Where Metals Will Go As Japan's Economy Rebuilds

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As the events in Japan have unfolded, the commodity markets have headed south as investors have taken fright that the world’s biggest importer of food commodities, largest importer of refined aluminum and third-largest importer of copper ores will go through a dramatic drop in demand according to the Financial Times.

Source: FT

Stock markets have been sold off too, as fears that a significant drop in GDP growth in the world’s third-largest economy will result in lower demand. Reuters explained that stagnant industrial activity and power blackouts that have disrupted industrial production and halted production at copper smelters, automotive companies and refineries are likely to erode demand. Power cuts have halted operations at Japan’s top copper smelter, Pan Pacific Copper Co’s Hitachi, as well as No. 3 Mitsubishi Materials Corp’s Onahama copper smelter. China imports ores and exports refined copper, producing some 7 percent of global output. Two zinc smelters have also been shut for checks. Steel production has been affected and electronics firms have had to shut down or are on reduced output. No wonder commodity markets have taken a tumble, but how justified are they in their reaction? Of course we can’t see what may yet unfold at the nuclear facilities; a Chernobyl-type disaster would have far more serious consequences, but if the Japanese power company is able to contain the six at-risk reactors, what are the likely scenarios for commodities six months from now?

In the short term, the position will be disruptive, focusing just on metals. Palladium demand will be down as automotive is hit, but medium term it will recover, as will prices. Physical copper will be in short supply as Japan is a major producer (which should be supportive for copper at current levels), longer term copper will benefit from reconstruction investment and so will prices. In the short term, aluminum and tin will most likely be hit the most — Japan is a big importer of both, but as electronics production recovers and reconstruction takes hold, both metals will recover. Christen Tuxen, an analyst at Danske, singles out aluminum and steel to be the most likely to benefit next year from large-scale infrastructure demand.

Asia is going to be disproportionately affected, both in the short and longer term. China, for example, is the largest source of Japan’s imports and the second or third (depending on how you measure it) largest destination of exports. Many of China’s technology firms import Japanese-made components for assembly in finished products that are eventually re-exported to Europe or the US. This inter-regional trade is massive and Japan is a key part, particularly for higher-technology products. Imports from Japan to China totaled $176.8 billion last year, while exports from China to Japan were $121.2 billion. On the plus side, China and South Korea will no doubt step up steel production to meet any loss from Japan or should domestic production become diverted for infrastructure reconstruction in the next couple of years.

Broadly speaking, while the financial markets have taken a beating, the reality is the investment that will result is likely to cause a boost in demand 12-24 months out, driving prices back up. For buyers it could be a case of short-term gain, long-term pain.

–Stuart Burns

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