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)