COMMODITIES MARKETS BRACE FOR JAPAN IMPACT / THE FINANCIAL TIMES ( VERY HIGHLY RECOMMENDED READING )

Note from the editor

Commodities markets brace for Japan impact

By Javier Blas

Commodities markets are bracing themselves this week for convulsions from the most powerful earthquake in Japan’s history.

We will be reporting throughout the day on the impact on commodities markets. But here are my initial thoughts on what the crisis in the world’s third-largest economy – and a key importer of raw materials – means.


The impact of the disaster will drive prices lower in the very short term as Japanese economic activity comes to a halt – big companies such as carmakers have said they will not open on Monday, and with the country’s power supply severely disrupted, some others – particularly big electricity consumers – may not be able to open even if they try.


As such, the cost of commodities, from crude oil to iron ore and from copper to soyabeans, will drop over the next few days and potentially the next few weeks – although that will very much depend of the impact of the disaster on economic growth in the region and across the globe.


Expect big, short-term localised dislocations. For example, as steelmakers shut down because of a shortage of power in Japan, iron ore prices could drop but steel prices could rise. Copper concentrates prices could plunge, but refined metal could surge.


Over the medium term, Japan is going to need huge amounts of commodities to rebuild the areas hit by the quake and tsunami. This will boost Asia’s regional demand. Besides, global energy markets are braced for a big shake-up as Japan replaces a large chunk of its nuclear power capacity – if not all of it, if Tokyo is forced to undertake big safety checks after serious problems in two of the country’s reactors – with electricity generated by burning oil, natural gas and coal.


Japan is the world’s third-largest oil importer, behind only the US and China, and the top buyer of liquefied natural gas and thermal coal. The reactors affected – 9,700 megawatts of nuclear capacity, about a fifth of Japan’s total – will not return to power for the year, if at all. More important, Tokyo is likely to close other plants for safety checks, or to rebuild defences against tsunamis.


Uranium prices will drop as consumption falls – and the few speculators active on the market are likely to liquidate their positions immediately, prompting a big price correction.


The impact will not be felt immediately as economic activity in the country comes to a halt. Besides, March and April traditionally see the lowest point in electricity consumption in Japan. But as factories restart and reconstruction begins – and the peak power consumption period of July and August approaches – demand for alternative sources of electricity will spike.


The International Energy Agency, the western countries’ oil watchdog, estimates that it takes about 38.8 barrels of crude oil to replace 1MW of idled nuclear power generation capacity in Japan. If the country were to replace its missing nuclear capacity with oil alone, it would have to import a further 375,000 barrels a day, on top of expected purchases this year of about 4.25m b/d.


Japan is more likely to opt for a combination of oil, LNG and thermal coal, however.


The country significantly boosted its purchases of LNG, thermal coal and crude oil in 2002 after 17 of Japan’s 54 reactors were shut down for safety inspections, and again in 2007 and 2008 after the shutdown of the Kashiwazaki-Kariwa atomic station, the country’s largest. As such, higher thermal coal prices are likely. Annual contracts for the Japanese fiscal year, which starts on April 1, are likely to exceed the record high of $125 a tonne set in 2008-09. Crude and products such as fuel oil and LNG will also rise.


Over the longer term, the crisis is likely to prompt a rethink of nuclear power everywhere, with the possible exceptions of China and India, and make LNG the fuel of choice.