Macroeconomic themes play an essential role in my investment decisions. Global warming, whether you believe it or not, will play an increasing role in economics/politics in the coming decades.
In an article authored by Robertson Morrow of Clarium Capital Management, Morrow explains how there can be bull and bear markets in politics as well as financial markets.
For most of the past 25 years, the West generally, and the United States particularly, experienced a surprisingly apolitical interlude. The great perturbations of armed conflict, trade disputes, sweeping social reforms, petro-diplomacy, and their ilk were largely absent. For investors, this meant politics became a much less important variable in the economic calculus of interest rates, innovation, global integration, and so forth. But the apolitical climate of the recent past, at least in the US, is giving way to a much more politicized future, with profound implications for a wide range of asset classes. One way to help understand the shift is to conceive of bull and bear markets in politics. In bear markets, like that which recently prevailed in the West, ordinary life is mostly unaffected by politics; the lives of the economy and citizens progress without substantial overt interference by government. By contrast, in a political bull market, government influence–over trade policy, social programs, decisions of war and peace–becomes much more important. The US now finds itself shifting from a bear market in politics to a bull market.
It seems that the current bull market in politics has focal points around three fundamental areas: global warming, healthcare, and the economic system. This article is primarily interested in the topic of global warming.
Let me cut to the chase. Current policy prospects for solving global warming stand just about a zero percent chance of solving global warming. Let me rephrase that in case it didn’t come off clearly….it doesn’t stand a snowball’s chance in hell of solving global warming. This is for a whole host of reasons. But nobody in office is particularly interested in the science or economics behind tackling this issue. However, they do care about votes and let’s face it, taxing the refining industry into bankruptcy has significant short term political benefits for every liberal democrat taking advantage of people who Bill Maher would refer to as “stupid people.” (I am not so sure he should be excluded from this group when it comes to the topic of energy policy and global warming.)
In my opinion, the only economically feasible solution that stands any shot of tackling the global warming issue is nuclear power. No global warming policy should be taken seriously unless it includes significant outlays for nuclear energy. Yes it has tremendous up front costs, but it is the lowest marginal cost provider of energy with the lowest emissions. Quite frankly nothing else comes close to nuclear power with any sort of scale.
Here is how I see it playing out...
The current bull market in politics will keep on pace subsidizing corn ethanol production in an effort to earn the Iowa caucus votes and the subsequent political benefits regardless of the fact that this policy offers zero positives to society but it does provide tremendous costs for the world. Solar and other alternatives will once again re-emerge as an investment fad. Much like the tech bubble, these companies might soar up in value as the craze hits. This craze will end much like the tech bubble ended. Investors will unfortunately find out that most of these alternative energy companies are not profitable and not even economically feasible with enough scale to warrant support, thus it will end in tears. They will go bankrupt but not before billions in IPO’s and political payoffs to lobbyist groups and politicians in which everyone i.e. Al Gore make millions and millions of dollars promoting bad policy to gain votes in addition to personal financial wealth.
When this collapse occurs, nuclear will finally emerge as the “duh” solution to solving global warming while expanding power capacity, thereby maintaining economic growth, for the world as well as the United States. At this point, the newly made millionaire policy makers will finally switch to some decent policy and will expand nuclear power plants in the United States.
In an interesting research report by Salida Capital Management the long term thesis for investing in uranium is explored.
All uranium consumed today goes into electricity generation, much of it for base load capacity. Consequently, we should expect uranium demand to be utility–like in nature and only modestly impacted by economic weakness. At the same time, growth will be driven not only by global power needs, but also by market share gains, as expansion of nuclear should lead an industry increasingly focused on emissions control. Nuclear power is also competitive economically — high capital costs (2–3 times as high as coal–fired and 5–6 times as high as gas–fired) are offset by low ongoing fuel, operating, and maintenance costs. According to the Nuclear Energy Institute in the U.S. (2007 figures), an average cost of US$1.76/kWh for nuclear power compares to US$2.47/kWh for coal–fired and US$6.78/kWh for gas–fired. Importantly, unlike the alternatives, nuclear plants are fairly insensitive to feedstock pricing, as the cost of uranium accounts for less than 10% of the cost of producing electricity. Globally there are 436 reactors in operation today, annually consuming some 168 million lbs. of uranium to produce 16% of the world’s electricity. A further 151 new reactors are either under construction or planned, plus 266 more units proposed. Adding only those being built or planned would yield a dramatic 35% increase in the number of plants worldwide. If we simplistically assume the average new reactor consumes as much fuel as those currently operating, the industry must source an additional 59 million lbs. of uranium per year on an ongoing basis — and likely within the next decade. This represents a staggering 55% increase in mine output from today’s levels. Moreover, the startup of a new reactor causes a surge in demand as initial cores typically require 2–3 times annual requirements during the ramp–up phase.
In the Western world, nuclear is gaining support as a source of green power. In the U.S., a recent Gallup Poll showed a record 59% of respondents were either somewhat or strongly in favor of nuclear power. The stimulus package passed earlier this year includes $18.5 billion in loan guarantees to help fund five new reactors. These would be America’s first new nuclear power plants in the past 30 years.
Despite a spike in uranium pricing in 2004–07, mine production grew only 13.5 million lbs. during the ten–year period to 2007 — a mere 1.4% annually. This reflects the industry’s challenges in both expanding existing operations and starting up new mines— challenges spanning geological, economic, operational, and regulatory. Today, the industry faces the additional challenge of funding.
Global mine output is about 107 million lbs. annually, far less than demand of some 168 million lbs., with the shortfall coming from secondary supplies (primarily government inventories). While the remaining life of these inventories is difficult to ascertain, they are a finite and diminishing resource. One of the key secondary sources is the U.S.–Russian HEU (Highly Enriched Uranium) Agreement, under which the U.S. buys Russian material recovered from dismantled nuclear warheads. Although the program expires in 2013, industry observers do expect sales to continue (albeit at higher prices). Even if the relationship ends, the Russian uranium should still enter the global market through sales to either other countries or to domestic plants. The bulk of future mine supply growth depends on three key regions: Kazakhstan, Saskatchewan, and Australia — each of which faces real challenges…
Meanwhile, today’s uranium price provides limited incentive to explore for and develop new mines, while existing operations and known deposits face a myriad of challenges. The marginal cash cost for the uranium industry is believed to be in the US$45–$50/lb range, higher than today’s spot price. Adding in a reasonable return on investment suggests a minimum US$60–$65/lb contract price to justify investment in a typical new project. Given that reactors are far more concerned with security of supply than the actual price of uranium, there would seem to be little resistance to higher prices should market conditions tighten.
The relevant stocks of interest for this theme:
Cameco Corporation (CCJ) is a Canada-based company. The Company, along with its subsidiaries, is engaged in the exploration, development, mining, refining, conversion and fabrication of uranium for sale as fuel for generating electricity in nuclear power reactors in Canada and other countries.
ABB Ltd (ABB) is a global provider of power and automation technologies to utility and industry customers. The Company’s focus on power transmission, distribution and power-plant automation serves electric, gas and water utilities, as well as industrial and commercial customers.
Disclosure: Author is not long either CCJ or ABB at the current time; however forsees a purchase in the not too distant future.Author remains long PCU, FCX, VALE, NUE, PSEC, & ETV and Short calls on most of these stocks.