The Conversation (0)
The massive earthquake and tsunami in Japan last week has the potential to recalibrate our world’s geopolitical context. At the moment, the world is waiting to find out if the damage to Japan’s nuclear generators will result in another Chernobyl or Three Mile Island.
The land of the rising sun is experiencing a series of catastrophic disasters and misfortunes that will be felt throughout the world in the months, years and decades ahead, even as the capricious conditions continue to unfold. The massive earthquake and tsunami in Japan last week has the potential to recalibrate our world’s geopolitical context. At the moment, the world is waiting to find out if the damage to Japan’s nuclear generators will result in another Chernobyl or Three Mile Island.
The 40-year-old reactors, designed by General Electric (NYSE:GE), were due for decommissioning at the end of this month. Investors will note that as more data becomes available, the analytical framework and relative comparisons will continue to change. Analysts believe that the Fukushima nuclear incident will likely be upgraded from a level 4 to a 5 on the International Nuclear and Radiological Event Scale. The scale runs from 0 to 7 with Three Mile Island ranked at level 5 and Chernobyl acquiring the only level 7 event in history.
The 1986 Chernobyl tragedy spewed radioactive graphite and clouds over Ukraine and Belarus and reached as far as Sweden. The total cost of resettling inhabitants, cleaning and sealing the area as well as paying off medical claims is estimated by Belarus to be around $235 billion. This estimate is excluding another $1-2 billion required to replace a sarcophagus containing 180 tonnes of radioactive material which cracked last year. In 1979, Pennsylvania’s Three Mile Island (TMI) power plant experienced a series of events similar to those currently transpiring in Fukushima.
One inherent problem with light water reactors, in general, is the vicious cycle of needing to vent coolant to relieve pressure and then having less to cool the core, which progressively generates more heat and pressure that then needs to be relieved. If the core heats up enough, the zirconium cladding around the core causes the water to release hydrogen. The hydrogen builds up outside the reactor vessel, eventually causing the exterior walls of the containment building to explode. Fukushima and TMI both used water to cool and regulate the reactors, except that TMI had a pressurizer. Like Fukushima, TMI was vented into the air to reduce pressure in the core, releasing similar radioactive fissile products as Fukushima. The reactor also experienced a small hydrogen explosion, which tore off the exterior walls of the containment building, and a partial core meltdown. In the case of TMI, the estimated cleanup cost was $975 million and took 14 years to complete.
Some analysts are cautiously suggesting that if the situation does not become significantly worse, cleanup efforts and medical claims for Fukushima could be similar to those of TMI. The radiation exposure of the civilian population reported so far remains relatively light, and iodine tablets were promptly distributed to counteract any radioactive iodine released. Although the tablets only prevent thyroid cancer, so far only around 8,000 microsieverts have been detected outside the plant—far below the one sievert minimum for radiation sickness.
A decline in nuclear power will increase the demand for fossil fuels, although it seems too early to handicap what that will mean. A rapid rise in oil prices, which may also be impacted directly from geopolitical events unfolding in the Middle East and North Africa (MENA), could lead to the potential of a deflationary environment; however, it could lead to price inflation as manufacturing and transportation costs rise. Governments may feel compelled to conduct more quantitative easing to maintain growth. The Bank of Japan (BOJ) will certainly comply with pressure to increase liquidity to fund disaster relief and rebuild its damaged infrastructure and facilities, which could boost inflation further. Whether historical natural disasters result in inflation or deflation, the past several decades have demonstrated that either scenario generally results in underperformance from equities, while precious metals outperform.
Resource related stocks
Japan is one of the world’s largest consumers of metals and a shutdown of the manufacturing sector could impact demand in the very near termputting downside pressure on metal prices. Over a longer time horizon, Japan’s reconstruction will add to the world’s demand for industrial raw materials; thus resource related equities should be a primary beneficiary over the medium to long term. Demand for copper, steel and steel-related metals such as zinc, iron, manganese, nickel and molybdendum will rise as the construction sector picks up pace.
International trade balances with Japan show that China is by far the leading trading partner for Japan; however, resource rich countries, such as Australia, Russia, Canada and Brazil should benefit from a well entrenched ‘safe harbor status’ that will be maintained. Australia has been the third largest trading partner with Japan, and with relative close proximity and facing an inflationary fuel cost headwind, the continental country could receive a boost in revenues.
Regional trading partners
Despite having relatively scarce natural resources and general overpopulation constraining urban development and the formation of a large internal consumer market, South Korea has adapted an export-oriented economic strategy to fuel its economy. In 2010, South Korea was the sixth largest exporter and the fifteenth largest market economy in the world by nominal gross domestic product (GDP). South Korea has developed a strong reputation for manufacturing high quality steel which will observe increased demands from the massive infrastructure development expenses.
Health care and pharmaceuticals
Despite social media efforts by the World Health Organization and global health authorities cautioning, “consumption of iodide tablets is not a necessary precaution as there is no current risk of radiological I131 exposure,” consumers from North America to Russia’s Far East, are buying up the pills in droves, according to a report in the Wall Street Journal. Additional reports suggest that packets of potassium iodide pills are attracting bids of up to $540 on eBay.
Chile, the world’s largest copper producer and iodine supplier, has already had trouble meeting global iodine demands. There has been a worldwide shortage of iodine for the pharmaceutical industry, as it is also utilized in the manufacturing of LCD screens and television monitors.
Utility providers
In an exclusive interview with Resource Investing News, Adrian Lee-Chin, an international equities investment analyst, believes the inevitable pending regulatory and material changes in business models for many utilities companies involves a great level of speculation at this point. Utilities will be affected given their power generation mix, “companies with lower nuclear exposure will benefit off higher peak-power prices.”
Market analyst Dian Chu shares the view that in the short to medium term time frame, the hardest hit areas will likely be uranium mining companies and nuclear plant operators, “due to the heightened scrutiny from global governments as well as environmentalist groups.” Drawing an analogy between last year’s BP plc (NYSE: BP) oil spill, Chu contends that the nuclear sector has met its Deepwater Horizon in exclusive commentary to Resource Investing News, “Companies that have sunk tremendous resources for nuclear power plants (planning, under construction, or even operating) would likely see reduced demand and may need to scrap or write off their investments. Moreover, I expect new regulatory requirements could force some nuclear plants to shut down earlier than their expected life span…early shutdown would hit the existing plant operators’ future earnings and stock valuations.” Electricity should become more expensive in general over the long run, since the future of nuclear within the energy mix seems uncertain, and natural gas, oil, coal will become scarcer. Alternative energy technologies do not appear to be economically competitive or mature enough to operate on the larger scale.
Insurance industry
Huge insurance claims resulting from property and commercial damages in Japan, in addition to New Zealand and Chile will unquestionably take a considerable amount of capital out of the insurance and reinsurance industries; however, large insurance companies with high cash floats will be better able to compete on premium costs over the medium to long term. The best-capitalized insurers could be catapulted to the front because they are the only ones that can issue major insurance policies at a time when major policies are a compelling necessity. The companies with the largest capital base should be able to write more policies and take greater risks. They could raise insurance premiums, boosting their earnings. By contrast, poorly capitalized insurers will be either forced out of business or recalibrate their business models as they will not have the capital to write significant policies.