Home' Ships and Shipping : April 2011 Contents crude side because fewer imports will be required as refinery
feedstock, and the product side as the demand to which the
refineries would normally cater, whether it be domestic or
international, will need to be met by other sources.
Refinery utilisation in Japan was running at 90 percent in the
run up to the earthquake. This follows the figure plummeting to
the mid 70s in 2009, as Japan’s economy was hit particularly hard
by the global economic crisis. The subsequent recuperation of
utilisation rates was driven by ongoing recovery of the Japanese
economy in addition to rationalisation of refining assets in the
country, a phenomenon becoming increasingly apparent in more
The table above identifies five refineries with a total capacity of
862 thousand bbl/day, which are currently closed with no planned
restart. At a utilisation rate of 90 percent, this would indicate
demand for 776,500 thousand bbl/day of crude oil as a feedstock.
With Japan’s heavy reliance on imported oil and limited domestic
production, this equates to demand for seaborne crude of 38.6
million tonnes per year, or approximately 143 VLCC cargoes.
Approximately 90 percent of Japanese crude oil imports
originate in the Middle East, so we will see this route impacted
over the period of the closure. However, most of the shipments are
on time-chartered vessels and therefore it will be interesting to see
what happens with these liftings. Of the crude on the water and
destined for Japan at present, much of this may get resold, which
may have a further effect on the crude price.
The scale of the effect of the closure will depend on the length
of closure, and the location of the refineries that pick up the slack.
If other Japanese refineries were to step up to the mark and
increase utilisation rates, it is likely we would see little to no effect
on crude tankers – the same amount of crude would be imported
to Japan, albeit to different refineries.
If, on the other hand, the compensatory response is in
non domestic refineries, we will see fewer discharges in Japan, with
a substituting effect elsewhere. Quality specifications for gasoline
and diesel in Japan mean that this substitution is likely to occur by
more complex refineries capable of producing such products.
Looking at the clean products story, assuming the closed
refineries have a product yield of similar proportions to the
Japanese refining industry as a whole, a back of the envelope
calculation indicates that a three month closure would lead to
curtailed production, quantifiable as follows:
• 19.6 million bbl gasoline
• 19.6 million bbl diesel
• 11.2 million bbl jet/kerosene
• 7.7 million bbl fuel oil
• 7.0 million bbl naphtha
• 2.8 million bbl LPG
• 2.8 million bbl other products
The impact of these indicative figures on the product tanker
market will depend on the extent to which domestic refinery
utilisation is augmented; and the trade balance of the product in
question. The following analysis assumes that production
substitution occurs internationally.
Japan is highly reliant on imports for LPG and naphtha,
importing 409 thousand bbl/day of Naphtha (53.5 percent domestic
demand) and 371 thousand bbl/day LPG (78.4 percent domestic
demand). Combined with the fact that exports of these products are
practically non existent, it can be deduced that virtually all
domestically produced LPG and naphtha is utilised within Japan.
Consequently, reduced production manifesting due to the
refinery closure will need to be supplemented by increased
seaborne imports of LPG and naphtha. Under the assumption of
the closure lasting three months, were naphtha demand to remain
constant one would expect to see an additional seven million bbl
naphtha and 2.8 million bbl LPG imports into Japan.
Braemar Shipping Services expects the naphtha would be
sourced from the Middle East, of benefit to LR1 and LR2 trade (TC2
and TC5). However, with the damage and closures stretching
through to the petrochemicals industry, naphtha demand may
falter and therefore these projected imports may not be realised. It
has been reported that up to ten naphtha vessels were heading
from Europe to Japan when the disaster happened, and it is likely
that these cargoes will now be sold as distressed, into the already
over supplied Asian market. Decreased naphtha demand in Japan
is likely to exert downward pressure on crack spreads in the region.
To the other extreme is diesel, of which Japan is a net exporter,
exporting almost a fifth (178 thousand bbl/day) of the diesel
produced by its refineries in 2010. Imports are marginal, at five
thousand bbl/day last year. As a consequence, impaired diesel
production should result in fewer shipments out of Japan.
Braemar Shipping Services fixture analysis suggests that in 2010,
44.2 percent of clean spot cargoes fixed out of Japan subsequently
discharged in South East Asia, with 17 percent going to Europe
(and the UK) and a further 16.5 percent to west coast South
America. Japanese diesel exports to these areas which are frozen
due to the disaster will need to be substituted from elsewhere, most
likely refineries in India and the Middle East. In a three-month
shut down scenario, one would expect virtually all diesel exports
from Japan to stop, with the country becoming a net importer, as
the lost diesel production from the shut down would be greater
(271 thousand bbld/day) than that usually expected to be exported
over such a period.
A slightly different scenario exists for gasoline and
jet/kerosene, which are normally both imported and exported
into Japan. For gasoline, imports and exports were equal in 2010,
at 20 thousand bbl/day.
Exports of jet/kero exceeded imports, at 50 thousand bbl/day
compared to 20 thousand bbl resulting in a net export of 30
Braemar Shipping Services calculations imply that gasoline
imports to Japan will increase as a result of the refinery closure.
This is due to the 19.6 million bbl truncation being 17.8 million
bbl greater than the “normal” exported volume over three months
(based on average 2010 figures). Additional gasoline will need to be
imported to meet domestic demand. With Japanese fuel
specifications, this import is likely to come from Korean and
For jet/kerosene Braemar’s calculations suggest the opposite
scenario, with a reduction in exports and swing to a net import
position. The basis for this is that the 11.2 bbl curtailment in
production is significantly more than the 4.5m bbl exports typically
seen. The effect on fuel oil would be equivalent to the effect on
jet/kerosene as the reduction in production (7.7m bbl) is less than
expected exports over the period of 4.5m bbl. This import position
will be bolstered by increased demand for fuel oil as a substitute for
power generation while nuclear power stations are shut down.
In conclusion, the earthquake is likely to have a notable effect
on the tanker market. The scale of the effect will depend on how
oil demand in the country reacts – how quickly will it rebound,
and to what extent, in addition to the length of time the
refineries remain shut.
There are immediate and longer term effects for both the crude
and product tanker markets, the immediate effects manifesting
right down to vessels due to discharge in Japan in the next few
weeks and already on the water. In the longer term, decreased
naphtha demand is likely to negatively impact on the LR1 and LR2
trades. Imports of diesel, gasoline, jet/kerosene and fuel oil on the
other hand, are likely to increase, potentially to the benefit of the
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