Impact from Japan - CLSA Indo

Our thoughts and prayers go to Japan and those who were affected by the earthquake and the subsequent tsunami. While the full impact will only be realized after months, we try to take a quick look at the immediate impact the disaster may have on Indonesia.

Japan is a very important market for Indonesia. It is Indonesia's number one export destination for non-oil and gas products, accounting for ~13% (US$16.5bn) of total exports. It is also the number two contributor of FDI for Indonesia, accounting for 18% (US$836m) in 2009. As a result, this disaster will have significant impact on trade flows.

In term of listed companies, United Tractors (UNTR IJ) and Astra Int’l (ASII IJ) could be negatively affected (please see attached reports for the details). UNTR’s Komatsu large equipments are produced in the affected areas. Large equipment represents about 40-50% of heavy equipment sales revenue, or ~10% of its earnings.

For ASII, the impact on the car/motorcycle business is limited as the risk for ASII is coming from UNTR exposure, which accounts for 17% of total ASII earnings. Hexindo (HEXA IJ) could be more severely affected here, due to heavy reliance on the affected production area (Ibaraki).

Back to the bigger picture, we think these are the impacts:
Japan’s reconstruction efforts will be positive for commodities in general
Nuclear expansion around the region (China, etc) will slow down and more reliance will go to thermal coal and LNG
Tension in the middle East might be off investors radar screen at the moment. Oil price could still spike from here.

And here is why:
1. Reconstruction efforts. Japan will be able to afford an aggressive reconstruction program a'la the Kobe earthquake in 1995. Economist Eric Fishwick points out that Japan is a saving surplus economy. It is the long run not the immediate fiscal implications of Sendai that are the problem. Aggressive reconstruction program is bullish for commodities in general.

2. Energy front. Japan's nuclear industry provides about one-third of the nation's power need now in crisis. In total, around 10GW of nuclear capacity, or around 6% of Japan’s energy supply has been temporarily shutdown. History suggests that it could be years to re-start (if ever) the plants. A looming energy crunch could see a surge in Japan's demand for thermal coal and LNG.

China had previously flagged safety concerns as a reason to contain the ambitious nuclear build out it has planned, going from around 10GW currently to 80GW in 2020. These events will obviously lend substantial support to those advocating a slower nuclear build out in China and other countries. Medium-long term, this is very bullish for thermal coal and LNG demand. Indonesia is no 1 and 3 largest exporter of coal and LNG respectively.

3. Middle East rising tension. The rising tensions might be off the investors’ radar screen at the moment. However, Libya, Bahrain and Yemen, remain hot spots. And signs of discontent are also spotted in Saudi Arabia, where witnesses said gunfire and stun grenades were used by the police to stop planned protests in the eastern city of Qatif.

Oil price is the wild card here. The spike in oil prices could be very violent. I would go OWT coal names.