By Myra P. Saefong
A DOW JONES COLUMN
With Japan suffering from multiple disasters--earthquakes, a
tsunami and nuclear crisis--it's no wonder commodity prices almost
across the board have seen significant declines on bets that demand
for resources from the world's third-largest economy will slow.
But as the Land of the Rising Sun's calm and determined citizens
work to rebuild their nation, opportunities in the commodities
space are far from over.
"As always, there are opportunities in crisis," said Chris
Mayer, editor of Agora Financial's Capital & Crisis.
Energy, metals and agricultural sectors have all taken a hit
since the 9.0 magnitude earthquake shook northern Japan, causing a
massive tsunami that killed thousands and setting into motion
what's been called the worst nuclear disaster since the 1986
Chernobyl nuclear plant explosion in the former Soviet Union.
As of Wednesday, traders have seen oil prices lose nearly 5%
since March 10, the last trading day before the disaster; gold
prices have fallen more than 1%, corn lost nearly 10%, and
platinum's down about 4%. But natural gas has gained almost 3%.
"The whole earthquake/tsunami/radiation leak is a big,
unexpected event with large, potential consequences that are not
yet known," said Todd Hultman, editor of DailyFutures.com.
"It has created a big jolt of anxiety that has investors and
fund managers bailing out of investment positions and running for
cash," he said. "In these panics, even good investments get tossed
aside."
"If the radiation risk does not get worse in northern Japan, we
should see a rebound in corn, soybeans, cattle, crude oil, copper
and possibly lumber prices," said Hultman. "These are all
commodities with relatively tight supplies in relation to 'normal'
demand."
Other commodity market watchers say natural gas, coal, steel and
gold will also bounce back.
"A crisis can offer opportunities to selectively add to
positions where value can be identified and where the short-term
market reaction does not seem to match the actual fundamentals and
medium- to longer-term outlook," Martin Hennecke, associate
director at Tyche Group told clients.
Long Run, Quick Burial
For uranium, that boat has sailed--at least for now.
Japan's disaster was a "debacle for uranium," said Christopher
Ecclestone, a mining strategist at Hallgarten & Company LLC.
"It has maybe set back nuclear plants in the West by 15-20
years."
The UxC daily uranium broker average price, the average midpoint
of the three main uranium brokerages, was at $49.25 on March 16,
down from $55 a day earlier, data from nuclear-fuel consultancy Ux
Consulting Co. show.
Uranium prices are expected to plunge by 26% over the coming
months, said John Longo, professor of finance at Rutgers Business
School in Newark. "Needless to say, uranium producers will feel the
burn."
Shares in Cameco Corp. (CCJ), which accounts for about 16% of
the world's uranium output, have dropped more than 20% since
Japan's mega earthquake.
While longer term, looking out five years or more, the case for
nuclear power is "compelling" and the case for uranium even more
so, said Mayer, "the sector is dead money for 2011."
Uranium spot prices had reached an all-time high of $136 at the
end of June 2007, according to Ux Consulting.
"Japan utilizes over 10% of the world's uranium--obviously that
figure will decline in the wake of disabled power plants and the
widespread fear of health concerns," said Longo.
Uranium demand around the world may also decline. The Chinese
government has suspended approval of new nuclear power plants,
Spain has ordered a review of its nuclear power plants, and Germany
placed a three-month ban on operations at several of its oldest
reactors, according to news reports.
"The type of light-water reactor that is in trouble in Japan is
very common," said Sean Brodrick, a natural resources analyst for
Weiss Research, pointing out that there are such 23 reactors in the
U.S. A light-water reactor uses normal water as a coolant.
"These plants will have to be strengthened against future
disasters, and we will probably see a delay in projects around the
world," he said.
A delay, however, doesn't mean an end to nuclear projects.
The public perception that uranium-powered energy is too risky
will pass "when [the] consumer realizes what $100-plus oil means to
their pocketbook," said Tony Sagami, Asia analyst for Weiss
Research. "Nuclear power is the cheapest form of energy generation
known to man, and it is here to stay."
In Japan, uranium needs will drop for quite a while, said
Jonathan Hinze, vice president of international operations at Ux
Consulting, though "not to the point where Japan abandons
nuclear."
And "China, Russia, India and South Korea have not indicated any
change that would alter their long-term growth plans for nuclear,"
he said.
Changing Energy Landscape
For now, it looks like uranium's loss will be a gain for
alternative energy sources and construction-related
commodities.
Among the energy alternatives are solar, wind and biofuels, said
Longo.
Coal will be another energy source Japan needs to "keep in
stock," said John Person, president of NationalFutures.com, adding
that he's long on shares of International Coal Group (ICO).
Twenty-five percent of Japan's nuclear capacity was shut after
the quake and tsunami, and making up for the lost nuclear capacity
will require additional fuel oil and crude demand of up to 300,000
barrels per day, according to a report from Argus, international
energy price reporting agency. "Japanese demand for crude and fuel
oil for generation will add upward pressure to already high oil
prices."
Japan's crises will have "significant repercussions in global
energy markets," the report said. "Japan will rely more on oil for
power generation, at least until the end of this year...and it will
seek additional LNG [liquefied natural gas] supplies."
All in all, about 84% of Japan's energy supply relies on
imports, and the nation is the world's largest importer of LNG and
coal, according to Ben Smith, president of energy data and
information provider First Enercast Financial.
U.S. natural gas is somewhat sheltered from this event, he said,
given that the U.S. market will continue to be disconnected from
the international market until it builds out its LNG export
capacity.
But "if U.S. nuclear power expansion projects are halted or
slowed due to this event, natural gas would benefit as it is
probably the next best solution for substantially increasing our
future power-generation capabilities," Smith said.
Power Of Recovery
Other commodities are poised to benefit as Japan recovers.
After all, "reconstruction is a commodity-intense process," said
Weiss's Sagami.
The first commodities that will benefit from increasing demand
are the two basic building blocks: cement and rebar (steel bars),
he said, and there will likely be more demand for copper, steel,
iron ore and lumber, he said.
"After they survey the reconstruction phase and begin the
rebuilding process, that could be an immediate floor of support"
for July lumber futures contracts, said Person. July lumber trades
around $328 per 1,000 board feet, down from about $332 year to
date.
Two of the lumber stocks Person said he's looking to buy on more
of a pullback are Universal Forest Products Inc. (UFPI) and Plum
Creek Timber Co. (PCL).
Food's another necessity that'll soon see price spikes
again.
"In the short term, the livestock operations in Japan are going
to suffer and that will lower Japan's corn demand," said
Brodrick.
Damage to the infrastructure will also cause Japan to import
less corn for feed, according to Ned Schmidt, editor of the
Agri-Food Value View Report, but less corn for feed means they will
import more beef and pork.
"In the intermediate term, not only will those livestock
producers come back online, but Japan is probably going to have to
import more corn and other grains as it rehabilitates its swamped
farmland and broken infrastructure," Brodrick said.
And as for gold, the commodity often known as a universal safe
haven in times of financial uncertainty, it'll get a lift too.
"Longer term, the massive recovery efforts and the equally
massive currency creation that will finance them will be positive
for gold, silver and the rest of the metals complex," said Brien
Lundin, editor of Gold Newsletter.
(Myra P. Saefong is a writer for MarketWatch. She can be reached
at 415-439-6400 or via email at AskNewswires@dowjones.com)