Japan’s “Three Mile Island”

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Japan’s nuclear disaster is tragic on many levels. My focus here, though, will be on what it means for uranium investments and the world’s energy markets.

The main worry is that the situation in Japan chills the industry in the same way Three Mile Island did in 1979. Will political pressures quash the nuclear renaissance? It’s too early to know for sure how this will play out, but we can make some guesses.

First, some context…

Japan’s disaster affected at least six nuclear reactors. In total, 11 reactors in Japan have had emergency shutdowns and will be offline for months. The focus right now is on the nuclear reactors at a 40-year-old power plant that are experiencing partial meltdowns. These reactors are at the Fukushima Daiichi power plant, run by Tokyo Electric Power Co. (TEPCO). There are six reactors in total on this site, ranging from 35 to 40 years old. The number 1 reactor is the second oldest in Japan and is 40 years old.

It’s not certain how much radiation is escaping from the plant, but clearly, the news is going from bad to worse.

The shutdown of these reactors removes about one quarter of Japan’s total nuclear generating capacity and 4% of its total electrical generating capacity. For TEPCO, the Fukushima site is about half of its nuclear capacity and about one-third of its total capacity.

To replace its lost nuclear power, TEPCO will likely make up the difference by importing more liquefied natural gas (LNG) and oil. This could create something of a shock in the energy markets, though it is hard to say. Yes, Japan has to replace lost energy sources. But it will have less demand as factories close and as economic activity grinds to a halt in some regions. As it is, Japan is the world’s third-largest oil importer and second-largest LNG importer. In addition to LNG and oil, Japan will likely tap the coal markets to help make up the gap.

Then, too, there are political wild cards. If Japan orders its existing reactor fleet to shut down temporarily, the impact on global energy markets will be that much larger.

The political wild cards are the most worrisome thing for uranium investors – and not only in Japan. It didn’t take long before a US politician – in this case, Rep. Ed Markey (D-MA.) – warned of “another Chernobyl” and predicted “the same thing could happen here.” He called for an immediate suspension of licensing procedures for the new AP1000 reactors that have been crawling their way through the regulatory process for seven years.

Of course, the US is not the focus of the uranium story. The US hasn’t built a new nuclear plant since 1979, after the Three Mile Island disaster. Even so, old reactors supply 20% of US electricity.

In Europe, too, opponents of nuclear power jumped on the issue. Germany’s Chancellor Angela Merkel called for an immediate safety inspection of the country’s 17 nuclear plants. And opponents called for Germany to abandon plans to extend the lives of 10 European reactors. They also wanted Germany to close its oldest plants. European regulators are supposed to meet early this week in Brussels.

Still, two-thirds of the 324 proposed new reactors will come from outside Europe or the US. The uranium story is mainly an Asian story. China, Vietnam and Thailand have over 100 nuclear plants on the drawing boards. What they do will mean a lot as far as the nuclear renaissance is concerned.

Already, Thailand’s prime minister said that Japan’s incident would “impact the decision of whether to build nuclear plants in Thailand.” China, however, reaffirmed its commitments. But Asian power plants had not advanced smoothly, even before this whole disaster happened. About a year ago, Indonesia postponed its first nuclear plant after protests from villagers.

So this is where we are.

One of the great risks anyone investing in uranium takes on – the risk that another catastrophe sets the industry back – has finally unsheathed its sword.

How much will facts matter in the debate about nuclear power?

The fact is that all energy sources have risks, as The Wall Street Journal editorial column points out today. There are rig explosions, tanker spills and mining accidents. Still, nuclear has the most devastating consequences of error.

William Tucker outlines more facts in a column entitled, “Japan Does Not Face Another Chernobyl.” He points out, “You can’t have a ‘runaway reactor,’ nor can a reactor explode like a nuclear bomb. A commercial reactor is to a bomb what Vaseline is to napalm. Although both are made from petroleum jelly, only one of them has potentially explosive material.”

He follows with some technical explanations about how new reactors do not share the design flaws of older reactors. His conclusion:

“What the Japanese earthquake has proved is that even the oldest containment structures can withstand the impact of one of the largest earthquakes in recorded history. The problem has been with the electrical pumps required to operate the cooling system. It would be tragic if the result of the Japanese accident were to prevent development of Generation III reactors, which eliminate this design flaw.”

Still, I wonder how much facts will matter in this case. How much did logic and reason dictate what happened after the BP Horizon oil spill? The US government banned all drilling for a time. It didn’t matter how safe your rig was. And a de facto moratorium still exists, with new drilling permits incredibly difficult to come by. Why would it be different with nuclear power?

I don’t expect sudden enlightenment on the part of the public or politicians. I expect they will do what is easy and what plays well on TV. The easy thing to do is to quash development of new reactors, one way or another.

As I say, it’s too early to know for sure how this will play out. Your guess is probably as good as mine. My guess is this: The nuclear renaissance is dead.

I think we should sell our two uranium holdings. We’ll book a 73% gain on Kalahari Minerals (London:KAH) and a 10% gain on Paladin Energy (Toronto:PDN). The latter is down 23% today. Once, we were up 70% on the name. So this is a disappointment. But Kalahari is a very nice win for a stock we held little more than a year.

At the moment, I’m undecided on Cameco (NYSE:CCJ), which I recommended early last year to the subscribers of Capital & Crisis. It’s the biggest and best-capitalized company in the uranium sector. We’ll still need uranium to feed existing reactors. And not all planned reactors will die on the drawing boards. If you hold anything in uranium, this would be the one to hold.

I may be completely wrong about how the uranium story plays out. Maybe people look past Japan and continue to merrily build nuclear plants around the world. Somehow, I don’t think that will happen. In any case, it seems prudent to book some gains and move on to easier ideas.

As Charlie Munger likes to say, there are three buckets where investment ideas go: “Yes,” “No” and “Too Hard.” I think uranium is too hard.

Regards,

Chris Mayer
For Daily Reckoning Australia

Chris Mayer
Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer's essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is the editor of Mayer's Special Situations and Capital and Crisis - formerly the Fleet Street Letter.
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Philip Proust
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The support for nuclear energy on this website is interesting. The writers are ardently anti-statist and yet the nuclear industry has never been able to survive without massive levels of public subsidy. Nuclear power-plants in Australia will never get off the ground without very high levels of public expenditure and legislated regulation to protect the business. Port Phillip Publishing and its propagandists are just cherry pickers. They recoil when taxes are spent on projects that promote welfare, but they don’t seem to mind when the state subsidises and underwrites the capitalist enterprises it values so highly. The nuclear industry and… Read more »
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