Disputes not affect Sino-Japan trades?

Because the dispute between China and Japan over the Senkaku islands in East China Sea, many people have concerned about regional trade activities. Daiwa Institute of Research recently announced a report saying the dispute is likely to reduce Japan's exports to China this year by about 1 trillion yen ($12.8 billion).

However, Japanese exports to China has decreased from a year ago level since 2Q 2011. Accumulated amounts in the first eight months in this year fell 9.2% from the same period a year earlier. Japan's exports to China in 2012 are likely to loose more than 1 trillion yen from the previous year even if there is no friction.

If Daiwa Institute predicts that the disputes cause another 1 trillion yen of reduction adding to the original decrease over the past year, Japan's exports to China will fall 16% from a year ago in 2012.
Japan is mainly exporting materials, parts and machineries to China to support Chinese industrial activities. Therefore, the 16% decrease of supply from Japan will cause significant limitation over Chinese manufacturing.

China seems to try to hide its rapid decrease of demand for materials and machineries using the friction with Japan.

The below chart shows the monthly year-on-year changes of China's energy demand and Japan's exports to China.

Growth of petroleum demand has been sluggish since the latter half of last year, and growth of electricity demand has been approaching to zero.
Since the slowdown of energy consumption represents sluggish manufacturing activities, demand for Japanese materials and parts is also declining.

The apparent oil demand, which is thought as the Chinese domestic pure demand calculated by Platts, shows more clear tendency of lowered growth of Chinese petroleum demand.

China's crude oil imports seemed to keep upward trend until mid-2012, but the import figures in the first half of this year contained stockpile for the newly build 80 million barrels of strategic reserve facilities.
Then, imports in July and August decreased apparently, and suggest fewer crude oil processing in the following months.

Even if both nations didn't have frictions, Japan's exports to China could have been likely to drop sharply after September.


Can we believe recovery of Iranian oil exports?

Recently, crude oil exports from Iran are reported to rebound. Is it meaning a change of situation?

Iran's crude oil exports have decreased significantly since July when sanctions by the European Union were invoked. The sanctions inhibit European nations to import Iranian crude oil and do not allow European insurance companies to underwrite marine insurance for tankers that carry Iranian crude oil toward any regions. Therefore, Iran's crude oil export was estimated to decline below the 1 million barrels per day level in July from above 2 million bpd level.

However, some alternatives against insurance by European companies are said to re-activate Iranian crude oil export.

Japan and India have decided to set the sovereign insurance for tankers to import Iranian crude oil. Although Japan's Iranian crude oil imports recorded zero in July, it seems to resume in August.

South Korea, which ceased to buy Iranian crude oil in July, also resumed purchase in September. The country uses insurance provided by Iran.
Marine insurance provided by Iran seems to recall some buyers who were worry about the risk on uninsured transportation.

On the other hand, It is expected that financial sanctions by the United States to deter buyers expansion of Iranian crude oil imports.
The U.S. has decided to sanction against financial institutes of countries that trade with Iran. But the sanction can be exempted for 6 month if the country reduce crude oil imports from Iran significantly.

Japan was approved the first exemption in March and another 6 months extension was given in September.
Meanwhile, China and India won the first exemption in June and another 6 months extension could be decided by the end of December.
It is unclear whether the U.S. will give these nations another exemption or not if they resume large Iranian oil imports.

About China, there is an another concern whether the country needs further Iranian oil or not.
China imported average 560,000 bpd of Iranian crude oil in 2011. But the numbers declined to about 350,000 bpd in the first quarter this year due to conflict over price negotiation.

Although the nation's Iranian oil imports rebounded to 520,000 bpd in the second quarter, decreased again to 460,000 bpd in July and 370,000 bpd in August. The August figure fell 22% from a year ago.

The decline in the third quarter was not only affected by the insurance problem, but also was caused by the sluggish demand.
China's total crude oil imports in August decreased 12.5% on year to 4.35 million bpd. It was the lowest level since October 2010.

China's accumulated crude oil imports during the first eight months in 2012 rose 7.4% from a year ago to 180 million tonnes. However, China has completed construction of 80 million barrels of national petroleum reserve facilities in early this year and started filling.

If the stockpile oil is deducted from total imports, net crude oil imports by China rose by only 0.7% on year in the Jan-Aug period. The real import number is match with the fact that the growth rate of crude oil processing during January and August stayed at 1.6% on year and the domestic crude oil production in the same period fell 0.4% from a year ago.

Then, recent economic data suggest that the growth of Chinese crude oil demand is likely to shrink further. China seems not necessary to buy more Iranian crude oil in spite of the risk of suffering financial sanctions.


Mideast tensions rather to stabilize crude oil supply

Many market participants are afraid about that tensions in the middle east caused by anti-Islam film may threaten crude oil supply.
Does the turmoil actually affect on crude oil supply seriously?

Libyan civil war caused crude oil supply disruption last year. The war cut the country's crude oil production from the previous 1.6 million barrels per day to zero. WTI crude oil prices surged from around $80/bbl to above $110/bbl following the disruption.

Libyan crude oil output, however, rebounded rapidly after the cease of the civil war. Although battles spread over whole countries, damages on oil related facilities were much smaller than expected.

Similar situations were seen during the Iraq War a decade ago. Crude oil production resumed immediately after the end of major combat operations. Iraqi crude oil production recovered the nearly same level with pre-war level within less than half year despite continuing minor battles in the nation.

Why severe supply disruption can be caused by demonstrations and riots in urban areas, despite oil output facilities are not damaged even during war?

Political stability of countries being democratized by the Arab Spring movements in last year has been lowered. Combined governments are easy to be affected by extremists. It is difficult for those governments to control turmoil.

Demonstrations for democratization were seen even in Persian Gulf oil producing nations, and protest activities against the anti-Islam film also occur there.

But unstable situations in Libya and Egypt and the dire situation in Syria, where turmoil and civil war have continued since early last year without intervention by international society, seem to calm down people's enthusiasm against democracy in Arab oil producing countries such as Saudi Arabia.

Democratization does not bring better results,  people are likely to recognize that it causes deteriorated public security and spread of terrorism.
Therefore, current turmoil in the middle east may suppress democratization movements in regional oil producing countries. It seems to stabilize crude oil supply from the area as a result.


Japan gets over summer without nuclear power

Much heat waves and tropical nights boosted electricity consumption in Japan during August. Electric power supply in the Tokyo Metropolitan area rose 6.5% from a year ago to 27.5 billion kilowatthour.
However, the demand was lower by 12.5% compared to August 2010, when temperature was higher than this year, economy was recovering from the Lehman shock slump and no one was required power saving.

Electricity demand in western Japan's Kansai area around Osaka and Kyoto was also recorded highest in this year in August at 14.6 billion kWh. But a lack of nuclear power supply forced regional users to reduce electricity consumption. The August power demand was 2.5% lower from a year ago and decreased by 11.3% from the same month in 2010.

Therefore, daily maximum electricity demand in the area has remained at enough lower than the supply capacity. The average usage rate of the daily maximum power demand during July and August was 85% of the total supply capacity, according to the Kansai Electric Power Company.

KEPCO restarted two of its nuclear power units in July due to the forecast of power supply shortage. But actual demand exceeded the red line (power supply capacity without nuclear) of the above chart only once during the past two months. The excess amount was 130,000 kilowatt which could be covered by a single gas turbine.
Spare supply capacity is always required for the stable electricity supply, also  another round of heat wave may lift Japan's electricity demand even in September. However, so far the necessity for restarting the nuclear units was not so high definitly.

This could be a favourable result for anti-nuclear groups. But was the absence of serious power supply shortage without nuclear only led by the simple power saving?

Although domestic shipments of low sulfur fuel oil for power generation hit the record 430,000 barrels per day in early August, total crude oil throughput in Japan has kept year-on-year decrease in the past 11 consecutive weeks since mid-June, according to the Petroleum Association of Japan.

Japan's exports to China in the first seven months in this year fell 9.1% on year, this shows demand of materials and parts from the "world's factory" is shrinking.
Therefore, we can recognize that international economic slowdown makes Japanese manufacturers to reduce power consumption easily. It might be wrong to think that the forced power saving supresses industrial activities in Japan.

Someday when the global economy resumes strong recovery, does Japan face significant power supply shortage?
Accelerated overseas transfer of factories is likely to cap growth of domestic energy demand.