The impact on Japan’s economy and the copper industry, both domestic and global, is an evolving situation. The potential outcome changes by the day due to strong aftershocks and developments at the nuclear facilities on the east coast. Only when the reactors at Fukushima have stabilised will it be possible to make more specific forecasts. These, then, are our overall thoughts, perhaps more philosophical, against a background of the millions of words which have been written on the subject.

First, few if anyone, really know what will be the eventual outcome at the stricken reactors. Meanwhile, the damage from the earthquake and the tsunami has shut down 12% of Japan’s power station capacity and 25% for Eastern Japan. Power cannot be transmitted from the surplus in the west to the shortage in the east because they operate on different cycles, 50Hz for eastern Japan and 60Hz for the west. Restarting thermal power plants, which were either shut down for maintenance or were being taken out of service, will still leave a power shortage especially during the coming summer. Rolling blackouts could last for several months.

Second, nuclear is a sensitive issue in the country. Some hard decisions will have to be taken on the 54 operating nuclear reactors. There are plans to raise electricity generation from nuclear facilities from 27% of the total in 2009 to 40% in 2017 and 50% by 2030. Whether this plan will be changed is impossible to say at the moment. The six reactors at Fukushima will be a permanent loss of capacity.

Third, the human and physical loss has been enormous. No one underestimates this tragedy. The question is to what extent the authorities rebuild the stricken area. Like most regions in Japan, this is an area of declining population, inhabited by elderly people. Many have left; will they want to return? Within Japan there is surplus urbanisation. In all likelihood, what will be rebuilt will be less than what was destroyed.

Fourth, Japan has been accelerating its relocation of capacity out of the country since the credit crisis. This tragedy will prioritise the need in a step by step process. This development fits the re-globalisation of manufacturing, which is in the early stages of evolvement. Manufacturers now want their supply chains close to the market whether in Europe or in N America. Current events in MENA countries make this change more important. The change will be two-way. For instance, the auto industry will shift the export segment of its capacity in Europe to China to service the Chinese market and, with it, will move the industry’s supply chain. But, the supply chain currently located in China and elsewhere in Asia for export into Europe and N America will shift back into these two regions. Japanese companies will now move more rapidly, not just to elsewhere in Asia, but into the developed world.

Fifth, the supply chain in the high-tech sector will undergo a fundamental change, whether for semi-conductors, connectors, LCDs etc. Global stocks of raw wafer inventory at logic and semiconductor manufacturers are only around 6 weeks. Production out of Japan will continue to be interrupted until power supplies are stable and without interruption.

One example was given to us in Thailand, where a significant Japanese appliance capacity is located. Many companies depend on key imports from Japan, such as control panels and high-quality steel. When we were there, there was concern that these essential imports would be interrupted. Stocks in Thailand are probably no more than 4-6 weeks.

Sixth, manufacturers are starting to diversify their sources of supply away from Japan, both as an immediate and as a longer-term exercise. The move is partly to balance their currency portfolio and partly an over-reliance on Japan. This development is a nil change in a global context, but with important corporate implications.

Global manufacturers are starting to request radiation certificates. Japanese suppliers may have problems in conforming to these requests.

Seventh, there could be a political development. This government has been far more open and ready to take the advice of foreign experts than its predecessors. The initial dithering has given way to support for Kan’s handling of the tragedy. Japanese society finds profound strengths in the midst of unimaginable hardships. Kan’s government is providing those strengths. A stronger and more united government might be a positive outcome of this tragedy.

Eighth, Japan will import less goods as the economy slows. When imports recover is difficult to say. Exports will fall also because of interruptions to production processes, but also because of radiation concerns.

Ninth, Japan will use adversity as an opportunity. New technologies will be introduced under government support. Innovation will be the way forward. One of these will probably be in power transmission by introducing high temperature super conductors (HTS) in MV and HV cables and in windings for generators and transformers. Such a change will give Japan an edge on the rest of the world.

Similarly, in household appliances, where cost will be as important as reliability, aluminium wirings in place of copper are likely to be used since this trend has already begun. This change will apply also to aircons with aluminium tubes being used in place of copper. These are just two innovations which come to mind. One other potential will be to observe the extent to which nanotechnology will be introduced.

Tenth, the balance between interruptions to production and physical copper consumption in the country is finely balanced in the short term. It is not just fabrication plants that have suffered damage, nor the transport system, but the interruptions throughout the supply chain and at the final manufacturing stage, such as the auto and appliance industries.

Many analysts have assumed that Japan’s future copper consumption will be robust once rebuilding the economy starts. Against this optimism, we first need to understand what will be rebuilt, as stated earlier. Second, adversity will be the reason to introduce new technology across many fields, many of which will be unfavourable for copper. Finally, the tragedy has created a mountain of high quality scrap; its reprocessing will go a long way to meeting any future demand.

As we began by saying, it is too early to make precise forecasts.

Simon Hunt was one of the founders, in 1975, of top metals analysis consultancy Brook Hunt, which still bears his name. He left at end-2005 to start up Simon Hunt Strategic Services which specialises in copper, global economics and China.  For further information please contact Simon Hunt at Simon Hunt Strategic Services on +44 20 7859 111 or simon@shss.com – website www.shss.com