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Japan Tremors Spread to China & Beyond. Investors React

|Includes: Cameco Corporation (CCJ)
The shockwaves from Japan's catastrophic earthquake have gone global. As stock markets opened Monday, uranium miners were the first to feel the blow. Cameco Corp. (NYSE:CCJ) and uranium mining ETFs like URA all plunged more than ten percent as U.S. stock markets opened.

That much was predictable. But what will the long term effects be?

As expected, we're being bombarded with questions. How will Chinese stocks be affected? Which multinationals will feel the impact?

Although stocks in the U.S. fell at their opening in New York, it was a different story overseas. In Shanghai and Hong Kong most indexes were up. The Shanghai Composite Index rose by 0.1 percent and the China Enterprise Index rose by a full percentage point.

Hong Kong also edged up despite a drastic 7.5 percent decline in Japan. Where is this Asian investor optimism coming from?

Chinese firms are already looking forward to a role in rebuilding Japan. That's why steel stocks are on the rise in Shanghai. Angang Steel rose 4.8 percent and was the most active stock on the China Enterprises Index. Baoshan Iron and Steel closed up 2.1 percent during trading in Hong Kong.

Coal is essential to steel-making and China's coal companies also followed suit. Yanzhou Coal rose 5.2 percent, and China Shenhua Energy was up 2.7 percent. Coal shares are also getting a boost on suspicions that nuclear reactor construction plans will be delayed, creating a bigger future market for coal-burning power plants.

The Fear Factor

Nuclear reactor-makers felt the fallout from Japan's atomic crisis around the globe. GE, the maker of the stricken Japanese reactors lost 2.5 percent, although the firm's CEO claimed that its future reactor-building plans wouldn't be affected.

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In China, the government maintained that it would not be swayed from its ambitious reactor construction plans. But nervous investors still backed away from several companies in the nuclear industry.

Dongfang Electric, a leading nuclear equipment manufacturer, slumped 6 percent in heavy trading. Shanghai Electric Group, another big nuclear manufacturer, lost almost three percent.

These shares are likely to rebound if Beijing is able to convince investors that it will push ahead with its aggressive construction plans. China's energy planners say they aim to have 40 new reactors on stream by 2015. By 2030, China plans to build enough nuclear reactors to generate more power than all 104 reactors now operating in the U.S.

How credible is that goal? It is true that many parts of China are prone to earthquakes. But the crisis-stricken Japanese reactors are as much as forty years old. They lack many of the safety features being built into current "Third Generation" reactors.

The fault in the Japanese reactors lies in the electric pumps which have failed to provide cooling water to reactor cores. Third Generation reactors require no pumps because they rely on the natural convection currents generated by heated water to move coolant through the core. It is a much simpler and safer system.

It's also important to quell the panic on a number of other fronts. The horrifying specter of Chernobyl is frequently raised by the media as a possible outcome in Japan. This is a false a dangerous myth.

Chernobyl had no containment building. But the Japanese reactors have concrete shells which have withstood one of the worst earthquakes in history.

Chernobyl used graphite rather than water in its core. Graphite can catch fire and that's exactly what happened when the Soviet-built core got too hot. The seawater being pumped into the crippled Japanese reactors is obviously not flammable.

This is not to diminish the seriousness of Japan's crisis. Our sympathies go out to all of the Japanese people in their time of pain and loss.

But when it comes to China, the future of nuclear power seems unshaken. China has set a goal of converting a high percentage of future energy production to alternate sources. Beijing has shown again and again that it pursues its goals with determination and doesn't change course easily.

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Other Tremors

Looking beyond the nuclear scenario, China faces a number of other effects from the Japanese crisis. Japan exported more than $18 billion dollars worth of autos to China last year. Toyota is the third largest brand in that country. American automakers have declined to comment on the outlook for Japanese competitors.

Some in the Chinese auto industry say the earthquake may prompt more companies in China to source parts locally. But the hopes of some Chinese companies to grab Toyota and Honda's share of the market seem exaggerated. We have no reports of serious damage to Japan's major auto factories, although most have been closed for several days.

There is also concern that some electronic chips made in Japan could be in short supply. The chips in question are called "NAND" flash circuits. Some LCD screens made in Japan may also be in short supply. There is speculation that Apple product production could be affected. We believe that Apple rarely relies on single suppliers and any product shortages will be short-lived.

Camera price-hikes have also been rumored. Sony, Nikon and Canon have announced suspension of some of their production capabilities. But, again, there are no reports of serious damage to production facilities. Right now the Japanese nation and its economy are in a state of shock.

For the long run, the story of post-quake Japan will be a tale of reconstruction. While it may seem ghoulish to discuss profit during a time of misfortune, I think differently. We are looking ahead as investors to a time of rebuilding, an appropriate thing to do as Japan rises from the ashes.

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