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Asia:Are commodities hit by earthquake in Japan?

https://www.chemnet.com   Mar 23,2011 commodityonline
The earthquake and tsunami that struck Japan on March 11 has caused tremendous destruction to the country. Police confirmed at least 7197 people died but actual casualty will likely be revised higher. Currently 11 of the nuclear reactors totaling around 9.7 GW, or about 20% of capacity, and 11-12 GW of thermal power generation, have been closed down after explosions in nuclear plants. Radiation leak after nuclear plant explosion has terrified people living in the country and worldwide. Nuclear capacity shut currently will likely be lost for a prolonged period of time, if not forever and the government will need to replace this energy source by oil, gas and thermal coal in the long-term.

The nuclear crisis in Japan has sent an alarm to nuclear industry globally. Policymakers worldwide have been debating over the safety of nuclear generation. US president Barack Obama requested the Nuclear Regulatory Commission to examine nuclear plants to ensure they can withstand earthquakes and other disasters. The US' 104 nuclear reactors are providing roughly 20% of the country's electricity. In China, the government has suspended approval for new nuclear power stations. While currently acquiring only around 2% of electricity from nuclear power from the 13 reactors, China has aggressive plans to increase the number of reactors to 110 over the next few years. Nuclear power represents about 5.5% of the world total energy demand. If 10% of global nuclear power facilities had to be closed for safety reasons and governments shifted to other energy sources, it would lead to approximately an +1.5% increase in oil demand, a +2% increase in each of LNG and coal demand.

The situation in the Middle East and North Africa remained tense. While Libya's government announced a ceasefire against the rebels, fighting continued. US President Barack Obama delivered an ultimatum to Qaddafi, threatening military action if he ignores non-negotiable UN demands for a ceasefire and a retreat from rebel bastions. The warning was backed by France, Britain and Arab nations.

Crude Oil: While oil prices changed little from the previous week, they had volatile trading as aftermath of Japan's earthquake and tsunami as well as violence in the Middle East and North Africa continued to push and pull the complex. Oil prices initially extended weakness amid worries that the dampening effects on growth by natural disasters would reduce Japan's oil demand. Both WTl and Brent crude prices fell to 3-week lows on Wednesday. Rebounds were seen later in the week as tensions in the MENA region escalated and the UN voted to impose a no-fly zone across Libya. Prices, however, retreated again on Friday after the news that the Libyan government announced an immediate ceasefire against the rebels.

Generally, the oil market's reaction to Japan's earthquake has been negative as investors focuses on the negative effect on GDP from the damage to infrastructure and the closure of many industrial operations. The concerns were probably overdone. Most of the analysis have so far shown that the impacts on Japanese and global growth will be limited. Goldman Sachs believed that there will be no direct impact on GDP data while Citigroup said that the earthquake will cause 'modest supply disruptions' but is 'probably not disruptive to global GDP'. Concerning the impacts on the commodity market, we believe the long-term effect is positive. Indeed, as we discussed in our article 'Disrupted Nuclear Plants in Japan Drives LNG Imports', nuclear capacity lost due to the recent incident will be substituted by a mix of LNG, coal and oil.

Apart from the nuclear crisis, the earthquake also damaged refining capacity while the supply of jet fuel for Japanese airports is running low. According to the IEA, 6 oil refineries were initially closed, representing 1.4M bpd, or 30%, of Japan's total refining capacity. While at least 3 refineries (the 175K bpd Chiba refinery, the 270K bpd JX Nippon Oil & Energy (Negishi) refinery and the 335K bpd Kawasaki refinery) are expected to be back online soon, capacity of over 600K bpd may remain offline for an extended period. This should be positive for regional gasoil markets as Japan is a net exporter of gasoil.

Natural Gas: Gas prices rallied as driven by speculations that the ongoing nuclear crisis in Japan and potential changes in nuclear strategy worldwide will increase demand for LNG. The Nymex gas contract soared +7.17% to close at 4.17, the highest level since February 7. The ICE natural gas contract rallied to a 2-year high of 65.95 pound on March 16 before ending the week at 62.34 pound. Since the earthquake struck Japan on March 11, the UK gas benchmark has risen more than +4%. In our opinion, while outages of several nuclear power stations in Japan will boost the need for LNG., the impacts on European gas markets will be higher than those on US markets.

Japan will increase its LNG imports as a substitute for the lost nuclear capacity. It will likely draw from a range of sources in the Pacific Basin. At the same time, it will also turn to Qatar and Algeria for part of its demand, thus reducing supply from these countries to European markets.. Japan also increased its LNG imports after the earthquake in 2007. From 2007-2009, the country sourced LNG from various countries including Egypt, Nigeria, Algeria and Norway. All of these countries also supply LNG to Europe.

The US might experience a small loss of LNG imports but this will not tighten the US markets. According to the DOE/EIA, projected LNG imports averaged at 1.2bcf/day in 2011, down -3% from 2010, while imports in 2012 remain relatively flat. LNG imports represent a small portion of total US supply when compared with domestic production and inventory levels. The DOE/EIA estimated that total marketed natural gas production grew strongly throughout 2010, increasing from 59.7 bcf/day in January to an estimated 63.8 bcf/day in December. Annual growth in 2011 will just slow modestly by -0.8%. For 2012, total domestic production will climb +0.9%. US gas storage fell -56 bcf o 1618 bcf in the week ended March 11. Stocks were +1 bcf higher than the same period last year and +23 bcf above the 5-year average of 1595 bcf.

Separately, Baker Hughes reported that the number of gas rigs fell -7 units to 875 units in the week ended March 18.
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