Markets Brace for Impact Of Japan's Growing Hunger [WSJ]
By PATRICK BARTA
May 16, 2006; Page C1
TOKYO -- Commodities markets around the world are facing a new wild card: Japan.
The world's second-largest economy appears to be firmly on the mend after years of lackluster growth. That is an important development for commodities markets. Even as prices gyrate -- or, like yesterday, retreat -- Japan adds another driver of demand at a time when supplies of copper, crude oil and other goods already are tight.
No one is expecting Japan to have as much effect as China, where a surging appetite for roads, buildings and factories has helped push commodities prices to their highest levels in decades.
But the size of Japan's economy -- roughly twice China's -- means that any sustained uptick in growth could add pressure on prices, helping keep them above historical trends for some time to come.
This is particularly true for key Japanese energy sources such as liquefied natural gas and uranium, which is used in nuclear power plants. It also could be true for industrial metals like copper and iron ore that will be needed as Japanese companies add new capacity after years of hunkering down.
Japan's impact on oil prices is harder to predict. Many forecasters believe Japanese crude-oil demand will decline in the long run as the country's population ages, and as government initiatives to promote alternative fuels bear fruit.
Still, with China and India trying to gobble up international energy assets, Tokyo is prodding companies to become more aggressive about acquiring oil and natural gas abroad, with investments in Equatorial Guinea, Libya and elsewhere. A government energy strategy, due to be finalized in the coming weeks, calls for Japan to draw about 40% of its imported oil from assets owned by Japanese companies by 2030, compared with 15% today. Government officials say they are willing to subsidize these efforts.
Most of Japan's oil and gas companies are active in Libya, which became one of the world's most promising and competitive new oil plays after U.S. and international sanctions against the nation were lifted in recent years.
"Believe it, [Japan] will matter," says Jeffrey Christian, managing director of New York commodities-research firm CPM Group. "China is not the only engine" of global commodity demand, he says.
Japan's economy is expanding between 2% and 3% a year, a far cry from China's recent growth in excess of 9%. Also, Japan's economy is far more energy efficient, and less reliant on manufacturing, than China, meaning that it requires fewer raw materials to generate growth.
But Japan remains the world's third-biggest consumer of oil, behind China and the U.S., and the No. 1 user of liquefied natural gas. It also makes up about 30% of the world's demand for imported steel-making coal and about 20% of iron-ore imports.
Japan has played a critical role in commodities markets before, especially in the 1960s and 1970s, when its high-flying economy helped lift prices. The country's growth screeched to a halt in the early 1990s after years of overinvestment, triggering more than a decade of weak business activity. Corporate restructuring, low interest rates and a boom in exports to China and elsewhere have helped Japan recover.
Now the country's resurgence is visible everywhere, including Tokyo's glittering skyline. More than 160 high-rise buildings with 12 floors or more are under construction across Tokyo, according to Emporis GMBH, a German company that collects data on buildings. Each of those structures will need a hefty helping of steel, copper and other basic raw materials, as well as lots of energy. Japanese steel consumption rose 5% last year to about 83.1 million metric tons, and is expected to keep climbing this year.
Japan also is seeing renewed growth in factory construction. Steelmaker JFE Holdings Inc. says it plans to raise capacity to about 12% above its current production by 2008, primarily to produce more high-end steel for auto and other uses in Japan and abroad.
Other Japanese manufacturers have similar plans.
"One would have thought that somewhat surprising -- any new widget factory ought to be going up in [lower-cost] China right now, not Japan," says Peter Morgan, chief economist for Asia Pacific at HSBC in Hong Kong.
But he says many manufacturers are staying in Japan to take advantage of changes in government policy that made it easier to develop facilities close to Japanese cities, reducing the cost of distributing goods. Other factories are replacing aging equipment that they were unwilling to replace during Japan's long economic slumber.
Rising steel production in Asia including Japan is a key reason why large mining companies such as Rio Tinto and BHP Billiton appear to be on the verge of securing yet another increase in the price of iron ore, a steelmaking ingredient. Last year, iron-ore prices rose more than 70%. This year, analysts expect prices to rise another 10% or more.
Japan's energy picture is more complicated. The country's aging population means that its demand for energy won't rise as quickly as the rest of Asia. But unlike other parts of Asia -- including China -- Japan has almost no domestic reserves of energy to fall back on.
Japan has 13 nuclear plants under development, which should add another shot of demand for uranium, a mined commodity whose price has soared in the past few years.
Japan also is taking on a bigger role in the market for LNG, a form of natural gas that is cooled into a liquid so it can be shipped by tanker. Last year, Japan imported about 58 million metric tons, more than double the next biggest importer, South Korea. By 2011, analysts believe Japanese demand will increase to nearly 70 million metric tons.
In one example late last year, three Japanese utility companies beat out China to secure gas from Australia's Gorgon LNG project led by Chevron Corp., one of the largest LNG projects in the world, primarily because they were willing to pay more. China has few options for sourcing any large LNG supplies for at least the next several years. |
