China as a Nuclear Power Play

Sunday, December 13th, 2009

China as a Nuclear Power Play

By Romeo Dator
Co-manager, China Region Fund (USCOX)

Like all major economies, China is preparing for its energy future to accommodate rapid growth and the movement of more and more Chinese to cities. The foundation of the nation’s electricity generation plan is coal, but with loud calls coming from around the world for China to cut its output of greenhouse gases, a significant portion of new power will be nuclear.

From an investment perspective, this shows massive potential opportunity both in terms of infrastructure and natural resources, including uranium. Some analysts say the price of uranium, while soft now, could double over the next couple of years in recognition of future market tightness.

China’s nuclear capacity is now less than 9,000 megawatts, but the country has more than a dozen more plants either under construction or in the planning stages – according to figures from the brokerage CLSA, the capacity could grow fivefold by 2015. The official target is 40,000 megawatts by 2020.

Such an ambitious program raises the question of how to fuel all of the new plants that China wants to bring online in the next decade. Where will all of the uranium come from to handle this new demand?

China is not alone in its nuclear plans. Two decades of languishing interest in nuclear power after the Three Mile Island and Chernobyl incidents has reversed, and now too many nuclear energy is viewed as a relatively “green” energy with greater cost-benefit potential than solar, wind and other alternatives. Of course, the long-term storage of radioactive waste remains a stubborn obstacle to fuller acceptance of nuclear power.

Earlier this year, the International Atomic Energy Agency (IAEA) projected that global nuclear capacity would grow from about 370,000 megawatts (14 percent of world energy consumption) now to as much as 540,000 megawatts by 2020 and 810,000 megawatts by 2030. In dollar terms, capital expenditure on nuclear plants could total more than $500 billion over the next 20 years.

Roughly 40,000 megawatts of nuclear capacity are now being built on four continents, with China accounting for a quarter of that total, well ahead of #2 Russia and #3 South Korea. The chart above shows the global breakdown – even the United States is in expansion mode – and the chart below shows that China will be second only to the U.S. in terms of future capacity when projects at all phases are considered.

China has uranium reserves within its borders and it is aggressively lining up supplies in Central Asia, Africa and Australia to make up any shortfall. Government officials in Beijing say that more uranium mines are badly needed to satisfy future global demand for the resource – in China’s case, a Reuters story says the country can supply only a third of the 10,000 metric tons annually required to meet its 2020 nuclear capacity target.

The World Nuclear Association says the world’s measured uranium resources are sufficient to last 80 years at current usage rates, with the largest untapped deposits found in Australia, Kazakhstan, Russia and Canada. But just looking at China makes it clear that usage rates are soon to see a sizable increase. Like other resources, more uranium deposits may be economically viable at higher prices.

Uranium prices shot up to more than $135 per pound in 2007, after the first nuclear power projects began emerging, and are now around $45 per pound after a brisk supply response.

Some analysts see the price falling below $40 as new supplies from Asia and decommissioned Russia weapons come onto the market, but by 2011, price forecasts go up to $80 per pound as demand takes hold as the key price driver.

Romeo Dator is the co-manager of the U.S. Global Investors China Region Fund (USCOX). For more insights and investment research from U.S. Global Investors, visit www.usfunds.com.

Tags: Ambitious Program, Atomic Energy Agency, Canada, China, China Region, Dollar Terms, Electricity Generation, Emerging Markets, Energy Future, Future Market, Green Energy, Greenhouse Gases, International Atomic Energy, International Atomic Energy Agency, International Atomic Energy Agency Iaea, Investment Perspective, Long Term Storage, Manager China, Megawatts, Nuclear Capacity, Target, Uscox, World Energy Consumption
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Five Reasons China Is Not a Bubble

Monday, November 16th, 2009

This article is a guest contribution by Romeo Dator, Co-manager, China Region Fund (USCOX)

A year ago, nobody thought China could manage 8 percent GDP growth in 2009. With year-to-date growth coming in at 7.7 percent through the first three quarters and getting stronger, China is poised to break that 8 percent mark rather easily.

The success of the stimulus and the lofty economic numbers China has managed to produce amidst a global crisis has led many to claim China is the next great bubble.

We see five reasons China is not a bubble and believe that its prospects remain strong for at least the next 20 years.

1. Consumption Continues to be Strong
   

China is transitioning to a consumption-based workforce. Retail sales rose 16.2 percent in nominal terms during October and have been accelerating. The retail sales figure isn’t a perfect proxy, but it is the best available indicator of overall consumption because it does include sales to consumers and not just purchases made by the government.

We also saw strong growth in industrial production (IP) and power generation both were up more than 16 percent on a year-over-year basis in October. Housing starts were up more than 50 percent (yoy) for the second straight month.

1. Structural Changes to Domestic Economy
   

We’re seeing a transition to a service-related economy. The service industry is the fastest-growing sector (roughly 20 percent faster than construction) and now accounts for one-third of China’s workforce.

In general, the size of the service sector is directly correlated to the amount of goods and services an economy consumes. This is why the government has spent such a large amount of the stimulus on areas that benefit the domestic market—that’s where it thinks the economy is headed.

1. Stimulus Exit Strategy in Place
   

China’s stimulus exit strategy is simple–create a strong economic base that the private sector can launch from. After private investment surpassed that of state-owned enterprises in September, the two flip-flopped during October.

Given the environment, month-to-month fluctuations like this are to be expected since private investment is dependent on how willing Chinese citizens are to put their own money at risk. Even though Beijing is determined to wean China’s economy off of government stimulus, the government will not hesitate to ramp up activity should the private investors become risk-averse.

1. Government Controls on Flow of Money
   

After lending more money over the first five months of 2009 than all of 2008, we’ve seen loan numbers come down. There’s a longstanding pattern of new loans slowing down during the second part of the year as banks have historically rushed to meet government-mandated loan quotas.

The magnitude this year’s slowdown—trillions of yuan—is evident of Beijing’s dedication to prevent a bubble from forming. Once the figures grew too large, the government moved quickly to hit the brakes.

While U.S. regulators have many holes to plug in order to keep the economy afloat, the limited number of investment options available to Chinese citizens—basically stocks, bank savings and property—makes it easier for the government to institute controls.

This is what happened in 2007 when the government forced a slowdown in the housing market before it overheated. After its economy grew 12.6 percent in the second quarter of 2007, China took more aggressive actions to cool its economic growth. The government raised lending rates and also raised reserve requirements to shrink the pool of money available for lending.

1. China’s Long-Term Goals Match Up With Short-Term Goals
   

In the U.S., the Federal Reserve and policymakers are faced with conflicting goals. They need people to spend in order to get the economy rolling again, but their end game is to have the American people spend less and save more.

It’s the opposite for China.

The problem in China is excess savings and not enough spending. The short-term and long-term challenges are the same—to get people to spend more.

Recent signals that China will begin letting the yuan appreciate against the U.S. dollar are not new. For several years, Beijing has stated a gradual appreciation of the yuan will benefit the economy, and CLSA expects Beijing to resume a 5 to 7 percent annualized appreciation process about midway through 2010.

Rapid economic growth may be common in emerging economies, but there’s only one China. Already the world’s third-largest economy on a nominal GDP basis and second-largest based on purchasing power parity, the Chinese aren’t making a break from the back of the pack—they’re leading it.

Domestic consumption, the rise of the service sector and increased private investment won’t make China immune to economic bubbles, but these strengths will provide some protection from external forces.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.

Tags: China, China Region, Dator, Domestic Economy, Economic Base, Economic Numbers, Emerging Markets, Exit Strategy, GDP Growth, Global Crisis, Housing Starts, Manager China, Power Generation, Private Investment, Retail Sales, Service Sector, State Owned Enterprises, Stimulus, Three Quarters, Workforce, Year To Date, Yoy
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