As I write this article on March 17, Japan’s problems are a week old. I will review briefly. First an 8.9 magnitude earthquake hit the northeastern part of the country. That caused a tsunami wave of water 30 feet high to hit the northeastern coast and destroy towns and everything else in its path for miles inland.
Japan has at least 54 operating nuclear reactors and five were in the area hit first by the earthquake and then by the tidal wave. Two of them are on the world’s list of 10 oldest nuclear reactors. They survived the earthquake, but 30 feet of water was too much for the system. It seems the engines used to run standby generators couldn’t run under water. They gurgled out and the generators stopped; the batteries likely shorted out and the cooling system for the nuclear reactors died.
As I write, the operating company TEPCO that owns some of the reactors is within a day of hooking up the reactors to an emergency power line. If the cooling systems still work, the electricity could save the day. Interestingly enough the company has had lots of volunteers to work at what has been called a suicide mission. I was talking with another older fellow and we agreed that at age 67 or 70 or somewhere up there we might be inclined to volunteer. As my wife says we are all going to die one way or another so maybe dying as a volunteer to save the country wouldn’t be so bad. It could make an interesting book to write too if a person lived long enough.
By the time you read this the whole problem could be fixed or could be a lot worse. As I sit here, thousands of miles from radiation I have to ask myself what’s next. While my heart goes out to the folks in Japan who have died or at best had their lives turned upside down, here at home it does seem right to ask some questions. What is going to happen in the upcoming months and maybe years to the economies around the world; how do we react; and, will there be opportunities behind these tragedies?
I think there will be months and maybe years of agony in parts of Japan and the closer people are to the heart of the tragedy the longer it will take to recover. But really only a small part of Japan has been severely damaged. I hear the nuclear reactors and the tidal wave hit an area that has a lot of fishermen and some agriculture. I also suspect that is why those reactors were built in such a dangerous earthquake zone — the fishermen were too busy fishing to band together and complain about the reactors. And the country needed the electricity so badly that no one bothered to think of how to protect the reactors from such a thing as a wall of water 30 feet high going at 500 miles per hour.
Most of Japan is still intact and as power is restored life and business will return to something close to normal. So for some it will be a few weeks or months of inconvenience and perhaps higher costs for stuff and then years of new opportunities.
A long time investor named Biggs has gone on TV and said he is buying Japan, meaning, I presume, he is buying shares in companies that work in Japan.
I don’t have the skill or resources to know the ins and outs of the Japanese stock market but I suppose there is a list somewhere. Instead, I look at what will be needed to help get Japan and its people back on their feet.
As you know, China and India have created a huge new demand for copper, coal, iron ore, wood and other stuff that is used to make tools, equipment, electronic toys, and so on. China has a ready supply of rare earth elements and has stopped exporting these elements to encourage more industry to come to China. General Electric (GE) moved a lot of its business to China to make sure they can tap into the supply of rare earth elements. GE by the way is one of the biggest if not the biggest manufacturer of nuclear reactors.
John Deere is building a new plant in China to be closer to the market for new equipment. Cadillac now has a plant in China to build cars for the more wealthy. There are 1.3 billion people in China and they are starting to want the televisions, cell phones, cookies, donuts, burgers and so on that we take for granted.
YEARS OF NEW DEMAND
As I heard it, about $35 billion of property was insured in the disaster area. That money will start to be paid out. Japanese are savers. Their country is running debts and deficits that are almost two times the country’s Gross Domestic Product (GDP) which is said to be unsustainable. But the people are savers. They will be taking money out of savings to rebuild. They will be selling gold, silver and perhaps shares in foreign countries to bring money home to rebuild. Governments at all levels will be building buildings, roads, bridges, ports and so on.
The areas and businesses that were not wrecked still have an infrastructure and equipment that can be used to clean up the mess and help build new infrastructure. Japan has not let in many immigrants for years so it likely will be short of labor and engineers.
In a big nutshell to me this means that soon Japan will add a new layer of demand for the stuff China and India are already demanding such as copper, iron ore, coal, wood, cement and food. I think we can add in natural gas, labour and brains.
SHORT TERM, LONG TERM
In the months ahead we can expect a run on the Yen and again as I write on March 17 the yen had gone up so much that the G7 countries talked and agreed to intervene and keep the Yen lower than higher. High Yen would hurt Japan’s exports and it needs them to recover the economy.
Part of the problem is that people and governments and perhaps businesses in Japan are selling assets abroad, selling gold and silver and so on and then buying the Yen to use to rebuild. It the market starts to think that intervention to keep the Yen low will actually work it will leave the Yen along and after a while the sales of the abroad stuff will be over and the Yen would drop on its own.
By the time you read this much of this could be behind Japan.
I see that IBM figures it will cost something like $150 billion or more to rebuild the damages in Japan. That is a lot of dough. That is a lot of demand for copper, iron ore, cement, wood and the things I mentioned before.
But roads will need to be repaired before much equipment can move. I would think equipment, supplies and people could come by sea and by land since the whole country has not been damaged. This is not Haiti where there was little infrastructure left standing, little equipment or qualified workers to begin with. Japan has them and not too far from the damaged areas.
Rebuilding will take a lot of equipment, new tires, fuel, engineers and labour. It would seem to make sense that anyone looking for work could go to Japan and find work. I don’t know the labor laws but they might have to be loosened up to allow builders to bring in the help they need to design and build what has been destroyed.
Japan has relied on about 54 nuclear reactors to provide a lot of its electricity. Five are damaged maybe beyond repair. The uranium those damaged reactors will not use is a very small share of the total uranium used in the world to produce electricity in the remaining 445 or so nuclear reactors.
Cameco and other uranium producers have been body slammed by this tragedy. In May 1986, the Chernobyl reactors exploded and spread radioactive fallout over a lot of the world. Yet more and more nuclear reactors have been built since then. China plans to build 60 new reactors, India is planning 40 and more are planned in other countries.
Yes, there will be more stringent regulations. Yes some reactors might need a lot of repairs of even be shut down. But Cameco and others retrofitted five nuclear reactors around 2004 in Bruce County in Ontario, north of London, and they are running just fine.
The main reason the reactors in Japan failed is because the engines running the standby generators drowned in the flood waters. I’m quite sure that will be addressed. I know a person who worked in the post office building in downtown Winnipeg. He said the standby generator was in the basement. I don’t know where the standby engines were at the damaged reactors but odds are they were not 40 or 60 feet above ground.
I have 1,000 shares of Cameco (CCO) which is one of the best uranium producers in the world. I did break a rule buying 300 shares out of the 1,000 when the price dropped to $30. Now my average paper cost is $36.60 and I have picked up at least $2.50 worth of cash by selling calls this year. My actual cost is somewhere around $34. I suspect that when the buzz in media stops, and it will, that CCO will be back. This could have been a great buying opportunity.
As for copper, we made a lot of money with Tech Resources (TCK. B) in 2009 and 2010. I sold them at $35 and bought some QUX and let them get exercised at $15 after we made about $3 on a $12 stock. Now I have been loading up on Copper Mountain (CUM) which is going to grow from a developer to a producer by June all goes according to plan.
CUM plans to mine one million pounds of copper, 35,000 ounces of gold and 300,000 ounces of silver per year and it has enough measured minerals to do that for 12 years. And it is in copper country so odds are there is more in the area.
At least one key smelter of copper has been shut down in Japan but China has excess smelter capacity. We don’t own any coal companies but there are some good ones. Another way to go is to own shares in a company on the west coast that receives coal from trains and loads ships.
Several lumber companies likely will benefit from new markets. I can only remember Canfor and I do not own any shares yet.
Natural gas might be used to drive more electric turbines and they can be built much quicker than a nuclear reactor and might fit some parts of society more than nuclear energy.
There likely is enough oil, gasoline and diesel in the world to keep motors running around the world. The world consumes about 87 million barrels of oil a day and that number is going up. I don’t own them but maybe we should own some Canadian Natural Resources (CNQ), Suncor (SU) and Baytex (BTE) or even Imperial Oil (IMO).
From what I saw on TV it looked like the tsunami destroyed many greenhouses so food could be short. I spoke with a couple canola producers but no one seemed to know if Japan’s canola crushers were in the disaster area or not. If they have been damaged odds are more canola oil will head to Japan instead of seed.
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