Lat week the head of the Japan's newly established Nuclear Regulatory Agency announced that the new nuclear safety rules are not expected to be finalized before the end of this year. The announcement remains somewhat overlooked by analysts and commentators. Yet its importance for nuclear energy investors should not be underestimated. It implies that no additional reactors will be restarted in Japan until well into next year. In turn, it should place additional downside pressure on Japanese electric utilities, uranium mining equities and general sentiment towards nuclear energy sector.
We have warned about the possibility of delay in Japanese reactor restarts. But believe that the announcement still comes as a surprise to many market participants who expected speedy restarts following the inauguration of the Nuclear Regulatory Agency on September 19.
What are the implication of the delayed restart for nuclear equities?
Japanese electric utilities are likely to be among those most negatively affected, particularly utilities with higher exposure to nuclear power (such as Shikoku (OTC:SHEKF), Kansai (OTC:KAEPF) and Hokkaido (OTC:HKEPF)).
Uranium mining sector is not going to be among beneficiaries either. For the most part, Japanese utilities continue to take uranium deliveries under the long-term supply contracts. Yet, idle capacity for at least another several months means further build-up in Japanese uranium inventories or deferral of nuclear fuel deliveries by Japanese utilities. (There is also a potential for uranium inventory sale, but we do not believe this to be a probable scenario at this time.) Under either scenario the near-term effect on uranium supply and demand balance is negative. As a reminder, Japan is home to a third largest nuclear fleet in the world with about 10% share of annual uranium consumption.
Perhaps the most significant impact could be on investor sentiment. Many investors expected the restart of Japanese reactors to be a powerful positive catalyst and a sign of early stages of recovery for the global nuclear energy. However this additional delay could further dampen investor confidence.
Overall, the case for the long-term nuclear energy growth is still valid. However, near-term challenges are proving hard to ignore. Investors in nuclear energy stocks (such as the Nuclear Energy ETF (NLR), Global X Uranium ETF (URA), Cameco (CCJ), AREVA, Paladin Energy (OTCPK:PALAF) and others) should adjust their expectations towards slower, uneven recovery instead of hoping for a near-term return of nuclear bull market.