Japan’s nuclear restart could be catastrophic for commodity markets


It took several years to prepare, but Japan is finally returning to nuclear power.

Although Japan is not re-igniting its reactors en masse, the Sendai nuclear power plant owned by Kyushu Electric Power is set to return to service this week, the first reactor to do so in years. Kyushu plans to restart a second reactor in October. And in 2016, 11 more units could be restored, marking a significant, if incomplete, return to nuclear power.

Due to new safety regulations, a tangle of legal challenges and strong public opposition, the timing of Japan’s return to nuclear power is unclear, although widely anticipated.

Prime Minister Shinzo Abe’s government has pushed back on public protests in support of a nuclear restart, and it’s not hard to see why. Japan has always had large trade surpluses, but its trade balance quickly turned negative after its entire nuclear fleet was shut down following the Fukushima collapse. Last year, the trade deficit hit a record $103 billion. Related: Saudi Oil Price War Backfires

Indeed, without the electricity produced by Japan’s 43 nuclear reactors, the country has resorted to expensive imported fuel sources, such as coal, natural gas and oil. The surge in fossil fuel imports has led to a surge in LNG cargo prices and also contributed to an increase in demand for coal and oil.

Thus, with the return of nuclear power, these trends could be reversed. What does this mean for commodities like coal, natural gas and oil?

Nuclear restarts will put downward pressure on LNG spot prices. Platt’s Japan-Korea Marker (JKM), a benchmark for LNG in East Asia, often traded below $10 per million Btu (MMBtu) in 2010, the year before the Fukushima disaster. . But in the years since Japan’s nuclear reactors were shut down, prices soared, reaching an all-time high of $20.20 in March 2014. Related: The price of “C” in China

Prices have crashed since then as new supplies have come online, especially in Australia. Additionally, since LNG prices are largely tied to the price of oil, the fall in oil over the past year has resulted in a corresponding drop in LNG prices. According to Platts, first month JKM cargoes for September 2015 are now trading at $7.825/MMBtu, less than half of where they were just a year and a half ago.

But the Sendai plant poses a new threat to LNG prices. Japan is the world’s largest LNG importer, accounting for more than a third of the world’s total LNG trade. With the restart of the Sendai plant, and with nearly a dozen additional reactors not too far behind, Japan’s LNG consumption could fall. This would be extremely negative for LNG prices, already reeling from an oversupplied market.

There is no doubt that LNG exporters around the world are watching these developments closely, especially those who have not yet secured long-term fixed-price contracts. Even for LNG suppliers that have lined up customers, many have not secured 100% of their export capacity for sale, leaving some remaining fraction for the spot market.

In short, Japan’s persistence in restarting its nuclear reactors could reduce profits (current and future) for LNG exporters in Australia, Qatar, the United States, Canada or any other country that has or is considering LNG terminals. export of LNG. Related: Mid-Week Industry Update: Have We Bottomed For Oil Prices?

The negative pressure on prices is also true for oil, although to a lesser extent. Japan uses oil in some of its power plants, a source of electricity that doubled its market share from 7% to 14% after Fukushima. More nuclear will reduce this share, and as the third largest importer of oil after China and the United States, lower oil imports will put downward pressure on oil prices, already falling in a surplus market. The effect will not be as large as it will be for LNG, not only because Japan uses relatively less oil for electricity, but also because oil markets are much more global and fluid, whereas the LNG has fewer players and more rigid prices.

For coal, the story is the same. International coal prices have fallen amid overabundant supply and falling demand, and more nuclear power will leave additional coal reserves on the market.

The collapse in commodity prices continues to deepen and Japan’s return to nuclear power will further eliminate market demand.

By Nick Cunningham of Oilprice.com

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