1. Introduction

1.1 Background
Japan has the third largest economy in the world. As it is surrounded by sea, the country’s port plays an important role in maritime transportation for both exports and imports.

In March 2011, the world was affected when Japan was struck with natural disasters (Earthquake and Tsunami). This sudden disaster sent everyone around the world into frenzy. It affected Japan’s ports, shipping and logistics. As a result of the natural disasters, ports in the northern area of Japan had to stop operations after the Tsunami washed away port facilities, leaving the area in tatters. Ports such as Hachinohe, Ishinomaki and Onahama were severely damaged and it would take months before operations can resume.

It will take some time for Japan to rebuild itself as this is the worst disaster to hit the country since the Hiroshima/Nagasaki nuclear bombing during the World War 2.

1.2 Objectives of Project
The team will be doing a research and critical analysis on how the crisis has affected Japan’s economy and how the revival of Japan will benefit the shipping economy.

The areas of focus will be on the economic impacts of the various shipping markets and other factors contributing to the crisis and forecasting the future outcome in the shipping industry.

We intend to go beyond the surface and dig deep into the crisis to fully understand how dealing with a crisis really works. This includes looking at past records as well as analyzing the situation in a chronological pattern – 1) Before the crisis, 2) During the crisis and 3) After the crisis.

1.3 Methodology and Scope
To assist the team’s research, information will be sourced out from newspaper articles, books and internet websites. Interviews will be conducted with companies on how the disaster has affected the industry and what are the possible ways to overcome it.
2. Japan

2.1 Introduction
The unprecedented disaster that recently befell Japan brought about much havoc. Measuring a massive 9.1 on the Richter scale, the earthquake along with the tsunami has been thought of as the monster among monsters. Not only did it devastate Japan literally in regards to land or housing, the disaster wrecked havoc in political and economical areas too. This would lead one to wonder if the actual destruction is not in the lands that were hit, but Japan’s economic stability.

The revival of Japan is said to be as difficult, if not more, than that of during World War ll. There is much to be said and studied in regards to the effects of the disaster; however, our area of focus will only be on Japan’s maritime industry. It also must be noted here that whenever we speak of Japan’s maritime industry / economy, we refer to the maritime industry / economy on a whole because all “sub-categories” in the world of maritime are intrinsically linked; therefore, we must affirm that the exclusion or inclusion of the word “Japan” is not of paramount importance to our project in the broadest sense.

By this you can expect that this project on Japan’s economic revival is not just confined locally (regarding Japan only), but globally (regarding the entire maritime world); in other words our project explicitly presents a thorough case-study of Japan’s maritime industry, and on the other hand implicitly show the implications wrought out on the larger scale.

For an overview of things and for the sake of convenience, we will list down the main areas of focus that we undertook.

• Situation of Japan—Before, during, after. • Effects on Japan’s economy, port operations and ship tonnage. • Effects on the Tanker, Dry Bulk, Container and Car Carrier. • Forecast the future outcome in the shipping industry.
2. Current Situation
Currently, Japan is still not coping as well as they should. For example, just one month on after the earthquake, Japan and her economy was still in shock. Her shipping industry was affected badly with the short-term and long-term effects. The Baltic Dry Index (BDI) were crippled, Liquefied Natural Gas (LNG) imports suffered major loss due to port disruptions, and the crude oil production and growth were truncated.

These aforementioned areas were only deemed to be short-term, however, there is not much light at the end of the tunnel either; forecasts concerning the long-term of Japan’s revival were as bleak. Shipping trade routes have to be adjusted, general bulk cargo are said to drop further because Japan will not be able to import as much due to several reasons mainly the shutting down of nuclear and power generators.

Analyses have also said that Japan might face a potentially permanent change in the energy mix forward. Japan is the world’s third largest oil importer and the world’s largest buyer of thermal coal and LNG. Depending on the energy mix that Japan eventually selects - should they decide to substitute nuclear power going forward - bulkers and tankers will be needed to cater for this likely increased demand. Seaborne imports of the main three energy commodities are already short-term impacted by the event and long-term impacts could spell out accordingly.

For all the destruction that Japan has suffered, there is however people who stand to gain something out of the calamity. Ship-builders for example, are said to be enjoying the blessings in disguise; however thin that silver lining on the dark cloud may be.

Be it short-term, medium-term, or long-term, Japan is expected to be having a rough trip on her journey to recovery. For the maritime economy one thing can be sure, that however steady or progressive the growth may be, the March 2011 disaster will bring about long lasting effects.
3. Japan Economy

3.1 Introduction to Japan’s Economy Quarter 1
Japan has one of the world’s largest and strongest economies. With a large, wealthy and sophisticated domestic market, the strength of the economy has allowed its country to boom financially.

Japan not only generates substantial trade surplus, she also dominates fields such as electronics, computing, car production and banking. According to the President of WorldMoneyWatch, Kimberly Amadeo, Japan’s economy has shown to have rebounded strongly with an increase in the nation’s Gross Domestic Product (GDP) by 3 percent. This increase was said to be the “fastest growth in 20 years”.

On 11th March 2011, Japan became a victim of natural disasters; it shook the entire nation causing destruction to capital equipment, supply chain and electric power shortages, pushing the economy back into recession.

3.1.1 Fiscal Deficit
The huge outstanding government debt and fiscal deficit were said to be unsustainable during the quarter 1 period of 2011, before the disaster. In January 2011, Standard & Poor's, a United States-based financial services company, downgraded Japan’s credit rating.

Due to Japan’s rapidly aging population, entrenched deflation and a feeble economy, borrowing seems to be the only solution. Over the past two decades, the government has been pouring money into the economy hoping to boost economic growth.

However, the GDP growth has yet to rise and instead has caused the country’s economy to suffer four economic recessions. With years of pump priming, it created the largest burden of any industrialized country, a debt load exceeding 200 percent of its national GDP.

3.1.2 Gross Domestic Product (GDP)
As a nation of islands and a trading nation, Japan relies rather heavily on its ports for export sales. With the country’s industrial output being damaged by the disaster, its economy and trade balance will be hampered.

Statistics gathered from the graph below reflects the instability of Japan’s economy.
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Figure 1: Japan slides back into recession (The Financial Times Limited 2011)

Japan’s economy contracted at an annualised basis of 3.5 percent during the first quarter of 2011. Comparing the GDP with the last quarter in 2010 and the first quarter of 2011, it fell 0.9 percent.

Private Consumption, which accounts for 60 percent of Japan’s economy, fell by 0.6 percent due to consumers’ frugality. Japan’s net exports are mainly responsible for pushing down the GDP by 2.0 percent. The damage in the infrastructures and disrupted supply chain made it impossible for some manufacturers to ship their products to foreign markets. Fears of radioactive contamination halted shipments to and from Japan as well.

Based on Japan’s Ministry of Finance data, the rising commodity prices pushed up the price of imports, resulting in a plunge in Japan’s trade balance by 34.3 percent in March 2011 as compared to the same month a year ago.

This catastrophic disaster may halt or push the already slow Japan’s economic growth. Reviving the economy is a challenge due to Japan’s massive debt burden of 200 percent of GDP. Also, reconstruction efforts are costly and will lead to further fiscal problems.

3.1.3 Yen
The Japanese Yen has remained relatively strong and unaffected by global economy changes. Prior to the natural disasters in March 2011, other contributing factors such as low interest rates, slow GDP growth and record national debt weakened the Yen. Together with the catastrophe, Japan’s Yen slowly began to weaken.

However, after the March 2011 disaster, Japanese Yen touched 80.62 against a dollar, the strongest since 9 November 2010, as reported by Candice Zachariahs and Yoshiaki Nohara in Bloomberg.

Towards the end of the first financial quarter in 2011, the Japan Yen continues to remain negative as exports decline and fiscal deficit rise. The strong Yen, which tested records high against the dollar, makes Japanese exports more expensive and reduces the value of their foreign earnings, making it negative for the economy with a huge debt. Furthermore, it will be following up with expenditures for reconstruction.

To counter this growing problem, Japan might have to weaken the value of the Yen for their products to be less competitive against rivals like South Korea, allowing the boosting of its export sales in a bid to revive the economy.

3.2 Japan’s Economy Quarter 2
Japan’s economy in the second quarter contracted worst than expected as capital spending decreased, breakout of radiation contamination and the global supply chain disrupted. Gross Domestic Product shrank at an annualised 2.1 percent, more than the 1.3 percent contraction initially estimated, said by the Cabinet Office in Tokyo (2011).

3.2.1 Trade Deficit
Japan has turned a trade surplus to a trade deficit in Q2 2011. This was caused by a series of unfortunate events: tsunami and earthquakes, rising yen and gas price. It hurt imports and exports during this period.

3.2.2 Yen
Japan’s currency, Yen, has climbed to near a post-war record, Yen at 77.47 per USD, resulting company’s businesses as well as the leading indicator of capital spending, machinery orders, to fall and struggle with the high Yens.

Based on the survey by The Yomiuri Shimbun (2011), the continued appreciation of Yen has raised concerns to more than 80 percent of the companies. Of the 118 companies being surveyed, more than half said their business conditions were stagnant and were slowly deteriorating, with sluggish exports due to the rapid appreciation of the yen.

With the Yen becoming stronger, the impact will cause other currencies to become weaker and potentially affecting Japanese exporter as it may find it difficult to sustain. Exports will become more expensive with lesser buyers, straining the value of foreign earnings. To counter the rising Yen, local/domestic firm’s best alternative is to move the production at home and diversify productions bases overseas.

3.2.3 Fiscal Debt
The fiscal debt of the nation are still increasingly unsustainable and to overcome this, some form of credit event, debt restructuring or excessive monetisation should be implemented as the debt load is too large to pay off by normal means and will soon become too large to service.

Banks, such as the Japanese central bank, are fully aware of the situation of the Yen and will be intervening to control it. The Bank of Japan is providing market liquidity to ensure the stability of financial markets; however the long-term impact will be negative to the country's struggling economy. Even though rebuilding will lift the economy slightly, it will add on and being outweighed by the probable increase to the national debt which are already unsustainable.
Thus, the appreciation of Yen and the huge debt load has continued to raise concerns as it may derail the nation’s recovery from the March earthquake and even stalling its economy towards the end of the year.

3.3 Japan’s Economy Quarter 3
The March 2011 disasters did serve as an impetus that forced Japan’s authorities to rethink most of their projects. Based from previous mega-quakes, several observers have noted that it has had a major transformational effect on Japan or coincided with major turning points in Japanese history. Being cautious against directly linking previous Japanese earthquakes with political and economic shifts, which is greatly been driven by international circumstances. Nevertheless, it would be odd if the March 2011 disaster, due to the sheer magnitude of the event, had no long-term consequences and benefits.

3.3.1 Energy Disruption
One of the salient ramifications is that it has exposed Japan’s vulnerability to energy disruptions. The meltdown of the Fukushima nuclear plant has raised new questions about the desirability of nuclear power plants, which generate 30 percent of Japan’s electric power. The surge in oil prices due to instability in the Middle East and North Africa has underscored Japan’s vulnerability to geopolitical events far from its shores. This could increase Japan’s dependency on imported oil and gas.

3.3.2 Internal and External Concerns
There are several main areas of reform and all of them are linked to political, environmental and economical concerns. The disaster causes Japan to rethink their fiscal expenditures. Japan desperately needs to reduce its budget deficit and debt burdens, but these concerns will be put on the backburner by the need for reconstruction of the damaged areas.
The Democratic Party of Japan (DPJ) has been seeking to reduce wasteful public works projects, but now has little alternative but to pursue them. Of course, reconstruction is not wasteful, but the risk is that Japan will slip back into old habits. Regardless, reconstruction spending could bring forward an eventual fiscal crisis in Japan for a few years.

Also, the nuclear disaster pushed ‘green’ issues further up the political agenda. In time, green forces could gain momentum. Eventually, green forces could champion broader political and social issues, as they have in other countries.

The disaster also exposed Japan’s over-reliance on imported energy and underscored the need for alternative sources of energy; namely, oil and gas.

3.3.3 Japan’s Reconstruction Period

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Figure 2: Estimated reconstruction impact (Barclays, 2011)

The initial impact on the GDP prior to the earthquake was due to a fall in production because of the destruction of infrastructure which lasted several months. It was estimated for Japan to take 2-3 years for most of the rebuilding to be completed.

During this period, the definite increase in the overall demand due to Japan’s reconstruction efforts in restoring infrastructure, clearing rubble, providing temporary building to relocate homeless people and providing temporary subsidies to private companies to help them with hiring efforts, including a proper supplementary budget spending that would slowly increase the GDP, improving Japan’s economy.

3.3.4 Gross Domestic Product (GDP)
Though there is some uncertainty in GDP figures due to political disagreements, there’s confidence that political parties will agree to an aggressive budget supplementary budget spending, which would provide a boost to growth in Q411 and into 2012. As published by Business Monitor International Ltd (2011), the pencilling overall Growth Fixed Capital Formation (GFCF) growth of 1.1 percent in 2011, but see a sharp recovery in 2012 to 3.2 percent (from 1.0 percent previously).

JPY2.5trillion of the budget will be financed by taking money out of public pension funds that is already available. While this does not add to Japan’s gross debt load, it worsens the net debt load by the equivalent amount, which is what matters for fiscal sustainability.

4. Japan Shipping Market

1 Dry Bulk Market

Japan is the world’s second-largest consumer of dry-bulk lines. Due to its lack of natural resources, it imports iron ore for steel making.

As a result of the natural disasters, a number of bulk operating ports in the north-eastern part of Japan was affected. According to Van Marle (2011), the ports of Kashima, Onahama and Sendai, all of which were badly damaged by the disaster, are now undergoing major repairs and will start operations in late 2011.

Some ports were closed, infrastructures were damaged, businesses had to stop, Fukushima Daiichi nuclear reactor’s meltdown, dry bulk cargoes shipping into the country had to be declined temporarily, ports congestion – all these are evidence of the after effects of the natural disasters.

Despite the problems that were faced, things are picking up for the industry.

Firstly, there are still plenty of other available operating ports in Japan for dry bulk vessels to dock and make deliveries. There were no reported damages to the ports in the northern and central parts of Japan, which includes major ports such as port of Tokyo, Yokohama, Kawasaki and Chiba.

Secondly, Japan’s rebuilding process will need big volumes of materials, such as steel, iron, cement etc, which will boost dry bulk volumes.

Lastly, the meltdown of Fukushima Daiichi nuclear reactor will push up coal imports, as an alternative source of energy, to replace the lost energy.

3 Japan's Rebuilding May Boost Dry-Bulk Shippers

The reconstruction in Japan following the overwhelming earthquake and tsunami that caused destruction to more than 150,000 buildings and infrastructure will boost volumes for dry-bulk shipping lines struggling with global overcapacity.

Rebuilding is a long process and requires large volumes of basic materials such as steel, iron ores, timber, logs and wood, which are transported mostly by bulk carriers. Thus during the rebuilding phase, there will be a demand in dry bulk products and resources.

The industries will most likely face challenges due to the sudden increase in demand of materials needed to rebuild in the short term, therefore Japan may increase imports of Australian iron ores and, logs and lumber from New Zealand and Malaysia. Additionally, the surge in imports will not happen immediately due to the current on-going repairs on the roads, ports and infrastructures, including problems of power shortages.

In the medium to long term, dry bulk shipping line will be seeing bullish as recovery and rebuilding efforts stimulate demand for iron ore, cement and raw materials, increasing imports into Japan and this will definitely benefit the dry bulk sector.

1. Alternative Energy
The meltdown of the Fukushima Daiichi nuclear reactor has caused a degree of power shortages across the country, in factories and homes and Japan’s reconstruction efforts is dependent on their promptness to attain an alternative source of energy to provide electricity and power. An alternative power source that comes to mind would be thermal coal.

In reference to the 2007 Niigita earthquake that caused the Kashiwazaki-Kariwa nuclear plant to shutdown for 21 months and it contributed to a rise in thermal-coal imports. Nightingale (2011) reported an estimation made by Credit Suisse Group AG, in order for Japan to provide sufficient power across affected areas and for the lost power supply in the country, Japan may need to buy additional 6 million metric tons of coal, which is enough to full about 90 panamaxes, to replace 20 percent of the lost capacity, with other alternative sources coming from liquefied natural gas, crude oil and fuel oil.

Additionally, this nuclear incident will raise concerns about building new atomic plant in a country that is frequently hit by natural disasters. If nuclear generator continues to be of threat to the environment and the Japanese population, the reliance on thermal coal would increase to meet the electricity demand.

Therefore, to meet the demands for alternative source of energy, there will be an increase in the imports of dry bulk commodities and will lead to the revival of Japan’s shipping economy.

2. Freight
The increasing demand of cargoes transported to Japan will benefit ship owners due to rising shipping rates. The surge in imports will not occur immediately due to the on-going repairs on the infrastructure of the ports and power plants. In the long term, a possibility of bullish commodity prices as most of what needed to import has to be shipped in.

An analysis of the shipping market reported the BDI declined sharply through the 2011 Q1 & Q2 the period of the disaster. The index has slowly increased as Japan plans for its recovery and it is expected for it to continue to increase.

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Figure 3: The dry bulk market before and during the crisis (Bloomberg Finance 2011)

4 Shipbuilding

Bulk carriers transport anything from coal and iron ore to basic agricultural products. Japan’s demands for recovery, reconstruction and alternative source of energy will need a large volume of materials that requires to be shipped in mostly by dry bulk vessels. With that in mind, Japan will have to charter more dry bulk carriers to meet with their demands.

Figure 4 below shows countries that produce bulk carriers. The largest producers are China, Japan and South Korea, with China producing more than half the amount of bulk carriers, while Japan producing about a quarter.

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Figure 4: Countries producing Bulk Carriers, Japan to complete producing 133 bulk carriers latest by 2013 (Bloomberg Finance 2011)

As shown, there were many orders for bulk carriers and those were already in motion before disaster struck Japan. Japan Ship Exporters' Association (JSEA) (2011) stated that even though Japan has contracts for 133 bulk carriers to be built, the disaster did not have any effect on Japan’s future export ships as the major Japanese shipyards that build large vessels for exports are concentrated in western Japan and remained intact.

Consecutively, countries such as China and South Korea are producing bulk carriers as well, and all these ships will be completed latest by 2012 or 2013. With that, it can be assured that there will be enough bulk carriers to render their services to Japan who will have a high demand in them as the nation rebuilds itself in the coming years.

As Japan bounces back from this disaster, demand will once again rise. The chart below shows the number of bulk carriers under construction.

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Figure 5: Number of bulk carries under construction, 535 bulk carriers under production for 2011(Bloomberg Finance 2011)

As seen from Figure 4, there is a sharp rise in the number of ships under construction in the year 2011 and this could be due to the improved outlook for the global economy as Japan will be redeveloping itself and many resources are needed in abundance. Additionally, as shipbuilders become more confident that their transportation services will be needed in the future, the desire to expand one's fleet will rise.

On the down side, however, with inconsistent power grids, production of goods has been reduced. This may cause exports to decline temporarily, forcing some ships to skip Japan's ports. The uncertainty surrounding the nuclear situation is a problem not only for the shipping industry, but the country as a whole. However, given Japan's past track record of dealing with disasters, I am confident the country will rise to the challenge.

19 Container Market

Japan is a prime player in the business of container shipping. On 11th March 2011, Japan became a victim of natural disasters that swept away thousands of containers and damaged numerous ports in the North-eastern parts of Japan. This dampened the country’s total export because of the supply chain disruptions, resulting billions of dollars in losses.

3. Damaged Ports and Facilities
Of the ports that were damaged as a result of the natural disaster, seven handled container cargoes were affected - Sendai, Hachinohe, Hitachinaka, Onahama, Kashima, Ofunato and Ishinomaki. While the damage caused will take a period of time before the port will resume operating as per normal, Kashima, the ninth largest container port in Japan and Hitachinaka, a medium-sized container seaport, was not severely affected and were back into operation after a few weeks.

On top of that, disruption in the Japanese manufacturing sectors like electronics and automobiles, which were mostly concentrated on the Tohoku region, was hit tragically, destroying many parts and components as well as destroying the transport infrastructure. This reduced production and made it tougher to get goods to and from port while the damaged nuclear facility led to widespread power shortages.

4. Radiation Affecting Services
One of the main concerns for the container ports is the threat of radiation leakage. The earthquake had damaged the nuclear cooling reactors of Fukushima and this damaged nuclear plant threatens the area around its vicinity. This resulted in a reduction of container shipments in and out of the country as radiation risk affected services and containership capacity deployment in the region. Until the radiation threat is brought under control, Tokyo and Yokohama will continue to face threats and see a decline in its container shipments and functioning ports.

However Japanese authorities were quick to carry out reforms. Just one month after the disaster, port authorities have imposed an exclusion zone in the vicinity of the Fukushima plant to overcome radiation risk. In addition to that, a monitoring campaign was introduced to alleviate the fears over ship and cargo contamination.
The Japanese Ministry of Land Infrastructure & Transport (MLIT) developed guidelines on radiation measurement and is also planning to introduce a radiation-certification system for ships calling at Tokyo and Yokohama container ports to reassure owners and shippers. Radiation levels will be monitored on all containers to be loaded at Japan affected ports, at the terminal gates, and only containers with a radiation level at the safety level, which is 0.38 microsieverts per hour (mSv/h), and higher will not be loaded. Containers with an unacceptable radiation level will be decontaminated by washing, isolated or removed depending on its level. Ships and seawater within ports will also be measured.

5. Container Market on the Rise
To date, Japan’s shipping industry has slowly begun returning to normal. Radiation is slowly subsiding and shippers are still maintaining their routes to Japan’s undamaged ports. However, shipments getting to and passing through the port are still slow. Container imports from Thailand and other Asian countries that supply industrial materials and parts to Japanese companies were starting to return to pre-earthquake levels, Knudsen (2011) said in June.

Furthermore, import container shipments may see a boost as the revival of Japan would provide a demand in new materials, finished products, foods and replacements for those that had been destroyed by the natural disaster. With that, it is expected to boost Japan’s economy. With regards to exports, a sign of recovery is being seen as the manufacturing industries restore their production and supply chain recovers.

In addition, things seem to be improving as Japan’s port of Sendai, the largest port in the north-eastern Japanese region that bore the brunt of the devastating March 11 earthquake and tsunami, international container services partially resumed operation in September 2011.

Despite the tragedies, the impact of Japan’s container market’s decline will have little effect on a global scale. World Shipping Council (2010) reported Japan is ranked 25th in 2010 handling a volume of 4.28 million TEUs. Japan handles about four percent of the world’s container. Even though exports from Northeast Japan halted, other container ports, especially the major container ports, were unaffected. Also, other countries handling more global containers are still operating as per normal. So it is safe to say that the effect of the earthquake on Japan’s container market is mostly local and not global.

20 Car Carrier Market

Japan’s car carrier industry is very competitive as the nation boasts several major shipping lines providing liner services. In the first quarter of 2011, world car sales recorded another strong quarter. This was mainly driven from the strong emerging markets consisting of Russia, India and China.

Before the disaster occurred, Japan and Korea had an optimistic start in 2011 as export volumes were well above the levels seen in early 2010. Cars exports out of Japan have slowed down considerably after factories close-downs in March and April due to the earthquake and tsunami disaster.

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Figure 6: US inventory levels of Japanese and Korean cars 2010-2011 (Automotive News)

In March 2011, stocks of Japanese cars all over the world began falling rapidly. The necessary restocking of Japanese cars would generate additional demands towards the end of 2011 and during the first half of 2012.

In the following months, car carriers have been idling outside Japan waiting for Japanese car export volumes to return to normal levels. Japanese car manufacturers made an announcement suggesting that Japanese car production is picking up faster than expected. Ship brokers also reported that the number of vessels idling is being reduced day by day from June onwards.
In 2011, the continued high deliveries of new buildings likely to remain a negative factor for the market balance in the car carrier market. With an optimism of the Japanese car production in Q3 2011, market information indicates that Japanese car exports may be back to normal. This is probably the reason why the idling fleet has decline within the summer. Looking beyond the temporary negative effects of the Japanese disaster, the underlying demand for shipment of cars and other rolling cargo is expected to continue to improve during Q4 2011 and 2012.

6. Freight market
Japan’s car manufacturing giants, Toyota Motor Corporation and Nissan Motor Company’s increased efforts to make up for their production loss after March 2011 disasters. This will benefit local shipping lines suffering from lower rates for hauling commodities and containers.

Japan’s auto exports plunged following the March 2011 disaster, with shipments down to a record of 68 percent in April, followed by a 41 percent drop in May and a 10 percent decline in June due to damaged plants and disrupted power supplies.

The fall in Japan’s production affected Nippon Yusen Kaisha (NYK Line), Mitsui O.S.K. Lines (MOL) and Kawasaki Kisen Kaisha, Ltd. (K Line), all of which slumped to losses in the second quarter of 2011. That caused them to slide more than the Nikkei 225 Stock Average’s 14 percent drop in Tokyo trading this year. NYK is down by 38 percent, MOL 43 percent and K Line 48 percent.

1 Strong Rebound

Europe’s biggest car-carrying line, Wilh. Wilhelmsen, saw a “strong rebound” in Japan’s car carrier market in June, Chief Financial Officer Benedicte Bakke Agerup analysed that the Japanese car producers have shown an impressive performance in getting production and export back to almost pre-tsunami levels.

Moderate growth is expected in the shipping line across its business in the six months ending December. Shipments rose 12percent to 18.8 million cubic meters in the Q2 2011.That includes Lysaker, Norway-based Wilhelmsen’s main fleet and Eukor Car Carriers Inc., a venture with Hyundai Motor.

The three big Japanese lines all expect to rebound from their fiscal first-quarter losses to post full-year profits. NYK forecasts net income of five billion yen, MOL predicts 17 billion yen and K Line expects two billion yen.

4.4 Tanker market

4.4.1 Effects of the Japanese earthquake
The natural disasters caused Japan’s refining capacity to be curbed for a period of time as five out of six refineries have no planned restart date.

The impact on both crude and product tanker markets are as follows: • Crude side: Fewer imports will be required as refinery feedstock. • Product tanker: Demands will change depending on whether it is domestic or international, will be met by other sources.

The table below shows five refineries with a total capacity of 862k bbl/day, all of which are either currently closed or have no plans to restart. At an utilisation rate of 90 percent, this would indicate demand for 776,5k bbl/day of crude oil as a feedstock.

|Company |Location |Capacity (bbl/day) |Status |
|JX Nippon Oil & Energy |Sendai |145,000 |Closed |
|JX Nippon Oil & Energy |Negishi |270,000 |Closed |
|Kashima Oil |Kashima |189,000 |Closed |
|Tonen General Sekiyu |Kawasaki |335,000 |Restart Planned |
|Kyokuto Petroleum |Chiba |175,000 |Closed |
|Cosmo Oil |Chiba |228,000 |Closed |

Table 1: Refineries (total capacity of 862k bbl/day) currently closed with no planned restart

Japan relies heavily on imported oil and with limited domestic production; they would need seaborne crude of 38.6 million tonnes per year (approximately 143 VLCC cargoes).

About 90 percent of Japanese crude oil originates from Middle East of which the majority are on time chartered vessels. As a result, Japan may have to have the oil resold, further affecting the crude price.

4.4.2 Aftermath
The scale of the effect of the closure will depend on the length of closure and the location of the refineries that pick up the slack. If other Japanese refineries were to step up and increase utilisation rates, it is likely that little or no effect will be taken on crude tankers.

4.4.3 Alternative Energy
The disaster has damaged nuclear power plants. This has led to a rethinking of nuclear power programmes in several countries. In replacement of oil, the demand for gas and coal has sky rocketed since and all other renewable energy alternatives are welcomed.

4.4.4 Reconstruction
Three Oil and Natural Gas Companies Filling Japan’s Energy Gap
Companies around the world are lining up to help the Japanese with the disaster. Focus on the effect that Japan’s woes have had on the oil and gas industry, and a few companies which stand to benefit.

Crude giant Saudi Aramco has indicated that it is prepared to help with supplies. He promised that his company will do its best to accommodate Japan’s needs. “Japan will have a priority in the months to come as it deals with this disaster and tries to recover” Khalid Al-Falih (2011).

The Oil Tanker Industry Steps Up
Since the disasters, only 66 ports remain and are fully operational. To aid in restoring the refineries, the world’s top five lines in the oil tanker industry have promised to lend a hand, travelling to the oil offloading facilities in Tokyo Bay.
Various oil tanker companies helping are:

• Frontline Ltd. is one of these tanker lines. Its fleet features a mix of 76 very large crude carriers (VLCCs) and Suezmax tankers. • Teekay Corporation is also assisting in the operation. Its fleet is twice the size of Frontline’s, and contains more than 150 similarly sized vessels.

The challenges faced by Japan will likely change the country’s energy mix for some time. This is good news for crude carries as opportunities lie for natural gas producers, particularly LNG carriers.

Russian Gas and LNG to the Rescue
With only six nuclear reactors and the associated power generation at Fukushima office, Japan will have to make up for its electrical power gap.

Analysts widely agree that Russia is the country that stands to benefit most from Japan’s shortfall in its energy supply. This pleased Gazprom OAO, the giant Russian gas supplier.
Thierry Bros, a senior gas and LNG analyst at Societe Generale, told Reuters television: “The question marks raised over the future of nuclear energy also make [natural] gas a much surer option… playing to Russia’s advantage. So the first one to benefit from this is Russia, and ultimately, Gazprom.”

Societe Generale estimated that Japan’s natural gas supply shortfall could amount to five billion cubic meters in 2011 and an additional two in 2012.

According to analysts at Seoul-based KB Investment and Securities Oceangoing, LNG averaged about six percent annual growths from 2000-2009. The number is expected to rise to 7.7 percent in the wake of Japan’s power woes.

With Australia’s Greater Gorgon natural gas project coming up in a few years, it can provide a massive boost to the LNG tanker market. The view is shared by South Korea’s Daewoo Shipbuilding and Marine Engineering. As one of the world’s largest shipbuilders, it expects LNG crude carriers to make up a large part of its business in the coming decades.
4.4.5 Global
Lesser demand of oil from Japan has caused oil prices to fall. There is growing unrest in a Yemeni area bordering Saudi Arabia, limited the decline in oil prices. Brent crude LCOc1, pressured by expectations of oil demand, edged down 0.2 percent to $113.60 a barrel.

4.4.6 Freight Market
Low freight rates reflect an oversupply of tonnage and will take a while before the situation improves. Some analysts predict that one to two years may be the time needed for the market to pick up.

The LNG market has benefited from increased cargo volumes, compensating for the lost nuclear power production, as gas-fuelled power plants were running at reduced capacity before the disaster. When reconstruction picks up speed, more significant fuel volumes will be needed.

The unrest in the Middle East and North Africa has had some impact on the tanker market and may have more. Finally, it should be mentioned that the oil market is dependent on consumer purchase. The combination of high energy prices and rising interest rates today has previously had negative effects on oil consumption.

5. Japan’s Port Authority

1. Port Safe Radiation Level
The Japanese class society has kicked off a monitoring campaign to alleviate fears over ship contamination.

Nippon Kaiji Kyokai (ClassNK) has started to test and certify radiation levels on ships as Japan attempts to reassure owners refusing to call at ports in Yokohama and Tokyo in fear of contamination from the damaged Fukushima Daiichi nuclear plant. The move comes one month after the disasters, when cruise ship operators are not calling in Tokyo Bay and as many as 20 box ship calls in the area have been cancelled.

Despite not having any radiation-testing equipment itself, Tokyo based Japanese classification society is subcontracting the work; counter-signing documents and offering own certification. Company official says the move is in response to heightened radiation found on a Japanese box ship classed by ClassNK.

The MLIT plans to introduce a radiation-certification system for ships calling at Kehin and Yokohama container ports to reassure owners and shippers.

Mediterranean Shipping Company S.A (MSC) says it will monitor radiation levels before loading at the Port of Yokohama as precautionary measure. Containers loaded will be monitored to ensure the safety level is at 0.38 mSv/h.

Port of Rotterdam is set to undertake this precaution and will check cargoes from Japan for radiation. MOL says its 6,350-teu containership MOL Presence was detained in Xiamen with radiation level of around 3.5mSv/h but has now been cleared to enter the port of Hong Kong.

The latest figures from MLIT show measurement of 0.000087 mSv/h at the ports of Tokyo and 0.000041 mSv/h at Yokohama, which are lower than average readings.
[pic]
Figure 7: Radiation Measurement on Containers and Ships in Ports (Outline)

[pic]
Figure 8: Radiation Measurement in Ports in Japan (Outline)
5.2 Japan Container Ports face some radiation risks
Ports of Tokyo and Yokohama handled 38 percent of Japanese containers in 2010. According to Alphaliner, up to 40 percent of Japan's container traffic would be affected if the risk of nuclear radiation from the badly damaged Fukushima Daiichi power plant forces the closure of ports in Tokyo Bay.

Of the ports that suffered serious damage only seven handle container cargo -- Sendai, Hachinohe, Hitachinaka, Ohahama, Kashima, Ofunato and Ishinomaki.

These ports handled 245,900 TEUs in 2010 or 1.3 percent of total Japanese container traffic in 2010. The largest of the seven, Sendai, handled 155,611 TEUs last year.

6. Japan’s Logistic Movement
After the March 2011 tsunami, Japan needs a lot of rebuilding, reconstruction and supplies for its nation. Thus, expecting a lot of imports from the global resources and supply which includes raw material for rebuilding and food supplies for the citizens. Logistic movement is vital such as the freight carriers and hauliers from ports for transportation and warehouses for storage.

6.1 Western Port of Japan (Safe Berth)
The western side of Japan is isolated from natural disaster areas and it is deemed a safe berth. The logistic process will commence once the cargo is lifted from the ship’s deck to the receiving dock. Hauliers will be in place to transport this cargo to warehouses for storage. Raw materials are transported to manufacturing plants where as finished products are stored or transported to distribution centre for local consumption. Provisions and construction materials will be required to be transported to the affected areas in the Eastern part of Japan as Sendai Port is still under repairs to receive any shipment.

The importance of a safe berth cannot be undermined as this is essential for the short-term and long-term progress of Japan’s economy.

6.2 Demands for Warehouses
Prologis Inc., the world’s biggest warehouse owner, said it expects profit in Japan to rise as rents at its properties in the nation will probably increase due to a shortage of available warehouse space in Japan, following damage to a number of facilities in the March 2011 disaster. The firm also plans to provide new supply to meet the strong demand.
The amount tenants actually pay property owners or effective rents, may surge as much as 10 percent in the next 6 to 12 months, said Miki Yamada, president of Prologis’s Japan operations in Tokyo. Demand has risen after some distribution centers in Japan’s northeastern region were damaged or destroyed following the March 2011 tsunami, he said.

With that first distribution center in Shinkiba near Tokyo Bay, Prologis pioneered leasing large facilities to Japanese logistics companies that offer a range of services such as inventory management, storage and distribution of goods. Prior to Prologis, firms traditionally owned their own storage space or leased space from warehouse operators. “Even banks approach us to see if there are any lending opportunities,” he said.

6.2.1 Transport Haulier and Infrastructures
The accessibility of trucks at older warehouses in Japan tends to be limited to the ground floor, Yamada said. Elevators are used to carry merchandise, which is less efficient compared with modern facilities where trucks reach every floor via ramps, he said. The design, which cut the time needed to load and unload goods by about 39 percent, is now standard for logistics properties in Japan and is also being used in Singapore and Hong Kong where land is scarce, according to Prologis.

7. Japan Shipping SWOT Analysis
Strengths
1. Japan's Pacific Ocean coastline gives it access to the main shipping routes to the west coast of the US, the country's main trading partner. 2. Japan's ports are ports of call on Maersk Line, CMA CGM, MOL and OOCL services.
3. The country boasts the world's most developed LNG shipping industry with 24 re-gasification terminals located along its coast.
4. The country is a major iron ore and coal importer - key drivers of dry-bulk shipping.
Weaknesses
1. Port infrastructure is exposed to potential earthquake damage, such as the major earthquake experienced on March 11 2011.
Opportunities
1. Japan's industrial sector is starting to recover, boosting demand for raw material imports. 2. LNG shipping demand set to play a critical role of Japan’s alternative source of energy.
Threats
1. A weak economic recovery in the West will stifle exports of cars and other high-end consumer goods. 2. Further appreciation of the yen will hurt exports, though it may boost import volumes.

8. Recommendations

1. Shipping Market
8.1.1 Container Market
The potential increase in the demand of container vessels will increase significantly due to Japan’s needs to import provisions. Reefer containers will need to carry high numbers of perishable products such as vegetables and fruits due to contamination farm products in the country. Other specialise container such as flat rack will be in demand for the need to transport heavy machinery, pipes, cables and other reconstruction materials.

8.1.2 Dry Bulk Market
Japan focus to rebuild and reconstruct will depend on their promptness to attain construction materials and coal to provide electricity and provide power for the affected areas. Japan may take a step out of the slump by chartering bulk carriers to transport coal for Japan’s direct-burn crude for power generations. Reconstruction materials such as sand, iron, cement, steel, etc will also require bulk carriers to be transported.
The logistic aspects should not be overlooked, all the imports of raw materials, provisions, etc requires a warehouse for storage and the need stock-up provisions and materials.

8.1.3 Carrier Market
Pure Car Carrier (PCC) will be back in demand to export manufactured vehicles once the factories are back in productions. Pure Car Truck Carrier (PCTC) might be in demand to transport trucks, cranes or other heavy vehicles to support the reconstruction process.

8.1.4 Tanker Market
The surging needs for tankers to transport crude oil for power generations and also to provide heating to the affected areas of the disaster will increase significantly on the short-term. More tank farms will be required to be build to stock up Japan’s Crude oil reserves for domestic use.
A greater emphasis will be on the specialise tankers such as LNG and Liquefied Petroleum Gas (LPG) will be in greater demand than crude as alternative source of energy on the long run as Japan may move away from nuclear powered to gas. Gas is the cheapest form of fuel in market as compared to crude and coal. Japan needs to build more specialise terminals and storage tanks to stock up their gas reserves for domestic use.

Container, Dry-Bulk and Tanker – In the long run, Japan would need to go into new shipbuilding. They will need their own vessels to cater to the long term needs for their alternative source of energy, provisions and construction materials.

2. Port Charges
Japan’s port charges has been the most expensive in the world but due to the earthquake/tsunami, Japan needs more import and to attract more vessels to come alongside, the port charges should be lowered by about 20-25 percent.

3. Western Port of Japan
The devastation on the east of Japan (Sendai, Okohama, Fukushima, etc) gave other ports in the West of Japan, Niigita a boost economically. Japan could enlarge its West Coast shore line into a major shipping port (most nuclear power is in the east) as a safety barrier from potential earthquakes in the future. This will give opportunities for foreign ship-yard builders, material suppliers, logistic providers and other port services related to the development.

9. Conclusion
Based on our findings, through intensive research and interview results, Japanese ports and the shipping industry on the whole have been slowly returning to normal.
The bulk shipping business, the car carrier sector (which was deeply impacted in the immediate aftermath of the earthquake) is expected to produce more transport demand in the second half of the year in order to make up for decreased production in the first half.

To meet lost nuclear capacities, Japanese utilities will increasingly rely on gas and oil feedstock to generate thermal power, which has risen by double digits on a year-on-year basis in each of the last three months.

For example, Japan will need to keep increasing LNG imports to meet forecast rises in energy demand. In June, LNG imports rose by 35.0 percent y/y to a 33-month high, following a rise of 35.8 percent y/y in May. At least nine spot cargoes were bought by Japan from countries including Yemen, Peru, Algeria, Nigeria and Equatorial Guinea over this period. The previous record was 11 spot cargoes bought in September 2008.

In conclusion, Japan’s shipping economy is recovering and it continually strives to regain its economic activities. Given that Japan is highly dependent on imports, Japan has aimed to diversify its sources and maintain high levels of energy efficiency in order to rebuild herself. Thus, Japan is able to achieve a continuous rapid growth on the supply and demand.

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