Japan power shortages to hit profits, output - MarketWatch

By Lisa Twaronite, MarketWatch

TOKYO (MarketWatch) — Tokyo Electric Power Co. said Friday that its electricity supply capacity would fall short of demand at least through the summer, as analysts weighed the impact of expected power outages on Japanese companies' profits and production.

The utility company more commonly known as Tepco /quotes/comstock/64e!9501 (JP:9501 846.00, -56.00, -6.21%)  said that it would resume operations at an idled thermal-power plant and get its thermal-power plants operating again.

Even so, Tepco said it expects its electricity supply capacity in July to total 46.5 million kilowatts, compared with estimated peak demand of 55 million kilowatts.

Japan's magnitude-9.0 earthquake and tsunami on March 11 knocked Tepco's two nuclear-power plants in Fukushima Prefecture out of commission, with some reactors damaged beyond repair. Some of Tepco's thermal-power stations also sustained damage, as did plants run by Tohoku Electric Power Co. /quotes/comstock/64e!9506 (JP:9506 1,506, -8.00, -0.53%)

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Workers were still struggling Friday to restore cooling functions to some of the reactors at Tepco's Fukushima Daiichi plant and contain radiation leakage there. Read more on Fukushima reactor radiation leakage.

Tepco began to implement rolling power outages in its service areas — including Tokyo — on March 14, and had said it plans to keep doing this at least through April. The expected summer shortfall makes it all but certain that some outages will continue.

"We see a growing risk of prolonged problems with electricity supply in areas covered by Tokyo Electric Power and Tohoku Electric Power, after the Tohoku Pacific earthquake halted generation at nuclear-power plants," said Nomura Securities analysts Seiichiro Iwasawa and Ryota Sakagami in a report this week.

Businesses in areas covered by those two utilities account for almost 50% of overall Japanese output and almost 45% of manufacturing output, according to Nomura.

The analysts estimated that a 10% shortfall in electric power capacity could dent recurring profit by 4.7%, or 1.4 trillion yen ($17 billion), in the Japanese business year beginning in April for corporations in the Nomura 400 companies index.

Although electricity shortages will have an undeniable impact on the Japanese economy and on corporate earnings, supply-chain problems may pose an even larger short-term risk, they said.

"Ironically, if supply-chain problems crimp production activities, this could mitigate the impact of electricity shortages," they added.

Investors "appear to have priced in profit declines almost equivalent to the worst-case scenario for supply-chain problems," the analysts said, and "to that extent, we think it makes no sense to get additionally worked up about problems with electricity supply."

Higher customer rates ahead

Assuming electricity supply in the areas covered by the two utilities were to fall 10% short of demand throughout the whole year, this could dent overall Japanese manufacturing output by 2% to 4%, the Nomura analysts said — although some production might be shifted to other regions.

Japanese banks and financial institutions are considering providing emergency loans totaling more than ¥2 trillion ($24.6 billion) to Tepco by the end of March to boost electricity supply, according to reports Wednesday. Read more on emergency loans to Tepco.

And it won't just be lenders and companies feeling the pain. Individual customers are likely to see higher electric bills in the wake of the disasters.

Tepco "may have to raise customer rates substantially to offset the higher costs for purchased power — even before increases to recover costs for damage, repair and reconstruction," Moody's Japan K.K. said a week ago, when it downgraded the utility's debt ratings.

"Regulators may phase in these rate increases in order to limit the rate shock to customers," Moody's said.

Analysts have said the shortfalls caused by the offline nuclear plants could also lift demand — and prices — for other energy commodities, including liquefied natural gas (LNG), but the extent is hard to predict.

"I think the earthquake will be net bullish for oil and LNG as we need to make up for the nuclear-power losses," said Robert A. Nunan, who handles risk management in the petroleum division at Mitsubishi Corp. in Tokyo.

"The problem with trying to forecast prices is that the earthquake will most certainly have a negative impact on economic growth, which will reduce overall oil and energy demand," Nunan said.

Lisa Twaronite is MarketWatch's Tokyo bureau chief.