construction. Minor bulks like cement and wood for construction of houses may also see higher demand when the rebuilding gets under way.
Should Japan in the short-term dramatically change its energy mix, freight rates will improve. But many vessels are already waiting outside Japanese ports to discharge the cargo fixed prior to the disaster. As imports have been halted or sent to other ports, national imbalances may occur. The immediate and most significant short-term effects will come from the need to substitute nuclear power generation with other sources of energy.
Spot freight rates have surprisingly not been greatly impacted, as some owners and charterers appear to be cautious about sending vessels towards Japan, in particular because of the uncertainty surrounding the nuclear plants and the risk of sending your crew, vessel and cargo into a potential radiation area. As regards to the many cargoes already on the way to Japan, based on existing commitments that will have to be contractually fulfilled, the picture is less clear but arising issues are expected to be dealt with on a case-by-case basis amongst the parties involved.
Going forward one should expect re-routing of vessels to protect the seafarers and to avoid any potential radiation cloud. See also “The Effects of the Tohoku Earthquake and Tsunami in Japan on Shipping” from BIMCO’s Front Office.
The impact on freight rates are most likely to be of a smaller scale. But the demand that will be created by the tragic events is likely to provide support towards a balancing of the anticipated strong supply side.
A long term perspective on the impact on worldwide shipping will depend significantly on a possible move away from nuclear power and substitution of other energy sources, e.g. thermal coal, oil and LNG. We have already seen many nations, prompted by this event, to rethink their use of nuclear power.
Container shipping is expected to be relatively un-affected by the event. The disaster did not affect any major container ports so exports from Japanese factories may only be indirectly affected due to a possible lack of material input to the production processes. But as Japan is also a major supplier of semi-finished goods and a wide range of components going into many industrial products ranging from cars to iPads – the repercussions from this interruption may have a flow-over effect to the global supply chain, mainly depending on the time that passes before full production and exports get back to normal.
On 11 March an earthquake rated 9 in magnitude and a subsequent tsunami slammed into Japan’s eastern shore. A very broad area, but mostly rural was impacted by this initial event. While the quake did some damage, most of the devastation originated from the tsunami.
This caused extensive damage to the general infrastructure, roads and bridges along the northeast Pacific coast. Relatively small ports in that area have encountered extreme damage. Moreover major electricity production facilities have been damaged.
Electricity shortage is severe with 11 of its 55 nuclear reactors being offline. Japan receives 25% of its electricity from nuclear plants, leaving the country short of 5% of normal level of electric power consumption. Many of the plants are expected to be shut down for up to a year and some may never reopen. Also a considerable amount of crude, coal and LNG thermal power generation capacity have been shut down, but are expected to be back at operations as soon as possible.
Estimates on the impact on Japanese refineries circle around 1.4 mb/d being shut down, equal to a third of total capacity.
Japanese ports, handling as much as 7 percent of the country's industrial output, have sustained major damage from the earthquake. This is likely to disrupt global supply chains until the goods starts flowing from other ports following a new setup of hinter¬land transportation. The ports of Hachinohe, Sendai, Onahama and Ishinomaki hand¬ling international trade involving containers, oil, dry bulk, break bulk and cars are severely damaged and will be out of operation for many months as reconstruction takes place.
Japanese shipyards are concentrated in western Japan and remain intact. The major shipyards are reported to have escaped the full impact of both the earthquake and the tsunami and no impact on production is expected.
While production facilities have escaped the disaster, the shipbuilding industry as such hasn’t. In fact, the events have made some investors somewhat more risk averse, prompting them to seek safe haven in JPY and CHF as a knee-jerk reaction. This has strengthened the Yen against the US dollar to the strongest level ever (76.37), leaving the Japanese yards struggling to stay price competitive especially vis-a-vis their counter-parts in South Korean and Chinese. This issue of course has a negative effect on Japanese exports. Recent financial market intervention by G7 has eased the pressure on JPY that currently trades at USD/JPY 82-83. BNP Paribas estimate that Japans GDP may be cut by 0.9 percent in 2010 because of the disaster.
BIMCO will continue to monitor developments very closely and will regularly report to the members as facts are coming in and the effects on shipping are ascertained, weighed and carefully analysed.
BIMCO - Shipping Analyst: Peter Sand PS@BIMCO.ORG
“The Effects of the Tohoku Earthquake and Tsunami in Japan on Shipping”
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