04/ 3/11

Minimal Impact to the Global Supply Chain?

In the absence of evidence to the contrary, it has become fashionable for some in the global business community to believe that the economic impact of Japan’s earthquake will be minimal. No one can truly know the ultimate impact because the world has never experienced such a severe natural disaster in an economy so critical to the global supply chain: This is not Indonesia, New Zealand, Chile or Pakistan — which have also experienced recent severe earthquakes — this is Japan.

For the past three weeks, the world’s third largest economy has been plagued by chronic power shortages and supply chain disruptions — the ‘new normal,’ which is likely to continue for years. Although much of Japan’s heaviest manufacturing occurs in its south, which was largely undamaged as a result of the quake and tsunami, the ability to ship components to these facilities has in some cases been severely impacted, and ongoing power supply disruptions threaten to introduce long-term interruption into the production process.

Japan produces approximately 60% of the world’s silicon, used to produce semiconductor chips. Shortages in these chips are only now being felt, as manufacturers had a 2-to-3 week surplus of chips prior to the quake. Japanese manufacturers are expected to lose up to $60 billion as a result of interruption in production capability this year due to power disruptions. For manufacturing organizations outside Japan, the long-term impact is more difficult to assess, but businesses as diverse as auto manufacturers, and video game, LCD, and laptop producers, have already been affected.

Businesses throughout Japan have reported difficulty obtaining raw materials and transporting workers. Given that the timing of rolling brownouts is unpredictable, the ‘new normal’ for businesses involves flexible office hour scheduling and inconsistent transportation links, which are subject to change on short notice. All indications are that this is likely to continue for the foreseeable future, and will become acute during peak usage seasons during the winter and summer. If so, expect a more significant impact on the global supply chain in due course.

The Importance of Chernobyl’s Radiation Legacy

Chernobyl resulted in 400 times more radiation being released than was released in the atomic bombing of Hiroshima, but compared with the amount of radiation released during the atomic testing of the 1950s and 1960s, Chernobyl was a small fraction of that amount. Current estimates of the nature of radioactive contamination in the area surrounding the Fukushima plant downplay the significance of a problem. According to an April 2nd New York Times article, and based on a variety of sources of information it gathered, air and food was only considered to be harmful at the plant “after a short period of time”, while air, soil, water and food was considered to be “possibly harmful after a longer period” near the plant. Only food was considered to be “possibly harmful” elsewhere in Japan, though most of the prefectures in northeast Honshu had detected radiation in food above the legal limit in Japan. According to the report, there is no current cause for concern elsewhere in the world.

If Chernobyl is any guide for Japan with respect to radiation contamination, this information is in stark contrast with the facts 10 years after Chernobyl. Vast areas of Belarus and the Ukraine remained contaminated.

According to a study released in 2006 by the IAEA, a combination of human activity and precipitation reduced the negative impact of radioactivity on populated areas near Chernobyl, but resulted in the contamination of sewage systems. The main pathways for radiation to impact people was from radionuclides deposited on the ground and the ingestion of contaminated terrestrial food products. The ingestion of drinking water, fish, and products contaminated with irrigation water were considered to be minor pathways toward contamination.

Due to the short half-life of radioactive iodine (just 8 days), the contamination of milk, which was the most immediate concern in the food chain, only remained a real concern for about two months following the period when radiation from Chernobyl was stopped. Contamination of various crops, including green leafy vegetables, was also a concern for about two months, though the longer-term impacts have been difficult to quantify. Longer-term concern with respect to human ingestion of foods were most notable in milk, meat, and vegetables. Japan should expect to need to monitor its food supply, and possibly rely on external sources of these foods, for a long time to come.

Why the Japanese Government Needs to Move Quickly

The focus of much of the press since the quake and tsunami has been on levels of radioactive iodine that has been released into the environment, but cesium-137 is a much greater health concern and has been linked to cancer deaths nine times greater than radioactive iodine, with a half life of 30 years. Last week, for the first time, the Japanese science ministry began to release measurements of cesium-137 in soil around the plant.

The levels were highest from two points northeast of the plant, ranging from 8,690 becquerels/kilogram to a high of 163,000 Bq/kg measured on 20 March from a point about 40 kilometers northwest of the Fukushima plant. The hottest spot is similar to levels found in some areas affected by Chernobyl. Assuming the measurement is no more than 2 centimeters deep, nuclear engineer Shih-Yew Chen of the Argonne National Laboratory calculates that 163,000 Bq/kg is roughly equivalent to 8 million Bq/m2. The highest cesium-137 levels in some villages near Chernobyl were 5 million Bq/m2. If true, Fukushima has already released higher levels of Cesium 137 than Chernobyl, making it the worst source of nuclear radiation release in history.

Given this, the Japanese government must now move quickly to stop the release of radiation from the Fukushima plants. If preliminary information is correct, Fukushima already is the worst nuclear disaster in history. It could become much worse by degrees if the Japanese government hesitates to use every resource at its disposal — including that of the IAEA and foreign governments — to solve the problem. In the absence of admitting the severity of the problem and acting with haste, Japan’s economy and its people face potentially grave consequences, and the northeast Asia region faces unknown consequences from the release of high levels of cesium-137.

Daniel Wagner is managing director of Country Risk Solutions, a political risk consulting firm based in Connecticut, and senior advisor to the PRS Group.