Japan Fossil Fuel Imports to Rise as Nuke Power Restarts Delayed: Deutsche

Delays to the restart of Japan's nuclear power reactors may mean the country's already 'elevated' fossil fuel consumption could rise further this summer, Deutsche Bank said in a report.


Such incremental fuel demand from the world's third largest oil consumer during the summer months, a peak demand season, may contribute to higher benchmark fuel prices, undermining the fragile global economic recovery. For Japan's economy a higher fuel import bill may negatively impact the trade balance, which recorded a surplus in February after a record deficit in January.

Hokkaido Electric Power said on March 26 that it plans to shut down the No.3 unit at its Tomari nuclear power plant on Japan's northernmost island of Hokkaido on May 5 for regular maintenance. If no other reactors are restarted in the meantime, the shutting down of Tomari No.3 would mean that all of Japan's nuclear reactors are offline, the Wall Street Journal reported last month.

"All indicators suggest that the elevated consumption of fossil fuels is likely to rise further this summer as the only nuclear reactor now in operation, Hokkaido Tomari Unit 3 (912MW) is scheduled to shut on 5 May," wrote Deutsche Bank analysts Xiao Fu, Michael Hsueh and Isabelle Curien in a note on April 4.

Citing Japan's Trade Minister Yukio Edano, the analysts said a decision about whether to restart any nuclear reactors will take more time as the government compiles more stringent safety standards and formulates a new regulatory watchdog.

"The Prime Minister has requested the creation of a safety standard which takes into account the analysis of the Fukushima events. Meanwhile, the April 1 deadline for the creation of unified Nuclear Safety Regulation Agency has been missed while discussions continue regarding its formulation," the analysts added. "The new agency would incorporate the existing Nuclear and Industrial Safety Agency but be independent from the Ministry of Economy, Trade and Industry."

The incremental cost of fuel imports in February — primarily crude oil, fuel oil and LNG — to substitute idled nuclear capacity "versus a business-as-usual case" was $1.9 billion, the analysts said. Costs could total $12 billion "on an annual basis after adjusting for seasonal effects."

Such a higher fuel import bill may erode Japan's trade surplus, which recovered in February to 32.9 billion yen after a record deficit in January of 1.476 trillion yen.

"A negative trade balance was one of the distinguishing marks of 2011, the first time in 50 years," Dan Slater, Director at the Economist Corporate Network told CNBC's 'Squawk Box' on Monday.

"So looking at the nuclear power situation — which is dogged by the fact that only one nuclear power reactor is currently open — is obviously going have a massive effect on the trade balance going forward. However, that could be compensated for by the great imponderable: global growth. If those figures on Friday hadn't come, which were so negative about U.S. jobs growth, I'd have said that I was fairly confident that the trade balance would be positive for this year. But until we understand the ramifications of what's happening in terms of global growth, I'm afraid the situation is a bit murkier than what it was recently."

On a global level, Japan's incremental fuel consumption could also boost benchmark oil prices that have risen to multi-year highs in New York and London. Japan has boosted fuel imports after the March 11, 2011 earthquake and tsunami that knocked out three reactors at the Fukushima plant northeast of Tokyo, triggering the worst radiation leak since Chernobyl.

Dominic Schnider, Head of Commodity Research at UBS Wealth Management said incremental fuel demand from Japan could tighten regional stockpiles though any upside risk to prices would be limited.

"I would be a little bit cautious," Schnider told CNBC on Monday. "We have seen the incremental demand for LNG imports shooting up quite a fair bit and also tightening up the regional market. The LNG price in Japan now stands around $16.50 per million British thermal units, Schnider noted. "Before the Fukushima event they've been around $11.00. So Japan already contributed to higher prices." Prices will probably rise "a little bit more, but most of it I think it's behind us."

Japan bought 15.8 million tons of LNG in January and February, up 25 percent from a year earlier, according to the Finance Ministry. Japan's LNG prices, which are pegged to the cost of oil, averaged $16.38 per million British thermal units in the first two months of this year, up 11 percent from the average 2011 price, according to the World Bank.