March 21, 2011
On March 11, a 9.0 magnitude seismic event off the coast of Honshu sent tsunami waves crashing into Japan. The devastation was massive, taking thousands of lives and leaving still more people missing in its aftermath. Complicating matters further, the cooling system at Fukushima Daiichi nuclear plant was compromised by the quake, raising fears of radiation among survivors.
As the island nation struggles to cope with the losses and begins to pick up the pieces, shockwaves from the event continue to emanate throughout the global economy. To better understand the potential financial impact and implications of this cataclysmic event, Baird offers the perspectives of four analysts from our industry-leading equity research team.
-Christine Tezak, Senior Research Analyst and David Parker, Senior Research Analyst
While current nuclear projects and innovation around the world are unlikely to move forward until Japan’s situation is resolved and its consequences known, the concerns it has raised may be enough to curb what many were hoping would become a nuclear renaissance.
This renaissance already faced a number of hurdles in the United States, including inexpensive natural gas and recent difficulty finding federal support given the tighter economic environment. But financing a U.S. plant is likely to become an even more expensive proposition if the process becomes more difficult in response to new safety concerns.
Congressman Ed Markey (D-Mass.) has already called for additional safety requirements from the Nuclear Regulatory Commission. Any new requirements could slow new U.S. projects that are under review. Existing plants seeking relicensing could face possible new regulatory requirements and potential public opposition as people continue to question whether nuclear energy can ever be safe enough.
Despite the significant magnitude of the quake (the fifth largest in recorded history), the facility in general performed as intended. As the President of Nuclear Operations at Westinghouse pointed out in a March 14 presentation:
• The plant structure remained intact
• The nuclear reactors shut down as they were designed to
• Back-up diesel generation was operational
The scale of the tsunami – which was 20-30 percent greater than Fukushima Daiichi’s design specifications – overwhelmed the plant’s water intake system. The resulting cooling system failure was the root of explosions and escalating risks.
The industry has been quick to point out that next-generation technology has come a long way since the Fukushima Daiichi plant was commissioned in 1971. Nuclear safety concerns following the partial core meltdown at Three Mile Island in 1979 prompted simpler nuclear designs including passive safety systems that do not need power to run. While many reactors have undergone retrofits and upgrades, the technology continues to evolve. Industry experts believe next-gen nuclear technology most likely would have averted the nuclear crisis in Japan.
While a nuclear renaissance was likely still years away in the United States, nuclear plants generate nearly 20% of the power we consume every day. The final conclusion to the quickly changing nuclear crisis in Japan will play a key role in shaping public sentiment and the regulatory future, both of which will shape not only the prospects for new units, but the retention of existing capacity. In the meantime, natural gas will likely benefit from continued debate, as it remains one of the most attractively-priced fuels sources, has short construction lead times, relatively modest upfront capital expenditures and easier permitting processes.
The Technology Effect
-Tristan Gerra, Senior Research Analyst
As the world’s third largest economy, Japan produces some of the most technologically advanced electronics and automobiles and is a major consumer of semiconductor technology. As a result, the devastation wreaked by the quake and tsunami will have ramifications in this market space.
Japanese demand for semiconductors is expected to be down in the second quarter of 2011 and possibly extending into the third quarter, due to factory shutdowns for semiconductor manufacturing and testing, power outages, as well as transportation and supply chain disruptions.
Meanwhile, component shortages could benefit pricing and gross margins for semiconductor companies, notably those with commodity exposure in segments reliant on Japanese production. Those shortages are expected to impact the broader electronic supply chain, notably memory, LCD and microcontrollers.
Rebuilding in Japan is expected to have a positive impact on semiconductor demand starting in the fourth quarter of 2011 and continuing into the first half of 2012. The end-markets most likely to be affected –negatively in the near-term and positively in the medium-term-- include: automotive, PCs/servers, TV panels, communication infrastructure, and the mobile phone supply chain.
-Rob McCarthy, Senior Research Analyst
The near-term impact on companies in this sector is expected to be modest, with few doing appreciable business in Japan and fewer still having significant operations in the disaster zone.
As the rebuilding begins, however, increased demand for equipment could have a noticeable positive impact for companies with Japanese market exposure. Cranes, large excavators and wheel loaders will be extensively used for clean-up and demolition. Mobile crushing and screening equipment will also be needed. Portable power will also be critical, creating incremental demand should increase for electrical generator sets, air compressors and high-force hydraulic tools and pumps.
Should increased safety concerns indeed lead to a slowdown in global nuclear plant construction, an incremental negative impact (mostly for cranes) could be felt. However, power generation capacity (whatever the fuel) will still ultimately need to be constructed as Japan rebuilds.
For real-time perspective on the events that shape the global marketplace, visit rwbaird.com.
This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy.
March 21, 2011