What To Expect From The Upcoming Nuclear Development Restart In China
http://seekingalpha.com/article/872981-what-to-expect-from-the-upcoming-nuclear-development-restart-in-china?source=marketwatch
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
After the China State Council's approval of the 12th Five
Year Plan and the Nuclear Safety Plan in late May 2012, there have been
no significant official announcements on the status of nuclear sector
development in China. While there are signs that the State Council may
be ready to allow the restart of nuclear power projects, the much
awaited official announcement is likely to come only after the full
leadership transition takes effect later this year.As the world's largest energy user, accounting for almost half of all nuclear reactors currently under construction, the announcement from China could send a powerful positive signal to the battered nuclear industry stocks, such as Nuclear Energy ETF (NLR), Global X Uranium ETF (URA), and others.
However, the longer-term effect of the potential announcement will depend on the size and pace of the program. Here is what investors should watch for:
- 2020 Target Nuclear Capacity: The key question is whether the earlier target of 80GW might be cut back. The latest unofficial announcements indicate that the target may be set at 60GW of nuclear generating capacity. Even at this level, China's nuclear fleet would be on the course to match that of France, which currently hosts the second largest nuclear fleet in the world.
- Construction of New vs. Pre-approved Nuclear Projects: Mainland China currently has 26 reactors under construction. Prior to the Fukushima accident, the government had also pre-approved development of the four nuclear projects (seven reactors) in Fuqing, Tianwan, Yangjiang and Shidaowan. Resumption of these projects, while positive, would only be an incremental step forward. Investors should keep an eye on the plans for new (in addition to pre-approved) projects as a sign of resuming the full-scale nuclear development program.
- Enhanced Safety Standards: China is expected to raise safety standards for the nuclear power industry, given concerns over nuclear power plant construction and operation. In this case, development of new projects (particularly for Gen II+ reactors) may result in further delays and higher costs. At the same time, enhanced safety standards may boost orders for newer Gen III reactors built in China by Westinghouse and Areva (ARVCF.PK).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
On Friday, September 21, 2012 Nuclear Energy ETF (NLR) completed its quarterly rebalancing. This time the ETF, which tracks the DAX Global Nuclear Energy Index,
made no additions or deletions to its composition. However individual
company weights have been adjusted (see table below for more details):| Security | Country | Index Weighting on 9/20/2012 | Index Weighting on 9/24/2012 | |
| 1 | EDF | FRANCE | 9.07 | 8.00 |
| 2 | PGE SA | POLAND | 7.41 | 8.00 |
| 3 | MITSUBISHI HEAVY | JAPAN | 7.30 | 8.00 |
| 4 | EXELON CORP | US | 6.91 | 8.00 |
| 5 | CAMECO CORP | CANADA | 6.63 | 8.00 |
| 6 | AREVA | FRANCE | 6.29 | 4.80 |
| 7 | URANIUM ENERGY | US | 6.01 | 4.80 |
| 8 | JGC CORP | JAPAN | 5.89 | 3.00 |
| 9 | US ECOLOGY INC | US | 5.35 | 4.80 |
| 10 | PALADIN ENERGY LTD | AUSTRALIA | 5.26 | 4.80 |
| 11 | ERA | AUSTRALIA | 4.81 | 4.80 |
| 12 | UPC | CANADA | 4.76 | 4.80 |
| 13 | URANIUM ONE INC | CANADA | 4.42 | 4.80 |
| 14 | TAIHEI DENGYO | JAPAN | 4.41 | 4.80 |
| 15 | IHI CORP | JAPAN | 4.1 | 3.00 |
| 16 | ENERGYSOLUTIONS | US | 3.72 | 4.80 |
| 17 | KAJIMA CORP | JAPAN | 3.44 | 3.00 |
| 18 | USEC INC | US | 2.77 | 4.80 |
| 19 | TOSHIBA PLANT SY | JAPAN | 1.45 | 3.00 |
While NLR is relatively small with assets of only $85 million, the fund plays an important role for nuclear energy investors. It provides sector-wide nuclear industry exposure, serves as a useful sentiment indicator and can help understand certain aspects of individual company performance:
Sector-Wide Exposure: The fund provides an opportunity to invest in a broad sector with some diversification and without taking individual name exposure. NLR has 19 constituents in 4 different regions including North America (US, Canada), Europe (France, Poland), Asia (Japan) and Australia and spans multiple industries from Mining to Utilities and Industrials. It is also one of the few ETF's with exposure to nuclear, together with Global X Uranium ETF (URA), PowerShares NUclear Energy ETF (PKN) and iShares Nuclear Energy ETF (NUCL). But unlike URA, NLR caps individual name exposure to a lower threshold, thereby limiting single name dependence. The fund also includes companies like Toshiba Plant Sys, Mitsubishi Heavy and US Ecology (ECOL), which have a relatively small exposure to nuclear compared to the overall scope of their operations.
Sentiment Indicator: NLR can often serve as a sentiment indicator. The fund typically trades close to its NAV with a 5 year average at 0.6% discount (in line with 0.6% net expense ratio). Over the years NLR typically traded at a premium during periods of investor optimism (such as rallies of late 2010 before the Fukushima accident and early 2012). Similarly, the fund usually traded at a discount to its NAV during periods when investors felt more cautious. While this is not a precise sentiment gauge, it can offer valuable insight into investor behavior.
Impact on Individual Stock Performance: It is unclear to what degree NLR affects individual name performance. From the daily trading perspective, the volume remains small relative to the trading volume of most of its individual constituents. In addition, far from every ETF trade results in an equivalent trade in an underlying. Based on our observations and consultations, most of the NLR trades are sourced from existing inventory or on the open market. However a certain NLR trade can cause trades in the underlying. These typically include:
- Creations or redemptions: In case of NLR, such redemptions or creations have been relatively infrequent and small in size, as a result the effect on individual company performance is fairly insignificant.
- Arbitragable discounts/premiums: When arbitragable discounts/premiums to NAV appear market maker or other market participants can trade a basket of individual names against the value of the ETF. Given a relatively tight premium/discount range and low trading liquidity, this strategy also does not appear to be a prevalent strategy for NLR.
- Reweighing and rebalancing: Depending on the nature of the rebalancing/reweighing, the effect on the stock performance can be fairly significant. In the case of NLR, this is particularly true for smaller, less liquid companies, such as USEC (USU) and UEC.
Huge Chinese Demand to Drive Uranium Export Boom
China,
the world's second largest economy, is bracing itself for a huge import
of uranium in order to fulfill a part of its ever increasing energy
requirements as the country plans to add to its current capacity
of 11Gigawatts (at the end of last year) to reach a target of 70
Gigawatts of nuclear capacity by the year 2020. Although
officials with China's leading nuclear companies have expressed
confidence that the country's domestic stocks of uranium are good enough
to fuel its burgeoning fleet of reactors for decades to come,
independent analysts and nuclear experts feel that China would
definitely need to import uranium and a good chunk at that in order to
satisfy the country's ever growing energy needs.Meanwhile, a recent Thomson Reuters report quoted Cao Shudong, director of planning and development at China National Nuclear Corp (CNNC), as admitting that uranium exploration activity within China fell into a lull two decades ago, but drilling had since been stepped up and CNNC had found new mines in the far northwestern regions of Xinjiang and Inner Mongolia. However, some experts disagreed with the rosy assessment of domestic uranium supplies. "China's own domestic uranium resources are, to be frank, not fantastic," said Steve Kidd, director of strategy and development at the World Nuclear Association.
An interesting case in point to the fact that China's domestic needs might not be enough to power the Asian giant is that despite CNNC's confidence in domestic supplies, it has already established China Uranium Corp, a subsidiary specializing in procuring overseas uranium supplies. CNNC is not an isolated Uranium import story as its rival China Guangdong Nuclear Power Corp (CGNPC) has also launched mining projects in Kazakhstan and Uzbekistan. On Wednesday, the company signed an agreement with Canada's CAMECO Corp (CCJ), one of the world's leading uranium producers, to supply 20 million lb of uranium through to 2025.
Uranium Production: Only a handful of mines in Canada and Australia produce uranium as their primary product, although some is also recovered as a by-product of mining other metals, usually gold. Canada currently leads world production, with 25% of the world's output, followed by Australia. Kazakhstan is currently the world's third-biggest uranium miner. The three countries currently account for more than half of global uranium production. Other uranium mining nations include the United States, the Russian Federation, Portugal, Namibia and Niger.
Uranium Supply Vs. Demand: On the supply side, uranium production has been growing at a snail's pace; the major players have started locking up long term supply, and Russia and the U.S. have slowed down their refined uranium sales programs. Annual output of 47,000 tons only meets 58% of demand. The world's 437 nuclear power reactors use about 67,000 metric tons of uranium each year. Uranium mines produced only 42,000 metric tons of uranium in 2005, with the rest of global demand being met from utility stockpiles or from decommissioned nuclear weapons. In fact, worldwide uranium demand already exceeds supply by 139%, and it could take a decade or more before mines are able to crank up production.
Rising Demand: Meanwhile, demand for nuclear fuels is growing. 30 new nuclear power stations are under construction, with several dozen more in the planning stages. China alone, hungry for energy resources of all kinds to fuel its phenomenal economic expansion, intends to bring on line 27 new reactors over the next 15 years. India plans 31 additional reactors, Russia 25.
The world has about 4.7 million metric tons of identified uranium resources, according to International Atomic Energy Agency. In addition, there are another 10 million metric tons of more speculative resources and 22 million metric tons of unconventional resources. This entire total is 600 years of supply.
Uranium Related Exchange Traded Funds:
For now, there is no dedicated Fund or ETF for Uranium minerals or metals in the United States markets. A few of these companies directly dealing in Uranium form part of the few Nuclear industry related ETFs. There are Uranium futures at CBOT/Chicago Mercantile Exchange, which are expected to grow once the industry gets more active. See below about this futures market information for interested futures or futures options traders.
Market Vectors Nuclear Energy (NLR): The Index provides exposure to publicly traded companies worldwide that are engaged in various aspects of the nuclear energy business.
NLR Top Ten Holdings:
1. Electricité de France (EDF): 8.13%
2. Exelon Corporation (EXC): 7.72%
3. Constellation Energy Group, Inc. (CEG): 7.69%
4. Cameco Corporation (CCJ): 6.99%
5. Energy Resources of Australia Limited (ERA): 6.84%
6. Fronteer Gold: 5.76%
7. USEC Inc. (USU): 5.22%
8. Denison Mines Corporation (DNN): 5.13%
9. Paladin Energy Ltd (PDN): 4.82%
10. Mitsubishi Heavy Industries, Ltd. (7011): 4.69%
Expense Ratio: 0.61%
Barclays iShares Global Nuclear Energy (NUCL): The index measures the performance of companies in nuclear energy related businesses.
NUCL Top Ten Holdings:
1. Amec Plc (AMEC): 7.61%
2. Cameco Corporation (CCJ): 7.31%
3. McDermott International (MDR): 7.25%
4. JGC Corp. (1963): 6.74%
5. E.ON Aktiengesellschaft (EOAN): 6.68%
6. Tokyo Electron Ltd. (8035): 6.35%
7. Kansai Elec Pwr (9503): 5.69%
8. Iberdrola, S.A. (IBE): 5.68%
9. Shaw Group (SHAW): 5.63%
10. NextEra Energy Inc (NEE): 5.08%
Expense Ratio: 0.48%
PowerShares Global Nuclear Energy (PKN): The Index is designed to track the overall performance of globally traded companies which are engaged in the nuclear energy industry with representation across reactors, utilities, construction, technology, equipment, service providers and fuels.
PKN Top Ten Holdings:
1. Areva (CEI): 7.41%
2. Toshiba Corporation (TOSBF): 5.75%
3. Exelon Corporation (EXC): 4.84%
4. Thermo Fisher Scientific, Inc. (TMO): 3.32%
5. Equinox Minerals Ltd (EQN): 3.19%
6. Emerson Electric Co. (EMR): 3.14%
7. Paladin Energy Ltd (PDN): 3.12%
8. Hitachi, Ltd. (6501): 3.11%
9. Parker Hannifin Corporation (PH): 3.03%
10. Cameco (CCJ): 2.83%
Expense Ratio: 0.75%
Uranium Outlook: Global population growth, in combination with industrial development, will lead to a near doubling of electricity consumption by 2030. Nuclear energy is on the policy agendas of many countries, with projections for new building projects similar to, or exceeding those of the early years of nuclear power. The Uxc estimates that demand will outstrip all production (secondary and new production included) in 2014, but if the high end of demand is reached, demand will continue to outpace production at an increasing pace through 2020.
Increased awareness of the effects and dangers of global climate change has led decision makers, media and the public to become critical of the use of fossil fuels with the focus on reduction and replacement by low-emission sources of energy, such as nuclear power, a readily available large scale alternative to fossil fuels for production of reliable and continuous supply of electricity.
There are currently 439 nuclear units operating in 30 countries and they supply about 15 percent of the world’s electricity. Over the next 10 years, 108 new reactors are anticipated with the majority of the growth in Asia. Over the same time period, 19 reactors are expected to be shut down, resulting in a net increase of 89 reactors from current levels. Indian reactor demand for uranium, estimated at about 3 million pounds last year, will rise to as much as 10 million pounds in 15 years. Some analysts are forecasting China will increase nuclear power capacity by 9 times current values, targeting 80 GW by 2020.
Disclosure: No positions
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