Japan’s Nuclear Reactor Restart: Commodities Investors Worry About LNG Import Cuts

Published on 28 Aug, 2015

Japan Nuclear Market Research

Japan, on 12th August, restarted its nuclear reactor after a two year long hiatus ending its nuclear shutdown stance. The government approved the reopening of two reactors of Kyushu Electric Power Co's power plant of which Sendai 1 has begun to generate electricity. It is likely to operate at full capacity by September.

The move comes after Japan decided to shut down all its 43 operable nuclear reactors in September 2013 as they failed to comply with stricter regulations introduced after the March 2011 triple meltdown of the Fukushima Daiichi nuclear-power plant.

With its decision of nuclear free power in 2011, Japan had joined the likes of European nations including Germany, Belgium and Spain, before its U-turn.

The public animosity against nuclear power plants in Japan continues to linger. However, the Prime Minister Shinzo Abe remained unfazed with the protests as he has been more concerned about Japan’s ballooning trade deficit owing to a rise in fuel import bill, especially in light of a weak yen.

Until FY 2011, nuclear energy contributed approximately 30% of Japan’s total electricity generation. However, the aftermath of the disaster compelled Japan to shift to alternative fuels, importing huge amounts of coal, liquid natural gas (LNG) and other fuels, to meet the demand for electricity.

In FY 2011, the 10 largest utility companies consumed 52.9 million tons of LNG, an increase of 27% over FY 2010. With all nuclear capacity offline in 2014, these power companies imported a record 56.6 million tonnes of LNG, worth ¥5.02 trillion. Given this background, it comes as no surprise that Japan spent a whopping ¥27.7 trillion on fuel imports, accounting for a third of the country’s total import bill in FY 2014.

Japan’s currency played further havoc. The value of the yen, which reached a six year low in this period, aggravated the problem, resulting in trade deficits of ¥8.2 trillion in FY 2012, ¥13.8 trillion in FY 2013 and ¥9.1 trillion in FY 2014.

Given the above economic pressure, the Japanese government was forced to reverse the previous administration’s decision of shutting all reactors, which was greeted with open arms by the business and industrial lobbies.

However, the start of the nuclear revolution in Japan has several investors worried about the commodities market, especially LNG, which has been trying to make up for the loss of nuclear power generation in Japan. The country, which meets approximately 80% of its energy demands via imports, had bought ¥7.76 trillion of LNG (89 million tonnes) in FY 2014, accounting for 9.30% of its total imports and a third of global LNG shipments.

This huge dependence on LNG imports is unlikely to change at least until January 2016 as most LNG imports to Japan are bought under long-term contracts linked to oil, which are on a take-or-pay condition.

As part of Japan's long-term energy policy, the government has called for the nuclear share of total electricity generation to be at least 20–22% by 2030. However, the plan seems ambitious considering that obtaining approvals for restarting the reactors is a tedious task. Currently, the approvals come from both the country's Nuclear Regulation Authority (NRA) and from the local government bodies, which are fraught with hurdles.

That being said, with a second reactor to restart in October 2015 and 11 more planned to be restored in 2016; it is likely that Japan would look to cut back on its LNG imports in the years ahead. Rough calculations indicate that if Japan were to boost its nuclear output to full capacity, it could save imports bills to the tune of ¥1.5 trillion.

As such, Japan’s fallback to nuclear power seems a viable solution, at least for now. However, what remains to be seen is whether nuclear power in Japan would be able to achieve the highs of its pre-disaster era. Also, will it be able to restore faith among its countrymen who have borne the brunt of its fallacies. And, how will it impact the Japanese commodities market that seemed to be buoying lately with heavy imports of LNG.