Commodity Special Report - Japanese earthquake and implications for commodities - Citigroup

 Our thoughts are with the victims of the terrible disaster in Japan. We hope for an early recovery for the affected regions and communities. Our thoughts go out to all those dealing with the consequences of the earthquake.

 Earthquake devastates Japan — The earthquake that struck Japan's eastern seaboard last Friday recorded 9.0 in magnitude and was also the most powerful felt in Tokyo in decades. This was followed by a devastating tsunami that hit the east coast of Japan around Sendai. Coming to terms with the scale of destruction and tragic loss of life is still impossible. And while the situation is rapidly evolving (or even worsening), this note attempts to look at the likely impact on commodity markets and the implications for various commodity stocks around the globe.

 Exposure — In the short term, conventional thermal fuels (e.g. oil, gas and coal) should see some support as the Japanese energy mix adjusts to the shutdown in the nuclear sector. In particular, Japan's thermal coal demand could jump 10% or 7Mt this year, putting additional upward pressure on already high coal prices. In base metals, the short term impact could be negative, but that is likely to be more than reversed over the long term. The demand for lead should be boosted the most. The longer term we expect price increases in steel and raw materials (i.e. iron ore and coking coal) as the reconstruction efforts begin.

 Uranium — In the short term, uranium demand should be only slightly hit by the shutdown of over 11MW of generating capacity in Japan, but the longer term implications could be greater. Any significant public backlash against nuclear power could have negative consequences for the 225GW of nuclear generating capacity under construction or planned.

 Stock implications — The impact on Japanese steel producers should be mixed, with short term disruptions countered by stronger longer term demand. For Australian coal producers there may be limited upside to received prices in the very near-term due to the small scale of spot sales. However, we could see a longer term shift towards coal-fired power generation. In the long term, an aversion towards nuclear power could support LNG producers; Woodside may receive higher spot LNG prices short term, but the impact should be modest because the majority of its LNG is priced under long term contracts. Most uranium producers have long term price contracts in place and thus should be immune from spot price fluctuations. But we expect producers worldwide to be impacted by negative sentiment towards this sector. In Australia, Paladin could be most affected as it has the least amount of contract volume (60%).