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According To Goldman, Tsunami Puts 2011/2012 Japanese Rice Crop At Risk, Sees Vicious Snapback In Crude Prices

Tyler Durden's picture





 

A just released report by Goldman's Jeffrey Currie attempts to quantify the impact of the Tsunami on the Japanese economy from a commodity standpoint. Currie summarizes his conclusions as follows: "Assuming that the broader power grid infrastructure has not been  permanently damaged, we believe today’s events are likely to put upward pressure on residual fuel oil and diesel cracks, LNG, UK natural gas and rice; downward pressure on naphtha cracks and Dubai spreads relative to other crude grades." Yet the thing we found more interesting than energy related bottlenecks was the disclosure toward the end of the report discussing the threat to the Japanese rice harvest: "In addition to the damage to energy infrastructure from the earthquake, the tsunami also impacted rice producing regions in Japan. While Japanese rice inventories are large, this puts the 2011/12 crop production at risk and may in turn drive Japanese rice imports higher, posing upside risk to current prices." Granted, Japan is not a big exporter of rice, but it is a top 10 consumer. Should the country's consumption (which is estimated at around 9 million metric tons) need to be satisfied by a surge in imports, and with the price of rice already dependent on the margin on speculative money, this could be the catalyst that send the grain, which has plunged in price over the past month, finally break beyond any potential manipulative price suppression schemes.

In addition to rice observations, below are the key energy market view from Currie:

26% of nuclear generation capacity down

Although all ports in Japan are currently shut down, once operations resume, and assuming that the broader power grid infrastructure in the region has not been permanently damaged, we expect a substantial rise in demand for substitute fuels for power generation. Specifically, we expect LNG, residual fuel oil and diesel imports to rise to help compensate for the 12.5 GW (500 kbdoe) of nuclear capacity shut down. Importantly, such disruptions in nuclear facilities may last for years, as it takes time to repair, test and re-authorize commercial operations. Importantly, the downside pressure on crude prices is likely a near-term effect only. In the medium-tolonger term, once refineries are operational, but with nuclear generation likely still disrupted, the net effect is to the upside for crude prices.

20% of refining capacity down

The marginal impact of today’s events in the oil product market may be even more significant than in the gas market, as not only demand has moved higher for these commodities, but also supply has shifted lower. Specifically, 935 kb/d of Japanese refining capacity appears to be shut down, based on various reports. But while this is likely to put upward pressure on products at the margin, it is likely to do the opposite for crude. In particular, we believe today’s events will put downward pressure on Dubai spreads relative to other crude grades, as Dubai’s demand has been the most affected.

In terms of specific trade recommendations:

After today’s earthquake, and assuming that the broader power grid infrastructure in the region has not been permanently damaged, we believe that the main impact to commodities will be:

Upward price pressure: Residual fuel oil and diesel cracks; LNG and UK NBP natural gas; rice

Downward price pressure: Naphtha cracks; Dubai spreads to other crude grades

Importantly, the downside pressure on crude prices is likely a near-term effect only. In the medium-to-longer term, once refineries are operational, but with nuclear generation likely still disrupted, the net effect is to the upside for crude prices Today’s earthquake will dramatically impact both supply and demand across the commodity complex. Specifically, in addition to the extensive damage to residential and commercial areas, 12.5 GW (500 kbdoe) of nuclear power generation capacity, 26% of total available capacity, and 935 kb/d of refining capacity, 20% of total, have been shut down (see Exhibit 1).

Summarizing the infrastructure damage estimates:

As to what happens once thing revert to somewhat normal:

All import capacity is currently shut down in Japan. However, once ports become operational, and assuming the broader power grid infrastructure in the region has not been permanently damaged, we expect a significant increase in LNG purchases and an even larger increase in residual fuel oil imports, so that both gas- and oil-fired generators can help compensate for the lost capacity. Importantly, this increase in demand for oil and gas is also likely to last for a number of years, as exemplified by the impact of Japan’s 2007 earthquake, given the time required to repair, test and re-authorize commercial operations at the damaged nuclear facilities. Out of the 8 GW of nuclear capacity shut down after the earthquake in mid-2007, only 5 GW have been restarted to date.

The risk of a substantial rise in global LNG demand as a result of the earthquake has already started to impact UK NBP prices, currently up nearly 5% in intra-day trading, at $9.60/mmBtu. Spot LNG prices for delivery in Asia, which had been declining for the  past several days as winter demand in the region started to moderate, are also likely to rise quickly. Specifically, Platts’ JKM marker (delivery prices for spot LNG cargoes in Japan and Korea) was reported at $9.40/mmBtu as of yesterday. We believe these prices will need to rise to at least $1.50-$2.00/mmBtu above UK NBP levels, so as to cover transport costs to attract more LNG cargoes to deliver in Asia. We expect that this (potentially long-term) competition for resources will pose a significant upside risk to our UK NBP forecast of $7/mmBtu and $8.50/mmBtu for 2011 and 2012, respectively.

In the oil complex we expect today’s events to move naphtha cracks lower, as two naphtha-based ethylene crackers (828 ktpa of ethylene capacity) are down, but to broadly move cracks for other product higher. In particular, import demand for residual fuel oil and diesel, which can be used to generate power, is likely to rise, especially as Japanese refining capacity has also been affected by the earthquake.

In contrast with our bullish view for most products, regional crude oil prices are likely to move lower owing to refining capacity being shut down, especially while imports into Japan are restricted. In particular, the Brent-Dubai spread will likely widen, as Dubai crude is  the grade whose demand is most likely to be affected by these events.

Importantly, the downside pressure on crude prices is likely a near-term effect only. In the medium-to-longer term, once refineries are operational, but with nuclear generation likely still disrupted, the net effect is to the upside for crude prices

 


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Fri, 03/11/2011 - 17:40 | Link to Comment willlaughforfood
willlaughforfood's picture

.

Fri, 03/11/2011 - 17:44 | Link to Comment malusDiaz
malusDiaz's picture

You sir, are correct.

 

People die, the squid just thinks about all the money they just missed out on.

Fri, 03/11/2011 - 17:45 | Link to Comment CPL
CPL's picture

Everything is coming up roses isn't it?

Fri, 03/11/2011 - 22:38 | Link to Comment Ray1968
Ray1968's picture

Well, I bet Charlie Sheen is damn happy something bumped him out of the headlines!!

Sat, 03/12/2011 - 03:37 | Link to Comment DaBernank
DaBernank's picture

I was thinking the same thing about Saudi princes having world media distracted from the "day of rage".

Fri, 03/11/2011 - 18:16 | Link to Comment covert
covert's picture

rice will always be cheap, among the cheapest of foods.

http://covert2.wordpress.com

 

Fri, 03/11/2011 - 18:57 | Link to Comment mophead
mophead's picture

*stealth devaluation*

Fri, 03/11/2011 - 17:37 | Link to Comment NOTW777
NOTW777's picture

cause? they mix oil into rice?  

Sat, 03/12/2011 - 10:15 | Link to Comment Imminent Crucible
Imminent Crucible's picture

Duh.  Why do you think they call it 'fried rice'?

Fri, 03/11/2011 - 17:41 | Link to Comment NOTW777
NOTW777's picture

fukushima - direct from epicenter

Fri, 03/11/2011 - 17:42 | Link to Comment Ancona
Ancona's picture

This is some scary shit. I just read about the nuke plant that has lost all ability to cool one of their reactor cores, and they plan to release radioactive steam in to the environment. The current claim is that this will have "no material impact" on life or property. Really? the last time I checked, radiation was harmful, and radiation from the core, cooling sector and elsewhere in a reactor is especially harmful. We had all better pray that this thing does not melt down. The China syndrome could become the Philadelphia syndrome, given the location of the plant.

Fri, 03/11/2011 - 17:52 | Link to Comment CPL
CPL's picture

It's not just one nuke plant, it's three in total.  One has the ability to go critical hence the reason the GoJ has warned people to step back 9 km in radius.

 

Nukes "balloon" because of the nature of a nuclear blast (which is what a nuke energy plant is, a control nuke explosion) and radiation effects.

Bombs just detonate and fling crap everywhere.

 

When bombs finish, the crap falls down somewhere.

When nukes finish, 5600 years have past to consider a half life and it is assumed half the distance from the epicenter.

 

My bet is they back fill in the plants with concrete mixed with lead to contain it then build a tin shed around it like every other nuclear plant accident.  The Japanese aren't very pleased that they were the first reciever of nuclear WMD via American heroes.  This isn't going to go over well in a population of a 110 million people in a space the size of California.

Fri, 03/11/2011 - 23:52 | Link to Comment Invisible Hand
Invisible Hand's picture

Please, learn something about nuclear power plants before spewing nonsense.

Nuclear power plants CAN NOT EXPLODE like a nuclear weapon.  It is physically impossible.  Nuclear power plants have NOTHING IN COMMON with a nuclear bomb, except that they both use Uranium as an energy source and they both release energy using fission.  The OK City bomb blast used diesel fuel.  That doesn't mean your diesel pickup is going to explode and blow your house up.

A small amount of radioactive material is found in the steam produced by the reactor to drive the electrical turbine.  That is what has been released--due to breaks in the steam pipes.

A much larger amount of radioactive material is contained in the fuel rods (in the core).  These fuel rods are very tough (melting temp is above 1500 deg C).  However, after the reactor is shut down (this is done automatically when the quake occurs) the fission products in the fuel rods decay and give off heat.  This is the heat that must be removed by emergency cooling systems to prevent overheating of the fuel rods and potential failure of the fuel rods which would release more radioactive material.

http://www.cbc.ca/news/world/story/2011/03/11/earthquake-japan-nuclear-r...

This news story says that the emergency systems are working.  Not too surprising as they are designed to work IN EMERGENCIES.  There are multiple, redundant systems to remove decay heat from a damaged reactor.  They are designed to work without electrical power (passive cooling) and even when plant systems have suffered major physical damage.

This earthquake is a bad situation.  These plants, and many other things like refineries, train tracks, roads, etc. are severly damaged. Japan has lost a lot of its electrical power since many power plants were co-located.  However, it is a small country and this was a huge earthquake/tsunami. 

There is a small but real risk of a significant release of radioactivity but reports, so far, indicate that this hasn't happened and probably (and hopefully) won't happen.  (Eight times normal background levels outside the plant is of no danger to anyone.)  That could change, of course, so they are performing precautionary evacuations.  This is exactly what they plan for (Many years ago, I worked in emergency planning for a nuclear power plant in US).

Japan has significant problems right now.  The damage to the nuclear plants is going to be a long term headache for them, hopefully, mostly from the loss of the electricity.

FYI, CRITICAL means that the rate of fission in the reactor is CONSTANT.  SUPERCRITICAL means the rate of fission is increasing.  SUBCRITICAL means the rate of fission is decreasing.  NONE OF THESE TERMS INDICATE DANGER.  Every reactor goes Supercritical during startup, is Critical the entire time it is operating normally, and is Subcritical as it is being shut down.  I know, bad nomenclature but that is what the nuclear pioneers stuck us with.

 

Sat, 03/12/2011 - 09:11 | Link to Comment Rodent Freikorps
Rodent Freikorps's picture

Wouldn't a fusion plant actually be containing an explosion?

Fri, 03/11/2011 - 18:04 | Link to Comment SilverRhino
SilverRhino's picture

They just had the biggest earthquake in 140 years and you're worried about some fucking radioactive STEAM?  

The fact that not a single nuclear reactor has melted down is a GodDamned miracle and a testament to the skill of their engineers!

Keep everything in perspective. You could have been standing on the bridge in this photo.   The people in that town would be glad to take their chances with a little radioactive steam.

http://www.foxnews.com/images/root_images/031111_japantsunami_20110311_162918.jpg

 

Fri, 03/11/2011 - 17:43 | Link to Comment Lets_Eat_Ben
Lets_Eat_Ben's picture

Have my boobs appeared yet?

Fri, 03/11/2011 - 17:55 | Link to Comment KickIce
KickIce's picture

A question Tyler probably asks daily...

Fri, 03/11/2011 - 18:34 | Link to Comment akak
akak's picture

If and when they do, you can be sure that RobotTrader will post the pics of them here.

Fri, 03/11/2011 - 18:05 | Link to Comment Drachma
Drachma's picture

China's solution to rice problems...

http://www.naturalnews.com/031344_plastic_rice.html

Fri, 03/11/2011 - 17:52 | Link to Comment THE DORK OF CORK
THE DORK OF CORK's picture

A B- 29 raid would struggle to do so much damage - the Tokyo incendiary raid excepted of course.

Fri, 03/11/2011 - 17:57 | Link to Comment Atomizer
Fri, 03/11/2011 - 18:06 | Link to Comment gall batter
gall batter's picture

They will Bandaid it just like they "fixed" the Gulf Oil GUSHER.  A little this and a little that.  

Fri, 03/11/2011 - 18:38 | Link to Comment sbenard
sbenard's picture

And if the price of crude oil is due to rise again, then today's stock market rally is also a mere short-term phenomena. I'll take my money and run!

 

Thanks all, as always, for the insights!

Fri, 03/11/2011 - 18:39 | Link to Comment Lapri
Lapri's picture

I don't think they can even grow rice this year there, not to mention harvest! Soil contaminated with salt water, crude oil, diesel, toxic chemicals from various manufacturing plants in the area, and tons of debris on top. I guess you can hope that they will be able to clear the debris, decon the soil, repair the irrigation system, grow rice seedlings, and plant the seedlings by late May at the latest.

But hope is a dirty word these days.

Fri, 03/11/2011 - 18:44 | Link to Comment Mr Lennon Hendrix
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Shirakawa is knee deep in rice ETFs so look for the Nikkei to surge higher.

Fri, 03/11/2011 - 18:45 | Link to Comment KickIce
KickIce's picture

Since China is already using plastic rice I figured it was already undervalued.

Fri, 03/11/2011 - 18:59 | Link to Comment Papasmurf
Papasmurf's picture

Ultimately recyclable.  Just collect it after use and diffuse fresh melamine into it. 

Fri, 03/11/2011 - 18:54 | Link to Comment Papasmurf
Papasmurf's picture

You lost my attention when you said "Goldman's said".   Chances are they caused the tsunami.  And this one pales by comparison to their last one of 2008.

Fri, 03/11/2011 - 20:40 | Link to Comment Vint Slugs
Vint Slugs's picture

Re rice:

 

Fri, 03/11/2011 - 21:36 | Link to Comment sgorem
sgorem's picture

Just out: CNBC "Saudi Arabia to pick up the slack in rice exports", "Obummer & Nappy to vacation 2 weeks at Jamie Dimon estate in Virgin Islands", "oil to drop to $40-45/bl by end of March", Gadaffy to rebels, "WE surrender", "Sgorem & Sons Tree trimming and Garbage Haul-a-way Inc. going public IPO coming soon", etc., etc..........  

Fri, 03/11/2011 - 22:21 | Link to Comment dondonsurvelo
dondonsurvelo's picture

The Japanese will collectively eat less rice and feel good about the sacrafice.  They will not whine about their situation but will immediately work together to put the nation back in order.  Nagasaki and Hiroshima and their surrender to the US are not to distant in the past.  Yet the Japanese accepted their fate and then took control of it.  They will do the same now and I feel they will succeed faster than anyone will ever be able to imagine.

Sat, 03/12/2011 - 00:13 | Link to Comment luciusfargo
luciusfargo's picture

Indeed, there's no holding back the Japanese. We learnt that in 1990s.

Fri, 03/11/2011 - 22:28 | Link to Comment onarga74
onarga74's picture

We don't need no steenkin rice. We're doing without 65% of Russia's wheat crop and without 90.7 percent of our veggies cause of the worst freeze in Mexico since 1959.  In Oregon we have bright red tags on the lettuce that apologizes for the 4 dollar price.  I wrote em back and said lettuce doesn't taste like anything anyway and I'll grow my own if I remember how.

Fri, 03/11/2011 - 22:59 | Link to Comment lewy14
lewy14's picture

FWIW - the Japanese are a bit picky about their rice - the one time they had to import, they got rice from the Sacramento area.

Don't know how to play that one; someone here might.

Fri, 03/11/2011 - 23:36 | Link to Comment bugs_
bugs_'s picture

Could Goldman be right this time?

 

Sat, 03/12/2011 - 00:25 | Link to Comment DaveyJones
DaveyJones's picture

In the post peak world, and if we build them, how exactly do we keep plants safe along the multiple fault west coast  

Sat, 03/12/2011 - 01:07 | Link to Comment zebra
zebra's picture

and US market in celebration mode.

nice country

Sat, 03/12/2011 - 01:29 | Link to Comment Yen Cross
Yen Cross's picture

I'll be sure and bank that one.

Sat, 03/12/2011 - 04:48 | Link to Comment ivana
ivana's picture

surely GS would like to hike rice up up up to the sky... what a phony excuse - japanese rice crops and tsunami ha ha ha :-)

that must be 0.04% of all rice crops around the globe.

think GS should try back combination : snow+tsunami

Sat, 03/12/2011 - 11:01 | Link to Comment Pool Shark
Pool Shark's picture

 

The happiest man on the planet is Uncle Ben.

Now, he can blame fuel and food inflation on middle-east turmoil and the Japan earthquake/tsunami.

Anything to deflect blame away from inflation-producing fed policies...

Sat, 03/12/2011 - 14:51 | Link to Comment JNM
JNM's picture

Japan runs a trade surplus on the order of about $82B USD, with exports at $821B.

Short-term imports (on the order of days) will be reduced more than exports will drop, right(?) But, over the next 6 months to a year, it's likely the trade surplus vanishes. 

Domestic consumption in Japan, is likely to be higher, than previous forecasts.  No?

This is bad news for North American Oil and Equity bears.

I'm not entirely confident, looking for somebody to argue with me.

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