GUEST POST: The Japanese Crisis

Guest post by Vedran Vuk, Bud Conrad and the Casey Research Energy Team

With the Japanese crisis unfolding, I’m thinking about the policy consequences ahead for the U.S and the rest of the world. I’m positive that Japan will rebuild itself. As Kevin Brekke pointed out yesterday, the market was back within a year after the Kobe earthquake. Of course, a nuclear meltdown would surely push this time line further out, but eventually the nation would recover. However, bad political decisions may stick around for as long as radiation. This is the perfect time for politicians to enact poor policies that could last for decades.
    So, let’s think through some of these possibilities. The Bank of Japan is already pumping billions into the system, and the yen is dropping. After the monetary stimulus, a fiscal one is sure to follow. Unfortunately, Japan is in no shape to add on to its already gargantuan debt level at 225% of GDP.
    The stimulus might not simply go toward infrastructure repair and construction. Consider that the already weak Japanese banks just took a huge hit. Loan defaults will doubtlessly skyrocket from the crisis. On top of that, depositors will soon be pulling cash out of their savings accounts, draining the banks from a second angle…
    If the Japanese government bails out the banks and insurers on top of enacting a fiscal stimulus, where will the debt level stand as a percentage of GDP? While the earthquake is a very literal crisis at the moment, the seeds of a financial crisis are being planted next. Well, to be fair these aren’t seeds at all, but rather emerging seedlings already apparent prior to the earthquake. These sprouting problems are about to receive an extra dose of fertilizer.
    So, are there any good policies that could result from the earthquake? Yes, one being improved immigration laws. With Japan’s unemployment rate at only 4.9%, they’re necessarily going to require outside workers to get the job done, and cheap. Afterwards, they may decide to let many of them stay. Japan has a serious demographic problem of the older generation soon to outnumber the young. An influx of immigrants could be positive for Japan’s fiscal situation.
    First, Bud Conrad will update us on the economic situation across the board from Japan to the U.S., to commodities. Then the Casey Energy Team will give us a briefing on the Japanese reactors: what’s the status quo and what’s the worst-case scenario, plus what should uranium investors do about it?

Japan’s Stock Market Crash
By Bud Conrad, The Casey Report

The Japanese quakes are the worst in decades and serious. The Nikkei 225 dropped from 10,500 to a low of 8,200 Tuesday, or by 22% in two days. It crashed over 1,000 points after a recovery from a low point of 1,400 points down. As the world’s third biggest economy with close ties to China and our own economy, we will all suffer the consequences.

    Certainly, Japan will need to find other sources of energy than nuclear. In my opinion, that will mean bigger imports of oil. Their refineries are damaged; as a result, their purchases will focus on gasoline and jet fuel rather than crude. And that will increase shipping rates. Natural gas could be an alternative fuel for electricity and might rise if it could be shipped to Japan as Liquefied Natural Gas (LNG).
    Across Japan, there are already shortages of gasoline, and store shelves are bare – only partly from panic and hoarding. The shortage of electricity means trains aren't running and many manufacturing plants can't operate. The loss of more power plants besides the Fukushima reactors has required rolling 3-hour power outages across Tokyo.
    The Bank of Japan (BoJ) has floated $180 B of new liquidity in two days to stem the panic, but panic has already stricken this low-priced stock market. Japanese government bond 10-year rates are down on BoJ buying and Japanese investors’ flight to safety out of equities. The U.S. stock market is down, and Treasury rates are also lower in sympathy. Japan will not be buying U.S. Treasuries and could become a seller to finance reconstruction.
    It is likely that the reactor and unit of Fukushima 1 that experienced a second explosion in the suppression pool below the reactor came from a breach of the containment vessel. The radiation rose to 400 millisieverts per hour, which is a level that is dangerous to health (compared to normal background levels of only 3 millisieverts). The situation is still getting worse, and it will affect attitudes toward nuclear energy for years. [Keep up to date on this news at the M.I.T. Nuclear Science blog]
    A scan of world stock markets this morning (March 15) shows Europe, Asia and the Americas reeling from the impact. While Japan recovered to only 10% down, Europe is 2% to 3% lower, and the U.S. Dow lost 200 points. Virtually all commodities took a hit, but not at panic levels. However, many commodities have been up as much as 100% since last year; so they could have further to go if world economies implode. The impact on worldwide confidence cannot be underestimated.
    Every major commodity has retreated, with gold losing $33 to $1,395 and silver losses approaching $2 to $34. Even oil eased to $97 for West Texas Intermediate, despite the potential demand for replacing the loss of nuclear energy with oil. Natural gas hasn’t participated in last year’s commodity boom and as a result is suffering the least. The simple explanation is that markets tend to move together, but the bigger implication is that world economies may be forced to slow down, decreasing demand for all commodities.
    Panic seems justified until the situation stops getting worse. This seems as serious as other events that triggered worldwide economic catastrophes in the past.
    Add to this the North Africa/Middle East protests and regime changes, and the situation gets worse. With Saudis moving into Bahrain, Syria sending arms to Qaddafi and the rebels losing to him, the traditional energy source of oil from the Middle East is hanging in the balance. (See more in my article in the latest Casey Report on this topic.) Our political response to the fast-changing events is only being taken one day at time.
    And then there is the continuing financial storm: the Fed is signaling that it will stop buying all the government debt by ending QE2. Since QE2 buoyed the market since last summer, its absence could send panic throughout the market. The Fed could have been pre-announcing the end of QE2 to defend the dollar against the yen ($1.22/100 yen) and euro ($1.40/E). Who knows how this will be played out? The Fed may continue QE2 to avoid internal panic. It is remarkable that Fed policy is only third on the list of current disasters.
    My conclusion is that we will see more financial aftershocks just as Japan is experiencing geological aftershocks (6.2 this morning, 75 miles east of Tokyo) for months to come. The long-term destruction of paper currencies is likely to be accelerated from government thrashing to fix all the problems. In the short-term, we should ride out these storms more comfortably in physical resource investments than in bank deposits.
The governments will try to paper over problems with more printing as the BoJ did with $180 B in two day $320b in three days, but the real-world limitations on energy supplies compared to population growth mean that long-term energy demand will still be with us and energy and precious metals will be important areas for investment in the long term.

Uranium and Japan
By the Casey Energy Team

The potential for a core meltdown at three of Japan’s nuclear reactors after a 9.0-magnitude earthquake and ensuing tsunami slammed the island nation is causing another onslaught, this one against every uranium-related stock in the world.
    Stocks of uranium explorers, producers and nuclear-reactor builders, and the spot price of uranium all fell dramatically on March 14 and 15, the first days of trading following Japan’s disaster. As the country worked to keep three reactors at risk for meltdowns contained, the world’s largest pure uranium producer Cameco (T.CCO, N.CCJ) watched as its share price fell as much as 22.7% in Monday’s intra-day trading. By the end of the day the loss had softened to 12.7%, leaving the company at C$31.70. By mid-day Tuesday, Cameco shares had lost another C$2.29 to trade at C$29.41.
    Uranium One (T.UUU), another major global uranium producer, fell harder, losing 27.7% on Monday. By midday on Tuesday, it had lost another 16.9% to sit near C$3.60. The world’s largest provider of nuclear equipment and services, France’s Areva (P.CEI), lost 9.6% on Monday and continued to fall Tuesday, sitting 9.2% down by the middle of the trading day.
    The impact reverberated all the way down to uranium explorers: Athabasca Basin junior Hathor Exploration (V.HAT) dropped 28.3% on Monday and continued the drop Tuesday, 15.6% down at midday, while producer-explorer Denison Mines (T.DML) lost 22.3% on Monday and had lost another 11.3% by the middle of Tuesday.
    The spot price of uranium, which is not traded on the open market but is represented by the average price of individual transactions, dropped 11% on Monday to close at US$60.75 per pound. By midday on Tuesday, it had plunged another 10.3% from there to sit at US$54.40 per pound.
    Germany suspended an agreement to extend the life of its nuclear power stations, Switzerland put some nuclear power plant approvals on hold, Taiwan announced plans to study reductions in nuclear power output, and Senator Joe Lieberman said the U.S. should put the brakes on new nuclear power plants until the Japanese situation plays out. Other nations voiced continued support for nuclear power, including France, China, and India, all nations wherein nuclear power is important and new reactors are being built.
    What does this all mean for uranium and nuclear power? To be blunt, there are two sides to this story: the objective, supply-and-demand side and the emotional, fear-of-nuclear-radiation side. Both are absolutely legitimate, because fear is a major factor in the uranium arena.
    That fear is certainly being stoked by news stories describing the situation as “the worst nuclear disaster since Chernobyl” and maps showing how winds could potentially carry radiation across the Pacific to North America. So before we get into uranium forecasts, let’s talk about what is actually happening within Japan’s damaged reactors.
    There are serious cooling problems and the likelihood of partial core meltdowns at three reactors within the Fukushima Daiichi plant, which is 270 km north of Tokyo. On Saturday, a buildup of hydrogen gas caused a major explosion at the No. 1 reactor; the walls and roof of the building blew off, but the containment vessel around the reactor itself remained intact.
    On Monday morning, the same thing happened at the No. 3 reactor. By Tuesday morning, the building housing reactor No. 2 exploded violently; this time the explosion seems to have inflicted some damage to the reactor’s suppression pool, which is a donut-shaped reservoir at the base of the containment vessel. Radiation levels spiked, then settled back to the low levels that have been the norm since the disaster started. On Tuesday night, a fire in the spent fuel pools near reactor No. 4 added to problems, but it was extinguished within a few hours.
    Now efforts are focused on keeping the reactors cores submerged in water, to keep them cool. The main challenges are that coolant and pumping systems have been damaged, personnel are short, and power supplies are inconsistent, especially after the three explosions damaged the plants’ power systems. Cooling efforts have yielded rewards at reactors 1 and 3, where temperatures are now dropping. Reactor No. 2 is still very unstable, and temperatures are starting to rise in No. 4.
    Despite everything, Japanese officials continued to express confidence that containment vessels will hold, keeping the high-level radiation that results from partial core meltdowns locked away. Operators have been venting steam that contains only low-level radiation. The reported levels have remained well below the maximum exposure limits set by the International Atomic Energy Agency.
    The take-home message is this: if the 8-inch-thick steel walls of the containment vessels remain primarily intact, things should be fine, and that is what we expect based on the events to date. The vessels are designed to stay intact even if the cores explode. However, if we are unlucky and one or more of the vessels burst (beyond the small breach inflicted by the explosion at No. 2), highly radioactive gases would spread for hundreds of kilometers, with the worst contamination hitting in a 50-mile radius.
    Really, no one should be mentioning Chernobyl because even the worst-case scenario at Fukushima would be nothing compared to Chernobyl. In the Ukrainian disaster, a nuclear reactor exploded while still in full operation, and its sub-standard containment unit was destroyed in the explosion, which meant radioactive gases and molten plutonium and uranium spilled into the surrounding countryside. Some 4,000 people would eventually die.
    In Japan, the reactors are shut down and the containment vessels have already held for four days. Experts say that longevity bodes well. Provided the vessels do hold, the situation will be much more like the Three Mile Island incident. That is also a difficult comparison, however, because many people misunderstand that situation. At Three Mile Island, a stuck-open valve led to major coolant losses, which led to a partial meltdown in one reactor. High-level radiation was confined to the containment vessel, and little radioactive material actually escaped. (The real problem at Three Mile Island was lack of training and protocol to deal with the situation.)
    Chernobyl instilled fear of nuclear reactors into the general population, and rightfully so. Three Mile Island was scary, and today’s precarious situation in Japan is also scary. But nuclear power is a mainstay of many countries’ green power plans and, provided this disaster does not escalate, that will remain the case.
    For one thing, there are 65 nuclear power plants currently under construction, and the builders cannot back out of the long-term contracts they signed to supply those plants with uranium. And as we’ve written before, global uranium supplies are not projected to meet growing demand, so if economics prevail, the price will rebound and uranium equities with it.
    If Japan’s nuclear troubles worsen significantly, however, fear may take over from economics. Governments wanting to reassure scared citizens will suspend nuclear power plans (as some have already) and institute heavy-handed permitting hurdles for new mines and reactors. In this scenario, uranium could drop back down into disfavor...

Vedran Vuk
Casey's Daily Dispatch  Editor

Image sources Casey Research, Objective Standard