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Japan Nuclear Incident to Have Lasting Impact on Commodity Markets, Scotiabank Report

B.C. forest products mills gear up for re-construction in Japan

TORONTO, Ontario, March 28, 2011 — Scotiabank's Commodity Price Index, which measures price trends for 32 of Canada's major exports, rose by 1.1 per cent month over month (m/m) in February - the eighth consecutive monthly gain - to a level 49 per cent above the April 2009 cyclical low. While the tragic March 11 earthquake and tsunami in Japan took a toll on some commodity prices in mid-March, the negative fallout is likely to prove temporary, with Japan quickly gearing up its economy again.

"Re-construction in Japan will boost demand and prices for lumber, OSB and plywood, especially from Canada's West Coast, steel and metals over the next six-to-twelve months," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank.

A surge in the Agricultural Index (up 4.3 per cent m/m) led the All Items Index higher in February, with wheat prices, which have lagged feed grain and oilseed prices, particularly strong. The Metal & Mineral Index also continued to climb in February (up 3.4 per cent m/m) alongside broad-based strength in base metals, a rebound in precious metals, linked to growing political upheaval in North Africa and parts of the Middle East, and strength in fertilizers. Spot potash prices (FOB Vancouver) moved moderately higher to US$392.50 per tonne and will advance by another US$80 in overseas markets by mid-2011, lifted by near-record world food prices and strong fertilizer application. The Oil & Gas Index posted another surprising, but likely temporary, decline (-1.9 per cent m/m). However, WTI oil prices - spiking from US$89.74 in February to as high as US$106 per barrel on March 24 - on growing expectations of a protracted conflict in Libya - have substantially lifted Alberta light and heavy crude oil prices in March.

The Impact on Global Energy Markets of Japan's Nuclear Incident

"Of the events which followed Japan's earthquake and tsunami, the incident at the Fukushima-Daiichi nuclear plant near Sendai - specifically, the loss of backup electric power needed to cool nuclear fuel rods and spent nuclear fuel - is likely to have the largest impact on overall commodity markets going forward," stated Ms. Mohr.

In the near-term, Japan is turning to imported LNG and crude oil to offset the loss of 9.7 GWe of shutdown nuclear capacity. Given little damage to LNG import terminals, except one at Sendai, and under-utilized capability at natural gas-fired plants, Japan has already arranged increased LNG imports for April mostly to supply power to the Tokyo metropolitan area as well as the Northeast from a variety of sources (Qatar and Brunei, among others).

"Perhaps the more lasting impact of the incident at the Fukushima-Daiichi Nuclear Power plant, a 40-year old facility with some outdated technology, will be to trigger a re-examination of nuclear safety procedures and reactor technologies around the world and to slow the development of nuclear power," added Ms. Mohr.

Over the medium-term, some shift from nuclear energy to imported LNG in Japan and to natural gas-fired power generation in the United States and parts of Europe will likely occur, giving a boost to projects such as Kitimat LNG for the Asia/Pacific market.

"However, China, India, South Korea and Russia - the major growth markets for nuclear energy, which had planned to add 105.2 GWe of nuclear power or 66 per cent of the world total prior to the incident - will almost certainly move ahead with significant nuclear expansion," said Ms. Mohr. "Not to do so would enormously raise the cost of fossil fuels (oil, LNG and steam coal) for consumers worldwide in the coming decade and limit the containment of greenhouse gas emissions. Overall, the Fukushima-Daiichi event will likely delay rather than derail the nuclear renaissance."

Uranium Prices Retreat, Then Partially Recover

After surging to a near-term high of US$73 per pound in late January (80 per cent above the cyclical low in early March 2010), spot prices for uranium eased back to US$69.75 in late February, in reaction to a small sale of UF6 by a Chinese entity, which subsequently re-purchased U3O8 volumes for processing in China. Prices then lost considerable ground following news of the Fukushima-Daiichi incident (-US$6.50 to US$60 in mid-March) and even more in subsequent days (falling below US$50), as China announced that it would temporarily suspend approval of new nuclear projects pending completion of safety checks at plants under construction and would update safety regulations. However, market conditions have since steadied, with prices rising back to US$60 in late March.

B.C. and Alberta Forest Product Companies Pledge Support to Japan

"B.C. and Alberta forest products companies, specialists in high-quality, Japanese-specification J-grade lumber, have offered their support to the Japanese government in home rebuilding," commented Ms. Mohr. "While it will take several months for Japan to map out its plans for re-construction, the Japanese government has already contacted wooden prefabrication plants in Japan to quickly build a large volume of factory-built homes as temporary dwellings in devastated areas. Construction of permanent homes will come later."

Japanese orders for J-grade lumber and OSB are picking up for West Coast mills. About 70,000 buildings (commercial, residential and institutional) were damaged (the equivalent of 8.6 per cent of Japanese housing starts totaling 813,000 units in 2010). Japan has a Wood First policy for government-funded or sponsored buildings, with wood considered an environmentally friendly green product, more capable of withstanding earthquakes than other building materials.

Scotia Economics provides clients with in-depth research into the factors shaping the outlook for Canada and the global economy, including macroeconomic developments, currency and capital market trends, commodity and industry performance, as well as monetary, fiscal and public policy issues.

News source: Scotiabank

 

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