Monday, March 14, 2011
The weekend's TV footage from Japan was awful and as though all Hollywood disaster movies had been wrapped into one horrible reality. There are so many bases for discussion as to how this changes the world that we hardly know where to start. This morning is remarkably quiet whilst everyone tries to work out the solution to the equation:
rebuild+sentiment+/-GDP+capital flows+ reinsurance flows+borrowing-nuclearpower+energysubstitution-exports+imports+intervention+reoccurring
and getting bogged down with so many unknowns, ending up doing nothing. Our latest pressing research is into the correlation of TMM trades and associated natural disasters. With our recent long NZ and then long Nikkei calls we are expecting Paul the Octopus type fame with regard to forecasting natural disasters.
Is the market getting "bad news punch-drunk"? What with Aus floods, NZ earthquake, Japanese Earthquake, Libya, and the rest of the middle east (though you 'd have to say the Saudi "day of rage" was more like a "Day of Mildly Miffed"), the dormant Euroblx, the bankrupt USA and UK, you would think we might be a tad busier.
The Euro EFSF news was a bit of a blindsider. The cynic would suggest that it was sneaked out under the cover of the Earthquake because in normal times it would be headlining. As it is we can see a none too surprising Core/ Periphery pivot supporting the PIGS. But we really do wonder how long before someone takes a closer look under the carpet of EFSF and realise that without some other stunning follow up the inevitable has just been further delayed. Wake up world! Euroblx is back in season!
As for the Middle East and Libya. they appear to be only occupying about 10% of the markets attention now Gadaffi (who we know should be spelled with a fashionable Q these days but just call us old fashioned) is merrily pushing east effectively Tiananmen Squaring the whole country.
Putting all of the above together we have only one sure fire trade - DFS (known to some as Dreadful F’in Sofas), the UK’s high street armchair outlet – Basically the financial world is fast running out of armchairs to accommodate all the armchair specialist’s currently needed to pontificate on the diversity of major issues.
For today TMM are going to try out a nice mock chesterfield single-seater in a pleasant beige radiation retardant velour, as we throw in our pennyworth as armchair nuclear power generation experts:-
You know that feckless friend from high school, the one who is an artist/actor/whatever and who drives a 1975 Datsun claiming its retro-cool but really drives it because he has neither the means or inclination to replace his car? One of us bumped into him over the weekend and apparently the Datsun is kaput. Busted. Scrap metal at best. After clearing a particularly large speed hump the rear axle broke and the aging bomb-on-wheels is no more. Shocking.
That pretty much summarizes how TMM feel about this earthquake and the reactors at Fukushima. The reactors that have currently blown are all boiling water reactors designed by GE whose design dates back to the 1970s and whose lives have been repeatedly extended through procrastination more than anything else. You would think that moving to a better and safer design like a pebble bed meltdown proof design would be a good option in a place that was on a fault line. Sadly, like many important regulated industries over the last two decades regulatory action has been nothing more than pass the parcel and duct tape. TMM think its time to face up to solid cold hard facts about investment requirements and what technology is appropriate where. We are sitting on the knife edge of an energy crisis in the Middle East to say nothing of global climate change (largely because TMM are split on the issue). TMM are big fans of James Woolsey’s work on energy security and think that a few million electric cars and a lot of nuclear could go a long way to de-risking the planet. Sadly the reaction so far has been a lot closer to Jane Fonda 1970s hysteria so far, though we hold the faint hope for some more sensible dialogue soon. At the very least the lazy practice of rolling over permits and safety approvals past life-of-asset estimates for nuclear power plants elsewhere should stop.
With the editorializing done it’s worth asking where now for nuclear and what does this mean for commodities demand? Given the pretty binary world uranium companies are now living in they’ve taken a pretty big hit thus far. As Canada isn’t open yet TMM can only show you some Aussie names – suffice to say the situation is already looking pretty ugly.
In all fairness they weren’t cheap to begin with and some of TMM had some shorts on – better to be lucky than smart as the old saying goes. To peer into the “official” data for future nuclear demand look no further than the World Nuclear Association which while being the industry cheer squad does have some decent numbers for future reactor plans. The summary is below:
As you can see, the bull market case for nuclear is pretty generalized and isn’t just a BRIC thing at all – it assumes a lot of growth in developed markets and that countries like Japan do not run a million miles away from the industry. Anyone who is trying to broke you some story that US/Europe/Japanese politics are a rounding error for industry size by 2030 has not done the slightest bit of work on this. Politics matters *a lot* here as it is not just a China story where the technocrats will determine what happens.
So when TMM run their models assuming all’s well in China and the WNA projections for a mid case, we get a low single digit deficit in uranium out to 2015 as China builds plants like no tomorrow but mines aren’t built fast enough. But what happens if the Western world spurns nuclear and shuts down old plants? In that case we are looking at a ~12-15% surplus. Ouch. Suffice to say holders of uranium equities have an awful lot riding on this – cash costs are around $20-25 for major producers in the industry and there is no reason they would not cut prices down from $65 to prices of yesteryear to survive (chart below). While the end of weapons decommissioning taking some supply out that does not hide the fact that with a lot of reactor plans in the pipeline it really is do or die time in this industry.
For those in some of the most pollution-blighted cities around (Beijing, Delhi, Shanghai, Hong Kong etc) which already live with air quality that moves the mortality tables, taking a chance on nuclear still looks good - especially if you are using better technology.
Hmm... that armchair was OK, but have you got anything in "Plate Tectonics" please?