The Rising Influence of Rising Affluence

[DewDiligence]

Energy Markets Brace for Japanese Jolt

[The biggest impact could be in the market for thermal coal.]

http://www.ft.com/cms/s/0/5eb3ca86-4d86-11e0-85e4-00144feab49a.html

›By Javier Blas
March 13 2011 16:56

The global energy market is bracing for a shock as Japan seeks to replace large amounts of the country’s nuclear power capacity devastated by Friday’s earthquake.

Japan is the world’s third largest oil importer, after the US and China, and the top importer of thermal coal and liquefied natural gas, so any abrupt change in energy production could have a major impact in global commodities markets, analysts warned on Sunday. Although they cautioned that the surge in demand could be cushioned by lower consumption due to widespread factory closures. [That’s not a grammatically correct sentence, but no one seems to care these days.]

The final impact of Friday’s earthquake on Japan’s energy needs will also depend on the extent of damage to the country’s economy and whether Tokyo orders the precautionary stoppage of other reactors for safety checks, analysts added.

Japan has shut down 9,700 megawatts of nuclear capacity which equals about a fifth of the total. It no longer has the impact on energy markets it once did due to the country’s shift away from oil but the loss of nuclear power will force Tokyo’s utilities to scramble for crude, thermal coal and LNG as replacement.

“The need now for reconstruction as well as alternative electricity generation fuels to augment shuttered nuclear units will boost Japanese demand of diesel and fuel oil”, said David Kirsch, director of oil market intelligence at consultants PFC Energy.

The International Energy Agency, the western countries’ oil watchdog, estimates that it takes about 38.8 barrels of crude oil to replace one megawatt of idled nuclear power generation capacity in Japan. If the country were to replace all its shut down nuclear capacity entirely with oil, it would have to import 375,000 barrels a day more on top of Japan’s expected purchases this year of around 4.25m b/d. However, Japan is more likely to opt for a combination of oil, LNG and thermal coal.

The country boosted significantly its purchases of LNG in 2002, after the shutdown of 17 of Japan’s 54 reactors for safety inspections, and in 2007 and 2008 after the shutdown of the Kashiwazaki-Kariwa atomic station, the country’s largest.

The increase in LNG demand will push up spot prices globally, hitting gas prices from South Korea to the UK, but the impact will be cushioned by a relatively loose supply and demand balance as producers such as Qatar boost their supplies.

Tokyo is also likely to increase coal imports, as Japan’s utilities negotiate annual supply contracts with Australian miners. The negotiations, which face a deadline on April 1, are likely to settle annual prices in excess of the record $125 a tonne agreed in 2008-09, traders and analysts said.

“Lower nuclear plant utilisation in Japan has proven to be bullish for thermal coal, which is likely to have to take up the slack from nuclear,” said Hayden Atkins, coal analyst at Macquarie in London, who estimated the country could buy an additional 20-30m tonnes of thermal coal this year on top of the expected 110-120m tonnes.

“This provides upside risk to the ongoing thermal coal contract negotiations,” he said.‹