Monday, March 14, 2011

Armchair Nuclear Power Generation Experts

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?

13 comments:

Anonymous said...

I really enjoy your writing. Again, it is nice to read this blog while I have a warm morning coffee.

I won't write off China on nuclear energy yet. Though usually officials faced little opposition at these issues, there were precedents that the official will was blocked.

A few years ago in Xiamen, Fujian Province, there was a chemical plant initially planned to be built there. Local residents successfully blocked the idea and pushed the project to relocate elsewhere. This could happen again on nuclear energy development.

Anonymous said...

I would also like to say that I really enjoy this blog. I really appreciate the time and effort that must go in to producing this type and quality of research on a regular basis for free and shared freely.

I don't always agree with the posts or with the commenters for that matter, but that does not stop me from appreciating the fact that you produce and maintain this blog.

Thanks again.

Anonymous said...

I think that equation in the beginning of the post works out to Japanese default in the next 3 years.

There is no way in hell massive tsunami destruction on eastern shore and long-term shutdown of about 20% of nuclear capacity providing the cheapest energy is going to really make the economy better.

If inflation does happen or there is just not that many buyers as people/corporates use cash for something more productive than government bonds, it will kill the JGB market - Japan is already spending 30% of its budget on interest costs at effective rate on total debt outstanding slightly north of 1% - imagine what a 100bps move in rates will do there.

Kyle Bass will have a field day soon with those 7 year interest rate call options soon...

Nemo Incognito said...

Anon @ 3pm - I'd have to agree. The fight was previously Kyle Bass et al vs the BoJ. I know Kyle's a big distressed turned macro swinger but that is not a fair fight. BoJ vs Kyle and the whole local banking system is another matter entirely.

Charles Butler said...

Hard to wade into that argument without risking life and limb, but there's a load of cognitive disconnect evident. In the event that nothing of a serious nature transpires at the generator in question, the thing will have survived a number 9 earthquake and ensuing tidal wave without actually causing any damage to anyone. I find it difficult to fabricate from that a bullet proof anti-nuclear argument.

Leftback said...

Agreed on 1970s engineering being past its shelf life. Touch wood, the specs may have been just good enough to avoid catastrophe. So bizarre that we were discussing U miners only a few days before this.... we left the Kevlar gloves hanging up today, but will watch the situation carefully with respect to falling knives.

Mark Thyme said...

Anyone else have a sense of deja vu? That the next stage of this Japanese crisis is Mothra emerging from Tokyo Harbor? Or did I watch too many 1960s monster movies when I was growing up?

On a more serious note, I have to agree with Charles Butler. Is there a better advert for nuclear than that 1970s nuclear station can survive a force 9 earthquake and the biggest tsunami since Noah (or Indonesia) with what are still relatively minor cost in terms of human life, especially when compared with your average coal mining disaster? The public don't see it that way, but once the hysteria fades, the engineers and politicians will take note of the risks relative to the energy output.

Carry Trader said...

Funny note to all the Nuclear haters out there,

http://imgur.com/r81co

Interesting to see how the Generator builders (Fossil and Nuclear) builders will perform going forward.

Anonymous said...

There is a fire at a spent fuel pond of a reactor and radioactivity has been released into the atmosphere ...

Anonymous said...

0800: Japan has told the IAEA it has extinguished a fire at the spent fuel storage pond of a reactor in Fukushima, Reuters says.

Charles Butler said...

Mark - the problem is exemplified by the Austrian environment minister appearing on the beeb this morning referring to the events as a 'nuclear catastrophe'. Now that the world economy is no longer returning to the stone age, nuclear is possibly the only field of discussion that knows no boundary between the subjunctive and the indicative.

LB - Kevlar? Maybe let the bund test 121-ish again.

Anonymous said...

For the wag who commented about the cast iron AUD$ denying all calls to come off.
Now wait and see when the theme trade get the message what all of this means for them. It's happening right now and Uncle Sam's 'the end is nigh' will suddenly become 'Uncle Sam doesn;t need you' ,but if you want to shelter here take some of these low yields and negative returns and ok you can come in.
Uni directional markets playing a theme always give a nasty shock at the end when what was working suddenly stops.

patritius said...

I have not tried pebble beds, but I take your word for it that they would be good for my back. However, what about the decommissioning costs - has this been solved?

Furthermore, what about all of this cheap natural gas that the good ole US of A has discovered. I thought that natural gas power stations were cheap to build and run and that they did not take long to build