Japan Says Sayonara to Nuclear Power
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It is 18 months since the disaster at the Fukushima nuclear power plant, and finally, the Japanese government has made a decision about the future of nuclear power in the country. The government has stated that it will phase out nuclear power entirely by 2040. This would make Japan the second major country, after Germany, to announce such a withdrawal from nuclear power.
Prior to the Fukushina disaster, nuclear power supplied about 30% of the country's electricity needs, and the government's previous plans had called for nuclear power to supply as much as 50% of the country's needs by 2030.
There are still some doubts whether Japan will be 100% free of nuclear power by 2040. After all, one of the reactors affected by the shutdown will not even come online until the early 2020s. It is unlikely Japan would close such an expensive and relatively new asset so soon. Nevertheless, the message remains that Japan is moving away from nuclear power in a big way.
Japan's decision can only be described as a huge one with major effects on commodities markets. Japan is the world's third-largest nuclear power generator, so its loss will negatively affect demand for uranium while at the same time affecting demand for oil, thermal coal, and especially liquefied natural gas (LNG) on the upside. Japan is currently the world's third-biggest importer of crude oil, tied with China as the largest importer of thermal coal and, by far, is the biggest importer of LNG.
Japan's decision is also not good news for companies involved in building nuclear power plants and generators. This is especially true for Japanese companies such as Toshiba, Mitsuibishi Heavy Industries, and Hitachi (NASDAQOTH: HTHIY.PK) which are among the world's leading builders of nuclear plants. Hitachi will be the least affected here, however, and it may even benefit from the phaseout. About 60% of its energy business comes from thermal power equipment, and another 20% comes from transmission gear and renewables. Only 20% of its energy business is nuclear-related. So Hitachi may be an interesting investment play.
There are other opportunities too for sharp investors. Let's start with uranium. Prices in the spot market are down to levels last seen in October 2010, at $47.00 per pound. Uranium is down roughly 10% so far this year, and 65% since the record high set in 2007. The Japanese phaseout of nuclear power is another piece of bad news for the producers of uranium such as the world's largest supplier, Canada's Cameco (NYSE: CCJ). The company accounts for 16% of the world's uranium production and is backed by about 435 million pounds of proven and probable uranium reserves.
Uranium supplies may decline in years ahead as high-cost producers are forced out. Some of these properties are being bought by firms like Cameco which recently acquired the Yeelirrie uranium project in western Australia. The decision by Germany and Japan does not bode well for the industry as even energy-hungry emerging markets are having second thoughts about moving into nuclear power in any major way. That may mean more years of grief for long-suffering Cameco shareholders.
It also is not good news for holders in two nuclear exchange-traded funds (ETFs) – the Market Vectors Nuclear Energy ETF (NYSEMKT: NLR) and the PowerShares Global Nuclear Energy Portfolio (UNKNOWN: PKN.DL). Both ETFs have a good percentage of their portfolio in Japan: 28% and 20%, respectively. Additionally, both have a high percentage of basic materials stocks (mainly uranium) in the portfolio, too – 28% and 18%, respectively.
Other Japanese companies besides Hitachi that benefit from the country's move away from nuclear power include the big trading houses – Sumitomo, Marubeni, Mitsui, and Mitsubishi Corporation (NASDAQOTH: MSBHY.PK). All of these firms have moved into energy in a big way, including shale oil and natural gas in the United States and LNG from around the world. At Mitsuibishi, for instance, net income from energy accounted for more than of the total of $1.25 billion , from just over a quarter of income a year ago.
With a bigger role for LNG and other power sources in the future of Japan -- at the expense of nuclear power -- investors would be smart to invest in the companies benefiting from the change, rather than hoping that somehow nuclear power makes a big comeback.
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