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Japanese earthquake – impact on the construction industry

World Cement,

On March 11, 2011, an 8.9 earthquake hit Japan, followed shortly by a devastating tsunami to the northeastern coast. The resulting damage, loss of life and confusion have all been augmented by constant aftershocks, significant power shortages and concerns over leaking radiation from the Fukushima nuclear power plant.

The cement industry has been deeply affected, with many plants temporarily stopping operations. The catastrophe has resulted in an increase in share prices in the cement and construction industries in other countries, which are expecting an increase in Japanese imports once the country begins the extensive repairs necessary.

Economic analysis

The chief economist at IHS Global Insight, Nariman Behravesh, reports the impact of the earthquake will be large, but most likely temporary on the Japanese economy, and will have a small overall impact on the rest of the world, due to Japan’s minor export market.

Similarly, analysts at UOB-Kay Hian predict the effect on the global equity markets is “likely to be mild,” since the country’s northeast is not a central manufacturing base.  Furthermore, the future reconstruction is expected to stimulate demand and spur economic growth. 

In Japan, however, the workforce has been affected alongside supply chains. Power shortages are expected as key oil refineries have suffered fire damage from the earthquake, and nuclear power plants are being shut down as a precaution. The energy rationing will continue for weeks rather than days, affecting millions of people across from the northeast coast to Shizuoka, 200 km south of Tokyo. The power outages are expected to have significant ramifications on all Japanese industrial sectors, with some steel and automotive plants having already closed down.

The government’s finances will be stretched, and the Bank of Japan has recently released about US$250 billion into the Japanese economy in an attempt to forestall financial panic. The Japanese insurance sector is predicted to see a loss of US$15 billion according to equity experts in the field.

IHS Global Insight estimates that Japanese real GDP growth may decrease by 0.2 – 0.5 percentage points this year, and then increase by 0.2 – 0.5 percentage points the following year. However, if the nuclear crisis turns into a larger tragedy, then it is certain to have a larger negative effect on this year’s growth.

Japanese cement plants cease operations

Many cement plants in Japan have been affected by the earthquake, and are reporting temporary stoppage of operations due to either direct damage caused by the quake, or as a result of the subsequent power shortages.

The Hitachi plant, situated north of Tokyo has reported damages to its site, and is closed until further notice because of power failure. Similarly, Nittetsu Cement’s northeastern Tohoku branch in the tsunami-ravaged city of Sendai has ceased its operations, and reports all workers are safe in shelters or personal residences. Nittetsu also reports damages on some of its service stations, and expects to release more information pending internal investigations.

Sources comment that Taiheiyo’s Sendai plant is currently closed, and is not expected to reopen until the general confusion in this area is resolved. Sumitomo Osaka Cement confirms minor damages to its sites, and the reopening of the temporarily closed Tochigi plant on its website. Additionally, the damages to the company’s Sendai port are currently under review. The Tokuyama Corporation reported its Kashima plant has stopped work, and more information regarding the extent of the damages is expected.

Denki Kagaku Kogyo Co reports minor damages to its sites, but aims to maintain safe operations throughout the power shortages. Ube Industries, located in Tokyo Bay, reports no serious damage although expects the earthquake to have an indirect impact on its business.

According to Keybank Capital Markets Inc., construction companies in Japan are likely to benefit from the earthquake. Fukuda Corp’s shares have surged 30% recently, and other companies positioned to gain include Daiwa House Industry Co., JGC Corp., Kajima Corp., Obayashi Corp., Sekisui House Ltd., Shimizu Corp., and Taisei Corp. “There is a possibility that some construction-related companies’ shares will rise just like back in 1995 when we had the Kobe earthquake,” concurs Tsuyoshi Segawa, an equity strategist at Mizuho Securities.

Demand for cement and construction imports likely to rise

It is not yet possible to estimate the total damage of the earthquake, but it is clear that the physical destruction of the country’s infrastructure has been colossal. Reconstruction will be a priority in the following months, in order to achieve a sense of normalcy.

China and India have been the epicentres of regional demand for construction materials over the past couple of years, but demand from Japan is now due to increase. The Chinese stock market has recently witnessed increases in steelmakers’ shares. Elvic Ng, an analyst at UOB-Kay Hian, reported that the rebuilding in Japan will require cement, boosting “sentiment” toward regional cement stocks. Japan is also likely to increase imports of steel and non-ferrous materials. Baosteel climbed 2.12% to CNY7.22 (US$1.10); Angang rose 2.55% to CNY8.04; China Shenhua Energy Co climbed 1.7% to CNY27.44; and Yanzhou Coal Mining Co advanced 1.8% to CNY31.62.

In India, the chief executive of Essar Steel Ltd. Malay Mukherjee, recently commented that "it would be important to note that a lot of the wooden houses and structures traditionally found on Japan's coastline may now be replaced with buildings made of steel and cement, as they would be better able to withstand the impact of a tsunami." Experts suggest construction sector imports will be slow in the beginning, as the Japanese wait to overcome energy shortages, but as the country stabilises and the infrastructure becomes the main priority, the demand will increase.

Heavy equipment makers like Caterpillar (CAT), alongside the lumber industry, are also likely to benefit from the natural disaster with an increased demand.

UPDATE: Taiheiyo Cement Corporation.
Taiheiyo reports all employees are safe, and the Ofunato plant has sustained damage and suspended its operation. Additionally, the company confirms damage to eight service stations. It is not yet known what overall impact the earthquake will have on the company's performance this year, but Taiheiyo wishes it be known, its focus currently lies with the safety of its employees along with assessment and restoration efforts.

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