Japan Quake, Tsunami To Disrupt Asia Shipping Operations For Weeks

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March 14, 2011

SINGAPORE (Dow Jones)–With many Japanese ports still closed after Friday’s powerful earthquake and tsunami in northeastern Japan, it could take several days if not weeks before shipping activity in the region returns to normal, traders and shipbrokers said Sunday.

“The structural stability at the ports will need to be certified before normal shipping can resume and this could take weeks,” said an official with a global oil major, who didn’t want to be identified.

“No official announcement has been received about the status of the ports, but it appears likely that those on the Pacific shoreline of Honshu Island will be out of operation for some time. There have been multiple reports of vessels running aground or colliding as a result of the massive wave that followed the 8.9 magnitude quake. Damage to infrastructure in the affected area is thought to be extensive,” an internal report of a Singapore-based shipping agent said.

“There are some unconfirmed reports indicating that a number of vessels have ran aground in the vicinity of the northeastern part of the Pacific basin of Japan,” another shipping company report said.

Even after the ports have been secured and cleared, shipping agents may find it difficult to store cargo at ports that have suffered substantial damage, the oil company executive said.

Shipments of several hundred thousand tons of grains such as wheat and corn, will also likely be delayed as shippers and importers come to grip with the calamity.

“We are still taking stock of the situation, but delivery of some of our cargoes may be postponed,” said a Tokyo-based executive with a global trading company.

Another trader said shipments of March cargoes may now spill over into April. Imported grain deliveries to northern ports, such as Sendai, Hachinohe and Kamaishi, will be delayed, he said.

It is possible that southern ports such as Tokyo, Yokohama, Osaka and Hiroshima will see more shipments, and distribution inland will be arranged from these locations, said Subhangshu Dutt, chairman, Institute of Chartered Shipbrokers.

With ships at Japanese ports and those en-route to Japan unable to discharge cargo immediately, the near-term impact will be a drop in the total number of ships in circulation, the Singapore-based oil company executive said, adding this could push up bulk rates.

On Friday, the Baltic Dry Index that tracks the cost of hauling dry bulk commodities around the world rose by 24 points to 1,562, its highest level since January 5. Prior to the quake, the index had fallen to 1,043 in February, its lowest level in two years.

On the other hand, there could also be a short-term dip in the demand for ships as Japanese businesses including power plants, steel mills and auto makers take time to resume operations, putting some downward pressure on short-term rates.

“It is too early to say what the net impact on rates will be. One might just cancel out the other,” the oil company executive said.

While some companies such as Nippon Steel partially resumed production Sunday, most others have said their plants will remain shut Monday and probably longer.

Nippon Steel said it resumed production at its plant near Tokyo, but operations continue to remain suspended at its plant in Kamaishi in northern Japan. The Japanese steel maker said part of the plant’s facilities has been flooded, while its port near the plant has been damaged.

On Saturday, container shipper Neptune Orient Lines said the power outage at the Yokohama port had disrupted its operations there. The company’s operations at Kobe port were not affected by the quake, spokesman Michael Zampa told Dow Jones Newswires.

“A total of 11 nuclear reactors shut down after the earthquake…. We believe other facilities in the power, oil and gas sectors have been damaged by the earth quake, but it is hard to get a detailed picture at this point,” Nomura Research said in a report Sunday.

“With at least 10 refineries shut, the demand for crude could fall in the near-term,” the oil company executive said, adding this could push up immediate demand for imported refined products, particularly low sulphur fuel oil.

“Even a 10%-15% drop in Japan’s nuclear power capacity could lead to a surge in demand for fuel oil to generate electricity, said Ashok Sharma of J.M.Bakshi Far East Ltd. a shipping services provider and freight broker.

But some disruption is expected in Asian petroleum shipping in the coming weeks because of damage to ports and other facilities, and crude and naphtha cargoes destined for Japan may need to be diverted to other markets, traders said.

The actual impact remains difficult to gauge before the release of detailed damage assessments from refiners, petrochemical producers and port authorities, as rescue operations are still continuing, they said.

During this period of transport chaos, freight rates of Very Large Crude Carriers and clean petroleum tankers are expected to face downwards pressure from demand uncertainties, they said.

On Friday, the rate for a 260,000-ton VLCC from Middle East to Japan reversed its upwards trend since early March and fell 0.62 to Worldscale 69.36. The rate for a 30,000-ton clean petroleum tanker from Singapore to Japan eased 1.22 to a four-month low of W126.21 Friday, according to the Baltic Exchange.

But once the initial impact is over, there could be an increase in the demand for everything from iron ore to coal and basic metals as well as fuel oil as restocking resumes and reconstruction work gets underway in full swing.

This could push up shipping rates in a month or two as even a small variation in demand can have a big impact on rates, said Sharma.

In 2010, Japan imported 215.350 million kiloliters of crude oil and 27.140 million kiloliters of naphtha, making it one of the top buyers of the two products in the world.

(Max Lin and Sameer Mohindru in Singapore and Neena Rai in London contributed to this report)

-By Denny Kurien, Dow Jones Newswires

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