Market Thinking

making sense of the narrative

What if the next big thing, isn’t?

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There is an old line that the Stone Age didn’t end because they ran out of Stones and just as the Dot Com crash was not caused by a collapse in the share prices of typewriter companies and fax machine manufacturers, but instead by the unwinding of the hype around the profitability of ‘the next big thing’ in Telecoms, Media and Technology (TMT), so we would suggest that there is less systematic risk from investing in ‘bad’ Fossil Fuel companies (the risk is in the price) than there is in being heavily committed to expensive ‘alternative energy’ technology that turns out not to be the next big thing after all.

As Mark Twain once said ” The thing that kills you isn’t the thing you didn’t know about, it’s the thing you were absolutely certain was true and turned out not to be”. The fact that every government and every Fund Management group is embracing the wooly concept of ‘sustainability’ does not mean that the solutions being provided are the best options, nor indeed that they are much use to anyone but the people selling them. Wall Street and assorted former central bankers are pushing Carbon Credits, politicians are pushing for tax increases and ‘clean energy’ providers are pushing for subsidies. Big Oil successfully killed off its big rival, coal, by using Climate Change to push Natural Gas to such an extent that there are now shortages across Europe, with prices spiking and the very real prospect of power shortages this winter. As western European politicians seek to ratchet up the restrictions on (and therefore the cost of) conventional power, the consequence is that the rest of the world goes along with the targets, but not the ‘required solutions’.

The Nuclear Option

One of the key issues then is that it looks like Nuclear power may be making a comeback, certainly in China and the US and maybe even in Europe. The reality is that so called ‘renewables’ only satisfy end demand through creative accounting. As Michael Shellenberger points out in his book Apocalypse Never, when Bernie Saunders and the people of Vermont closed down their nuclear plants and tried to get customers to switch to Solar and other green energy, they ended up increasing Carbon emissions by 16% instead of decreasing it by 25% as planned. The reason was the clash of idealism and reality; so called renewable energy is quoted as a capacity when it works, but when the wind doesn’t blow or the sun doesn’t shine, then the power has to come from back up generators, which are all fossil fuel. Vermont frequently had to import fossil fuel generated energy from out of state. California is currently doing something similar and of course Germany also shut down its nuclear power plants in the wake of Fukishima, leading to a sharp increase in the use of coal fired plants. Indeed, the Drax coal fired plant in the UK, which was switched to so called ‘green’ energy with great fanfare but actually simply switched to burning woodchips literally shipped across the Atlantic (a complete coincidence that the Chairman of the company providing the woodchips is a former UK Environment Minister) sold its turbines immediately to Germany who simply fired them up again to burn coal. The UK reduced its carbon footprint, but Europe as a whole did not.

The recent run up in Uranium prices was partly connected to the launch of a new Uranium Trust by Canadian Commodity specialists Sprott – shown in Orange on the Graph – but also reflected an increase in energy prices generally as we noted in the September Market Thinking. But it also reflects a growing view that the only way to reconcile the ‘letter of the (Green) law’ on Co2 and actually meeting the energy needs of society is to go back to nuclear power. And that means more Uranium, The chart shows the Uranium Price (red) along with the three main ETFs that track baskets of Uranium related stocks that we discussed back in June. The white line at the bottom is the ‘Clean Energy’ ETF that performed so well last year, but this year has struggled.

Source Bloomberg. Market Thinking

This is of course a possible existential problem for all our friends in the ESG world on the basis that in the energy world, they can only invest in the white line. To take as an example the wording on the ESG elements on all of Blackrock’s ETF’s.

  1. Identify all companies that own or operate nuclear power plants, active uranium mines, are involved in uranium enrichment and processing, the design and engineering of nuclear power reactors, or derive 15% or more aggregate revenue from ownership or operation of nuclear power plants and supply of key nuclear-specific products or services.
  2. Identify all companies flagged in Step 1 but derive 50% or more revenue from products, services, or infrastructure projects supporting the development or delivery of renewable energy and alternative fuels, or generate 50% or moreof their total electricity from renewable energies.
  3. All companies identified by Step 1 and not by Step 2 are excluded.

This is not to pick on Blackrock, just that it is the biggest player in this area and it undoubtedly reflects the groupthink in western governments and the Green Industrial Complex in general.

China has an advanced Nuclear programme and the green resistance to Nuclear seems to have largely disappeared in the US – Warren Buffet and Bill Gates are starting a small scale next generation plant in Wyoming as we discussed back in early June (a NICE future for Uranium) Interesting also that Saudi Arabia, which has been in discussions with China for the last few years about building Nuclear power plants has fallen out somewhat with the US in recent days which has prompted much discussion about how this is bad – not so much because of the normal complaints about nuclear in terms of nuclear weapon escalation in the Middle East, but more because the US nuclear industry might be losing potential clients! When the US companies lobbying to build ‘our Nuclear power plants’ around the world instead of allowing the Russians or Chinese to do it clash with the renewables lobby, it will be interesting to see who prevails. Why shouldn’t ‘Build Back Better’ include new nuclear?

Thorium and Uranium

Meanwhile another interesting article yesterday appeared about the upcoming test for a Chinese Thorium Nuclear Reactor. Others are here , and here This is something we have looked at frequently over the years, not least because it offers the prospect of nuclear power without the plutonium by-product. Indeed, this is actually a key reason why Thorium wasn’t adopted in the past, the US military saw Nuclear power as a bi-product of the plutonium it wanted for its weapons programs. This is not to say that you can’t make weapons from the bi-products, the Uranium 232 produced is fissile (if it wasn’t you couldn’t generate the power), but it is a lot more difficult. Having said that the step from Nuclear Energy to Nuclear Bombs isn’t that simple either.

The Thorium reactors use molten salt, like the next generation uranium reactors being built by Warren Buffet and Bill Gates, rather than the old water cooling design of Fukishima and as such are safer by design. They are also more suited to be located in the middle of deserts (the trial reactor has been built on the edge of the Gobi desert). Another key advantage of Thorium – for China at least – is that it is relatively abundant in China and would mean that Uranium would not have to be imported from places like Canada and Australia – both of whom are busy annoying China at the moment. Interesting to note that one of the supposed downsides of extracting Thorium is that it is both messy and (relatively expensive), but in fact it is a bi-product of extracting Rare-Earths. Something China has a huge interest in doing anyway! The other country particularly interested in Thorium is neighbouring India, which also has large deposits, plus of course it is highly likely that the newly emerging Afghanistan, sat as it is in the middle of the Shanghai Cooperation Organisation and the One Belt One Road development zone, will also be a rich source of rare earths and Thorium.

Bottom line. ESG has outperformed on some time periods as the result of a long-tech/ short-energy bet that was not available to other institutional funds (too much benchmark risk). However, by early this year, the weighting of energy stocks had got to a level making that trade difficult to sustain at the same time as the relatively illiquid alternative energy space got over-extended by ESG funds chasing momentum in the area. Meanwhile as the political rhetoric on Climate change has ratcheted ever higher, the reality of the cost of meeting these obligations is becoming apparent and if, as it seems, Energy consumption giants like China, India and the US embrace Nuclear as the only practical alternative to fossil fuels, then funds heavily invested in windfarms and solar may find that it is they who are in the true stranded assets.

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