Inflection Year For Nuclear Equities?

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Includes: CCJ, NLR, UEC, URA
by: NEIG

More than a year after Fukushima, the debate about the future of the global nuclear industry is still ongoing. With a number of key decisions expected in the next several months, 2012 could be an inflection year for global nuclear equities. This will also be a year in which public policy (rather than private side supply and demand fundamentals) will deliver key catalysts affecting the medium and long-term industry outlook. Investors should pay particularly close attention to policymakers in China, France and Japan. The outcome of the public policy debate in these countries will be critical in determining whether the industry remains in a bear territory or returns to a bull market.

In Japan, the clash between opponents and proponents of nuclear energy is in full force, with no clear outcome in sight. Prior to Fukushima, Japan was home to 54 nuclear reactors, accounting for 10% of the global nuclear generation capacity, and close to 12% of the annual global uranium demand. For the fist time since 1960s the country is without nuclear power, after its last operating reactor was shut down for maintenance and stress tests on May 6th.

The restart of the Japanese nuclear fleet is a highly debated issue. Recent Nikkei survey found that 54 percent of respondents opposed the nuclear restarts while 30 percent supported it. And although the government's recent recommendation to restart 2 reactors in western Japan contributed to improved near term industry sentiment, such recommendation is far from being a credible catalyst by itself.

It is worth remembering that Prime Minister Noda's administration has not made much progress in developing the national energy policy and has not defined long-term nuclear energy targets. Lack of long-term commitment from the central government makes larger scale restart of nuclear power plants significantly more challenging. We should look for more clarity on Japan's long-term energy policy and improvement in public sentiment as a more definitive catalyst for global nuclear equities.

In France the national debate on the future of the nuclear power is yet to begin. The fate of the 2nd largest commercial nuclear fleet in the world has become a key theme of the presidential campaign with President-elect, Francois Hollande, targeting to reduce the nuclear share of France's power consumption to 50% by 2025 from 75% now. We should not expect any immediate decision on the nuclear power plant closures just yet. Such decision is likely to require a broad and lengthy national debate. Participation of the Green party in the newly formed government and decision on closing France's oldest nuclear plant - two-unit Fessenheim facility - should serve investors as early signs of what France's energy policy under the new President likely to be.

The first positive catalyst is likely to be delivered by policymakers in China. Unlike Japan and France, China seems to be fully committed to the long-term commercial nuclear development program. The market currently expects 75-80Gw nuclear build-out target in China by 2020. However, the official announcement confirming this target is yet to come. With China accounting for over half of incremental demand in the next 10 years, the official announcement should go a long way in improving the industry sentiment and investment outlook for the sector.

Until we have more clarity on the catalysts above, we should not expect a sustainable rally in nuclear equities, such as the Market Vectors Uranium and Nuclear Energy ETF (NYSEARCA:NLR), Global X Uranium ETF (NYSEARCA:URA), Cameco (NYSE:CCJ), or Uranium Energy (NYSEMKT:UEC), while ongoing uncertainty likely to contribute to higher volatility and increased risk premium on global nuclear equities valuations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.