The Business of Nuclear

TH: Hello, I’m Tom Hosking. Welcome to Global Infusions, an investment podcast from the Liontrust Global Fundamental team that takes a long-term view of today's stories.  
 
Last episode we chatted about the business of weight loss from gym subscriptions to new wonder drugs. This episode we’re looking at nuclear energy from tokamaks to uranium. If your taste buds are tickled or you have any questions for our next episode, please do send them in via your client contact or through the contact us link on the Liontrust website. 
 
So sit back, grab a cup of tea, and remember that when we talk about individual companies, we are not making a recommendation to buy or sell shares and that some of these companies may not be held across Liontrust’s global fund range. 
 
Right, I’ve been looking forward to today’s discussion very much: a steady source of energy, environmentally friendly and ultra reliable, James Mowat is Head of Investment Companies at Liontrust. He and I have worked together for over 7 years now. Welcome to the podcast, James.

JM: Thanks Tom, glad to be here. And thank you for not introducing me as prone to meltdowns in that list of characteristics!

TH: Well that’s where the analogy between you and nuclear energy would have broken down!

JM: Well thank you all the same. I’m a long time listener, first time caller as they say! For my first contribution, as I know how much you like a quiz question on this podcast, I thought I would start with a quote on nuclear meltdowns for the listeners to guess.

TH: Oh great, we love a quiz question on global infusions.

JM: Yes I have observed that to be the case over the years. So who said the following?: "Oh meltdown. It's one of these annoying buzzwords. We prefer to call it an unrequested fission surplus"

TH: That’s quite a euphemism! Hm… I don’t know. Maybe a soviet official in the 1980s? For the sake of having a guess, I’ll say Mikhail Gorbachev?

JM: Good attempt at a guess Tom but no. It is actually… Mr Burns from the Simpsons!

TH: Oh of course it is, I should have got that in hindsight.

JM: Although I’m mentioning it as joke, for a generation of people the Simpsons is actually extremely well known and for many the first time they hear about the concept of nuclear.

TH: That’s true, and it’s quite telling of society’s perception of it at the time that the show’s producers chose a nuclear power plant as the way the cartoon’s evil millionaire made his money. 

JM: It’s quite understandable. The Simpsons started way back in 1989, that’s only 3 years after the Chernobyl disaster – and some of the older viewers of the Simpsons may recall the US’s own nuclear power accident at the Three Mile Island power station in Pennsylvania in 1979. The show frequently made references to nuclear waste that wasn’t disposed of properly. And the plant’s safety officer just sat around sleeping or eating donuts!

TH: Yes that was Homer’s job wasn’t it. I suppose the Simpsons was a product of its time. 

JM: If it was created today, Mr Burns would probably run a coal-powered plant or even a mine!

TH: Yes, climate change is the new villain. That’s been a big change over the last 10/20 years.

JM: Nuclear power generates very strong views both for and against. What about the case for it? And what exactly is it for a start? 

TH: Well nuclear power plants harness a reaction called nuclear fission. In simple terms, what is happening is that we are taking a large atom, normally uranium in power generation, and we are sort of bombarding it with a neutron. This destabilises the nucleus of the uranium atom, causing it to split into smaller chunks of nuclei and it normally also helpfully spits out another few neutrons which can go on to split other uranium atoms, causing a bit of a chain reaction. This whole process releases a huge amount of energy which we can then harness to heat and boil water, turning it into steam which is then used to turn a turbine which generates the electricity. 

JM: I have always thought that it’s quite funny how most of the methods for electricity generation are just convoluted ways of heating water to generate steam to turn a motor. 

TH: Yes I guess that’s true. At its core, it is all actually quite simple. But to do it efficiently and sustainably, we’ve got to the point that we have to literally split atoms to boil the water.

JM: Well this convoluted method does seem to have pretty chequered history. It is hard to mention nuclear energy without then thinking about the disasters of Chernobyl and Fukushima. 

TH: Yes, to a lot of people, the word nuclear is a pretty toxic word. It has had pretty horrific PR since the beginning. The genesis of this technology was one of destruction and it all started in WW2 with the nuclear bomb. And that’s not helped by Oscar winning films like Oppenheimer!

JM: Maybe pro-nuclear scientists could benefit from trying to change the name of the technology.

TH: Yeah that might actually help! Anyway, despite all of this, nuclear power is actually a much better source of energy than many think. It is extremely clean, extremely reliable...

JM: It doesn’t have the intermittency issue that affects wind and solar. Not having to rely on the weather means it’s well suited to providing baseload power to the grid.

TH: Yes exactly, it could be a useful part of the energy mix going forwards. And it’s also extremely safe. Technology has come a long way since Chernobyl, and the Fukushima disaster has put pressure on power plants to be safe in even the most unlikely circumstances like a tsunami.

JM: Yes, well I thought to myself how safe can a nuclear plant really be? And I found it interesting to learn in my reading that the amount of radiation that a nuclear power plant gives off is actually very low. And if you live close to one, you’re likely to get less radiation exposure than if you were to go for an x-ray.

TH: Interesting. People seem to overestimate the risks of nuclear energy, but they don’t spend enough time thinking about the dangers of all of the other types of energy production. 

JM: I think that’s right. And that’s led to Germany taking the controversial decision to close down its remaining nuclear plants while increasing coal fired power.

TH: Agreed. It’s particularly odd when you consider that coal powered stations don’t just emit a lot of CO2 and a lot of other particulates; the coal ash from one of those power plants actually emits over 30x the amount of radiation that escapes a nuclear plant! 

JM: Wow that’s pretty unexpected. So which countries have the biggest exposure to Nuclear?

TH: The US have the most reactors in the world with 93, roughly 20% of their electricity comes from Nuclear. Then comes France in second place with 56 reactors, and they are the most reliant on nuclear in the world with it accounting for over 60% of their energy mix.

JM: It seems silly that France has been chastised by the EU for being the only country to miss its renewables target of 23%.

TH: Agreed- having a low-carbon target rather than a renewable one would probably make more sense. But both the US and France will probably by overtaken soon by China, who are aiming to install 6 to 8 nuclear reactors each year. They currently have 55 reactors, 37 of which have been added in the last decade. For context the US only added 2 in that time. 

JM: Why haven’t we been building nuclear in the western world recently, as the Chinese have?

TH: Well plants haven’t necessarily been the most attractive investment propositions. Nuclear power is heavily regulated, and these are mega projects with highly specialised equipment. They cost a lot upfront and take quite a long time to start generating cash. 

JM: So it takes the public sector to step in and steer the market? 

TH: Yes that’s what China has done. They have provided SOE energy companies with cheap loans as well as land and licences. And tariffs are subsidised for suppliers of nuclear energy too. The result is that the price of nuclear power is cheaper in China at $70 per megawatt hour versus $105 in the US and $160 in the EU.

JM: Governments here also struggle to implement nuclear plans, politically. In 2008, Gordon Brown announced plans to have 8 new reactors running by 2023, and that failed.

TH: How many of those are now built? 

JM: Zero. And to give an example of delays: the first new nuclear power facility to be built in the UK since 1995, Hinkley point C in Somerset, is way behind schedule. It’s being developed by a JV composed of EDF and a China General Power. It was planned to be completed by 2025 but in January EDF admitted it probably wouldn’t be ready until 2031, 6 years late and double the original cost at a whopping £46bn.

TH: That is a big cost overrun. They can be dangerous for the contractors too: Westinghouse built plants on fixed priced contracts and the cost overruns almost bankrupted Toshiba, who had acquired Westinghouse back in the mid-2000s. 

JM: OK so here’s an idea: Why don’t we develop smaller nuclear facilities that aren’t so susceptible to these problems. For a long time, companies like Rolls Royce and BAE have been involved in making small nuclear reactors for the defence industry, for example to power nuclear submarines. 

TH: It’s funny you should say that because that does seem to be the way the industry will change. They are called Small Modular Reactors (or SMRs) and are about one third of the size of a normal reactor. And Rolls Royce indeed are one of the big companies to be investing in this area, along with the likes of GE and Hitachi.

JM: Ah good. And being modular presumably lowers costs. Being smaller would mean that the components that go into them can often be made in factories, rather than custom made components that go into larger power plants.

TH: Yes exactly. There’s been a wave of start-ups focussing them. Even Sam Altman, who we discussed on the podcast a couple of episodes ago, he is the chairman of a nuclear start-up too.

JM: He’s the CEO of OpenAI isn’t he? I wouldn’t have thought he had the time for that!

TH: Well quite... But one downside to these SMRs is that majority of new designs so far rely on highly enriched Uranium, where there is currently only one commercial supplier, a Russian company called Tenex.

JM: That is problematic but that shouldn’t be insurmountable in the long run. The US seems quite hell-bent on building up its entire nuclear supply chain through a variety of grant programs. The reason they haven’t banned Russian imports yet is that the US is currently getting a fifth of its Uranium from there. They are also teaming up with other western nations, part of what people are calling a friendshoring strategy. Last year the US, UK, France, Canada and Japan all agreed to invest $5bn to add capacity to enrich uranium.

TH: Yes, it does seem like the political will is there to overcome the geopolitical constraints. 

JM: OK, but back to uranium, the raw material for the nuclear fission power stations, why has the price been rising so much recently?

TH: Well in answering, it’s important to understand the context. Since the Fukushima disaster, demand spent a decade at levels way below what was seen before. Many reactors, especially in Japan, were shut down. As a result, the uranium market went into massive oversupply and the spot price collapsed. 

JM: Did a lot of Uranium miners go bust?

TH: Strangely no. Uranium is a very unusual commodity. One of the quirks is that the % of uranium that trades on the spot market is very low. It’s extremely expensive to start and shut down a nuclear plant so utilities prefer to buy uranium on long term contracts at prices loosely linked to the spot price. So the main producers of uranium had signed contracts with their clients to supply uranium at a price agreed pre-Fukushima.

JM: So supply didn’t correct as much as it would in a more traditional commodity market?

TH: Exactly. However, after about 5 to 10 years these long-term contracts began to start expiring. So after 2016, global uranium collapsed by about a quarter in just 4 years. The Canadian company, Cameco, the number 2 player, actually curtailed so much production that they were buying uranium from the spot market at a low price to fulfil their remaining uranium obligations at the higher prices.

JM: So a miner that was choosing not to mine itself? Interesting. But even if they were sort of bedding down and surviving just fine- I imagine they weren’t investing the normal amount of money to find, explore and develop potential uranium resources for future supply growth. 

TH: You suspect correctly. Without higher prices, miners were not incentivised to even keep their mines open, let alone go and try to build new ones. 

JM: And so is that why people are now worried about supply?

TH: Yes and prices have risen a lot in the last 12 months or so. The spot price of uranium has gone from about $25 per pound in 2019 to over $90 today after doubling last year in 2023. 

JM: That seems quite extreme. Financial markets can famously overshoot in both directions – is that what is happening here, or is it being driven by fundamentals?

TH: In this case, there are reasons to believe it’s the former. Movements in the spot market have been exacerbated firstly by that strange interaction of spot market and long-term market that we discussed, and secondly by new entrants into the spot market by other financial participants like Yellowcake and Sprott. People have taken note of the uranium supply deficit and have searched for ways to get some exposure.

JM: I read that in addition to simply buying shares in the miners, one of the more popular ways to achieve exposure has been through ETFs.

TH: Yes, that’s right- These open-ended ETFs take money from investors and use it to purchase uranium. As these ETFs gained popularity, they have sucked up more and more of the spot market. This, in addition to the miners doing spot purchases and the rising demand from utilities has sent uranium prices flying at the beginning of this year.

JM: I see. How do you and your colleagues assess the investment opportunities in stocks like these?

TH: When you see euphoria like this, we tend to try to be a little bit cautious and not get too tempted to chase any trends out of any fear of missing out. 

JM: That seems sensible. So that’s Nuclear fission, but there is a type of Nuclear power that doesn’t require any uranium at all- Nuclear fusion. Do you think that scientists will ever be able to make that viable? Some people claim they will put fusion powered electricity onto the grid within a decade.

TH: Maybe one day. It would be complete game changer. Imagine an energy source that is carbon free, generates hardly any waste and is essentially limitless. These nuclear reactions give you about a million times per weight more energy than the chemical reactions of coal or gas.

JM: And nuclear fusion, in simple terms, involves recreating the process that powers the Sun yes?

TH: Yes basically. You use powerful magnets to hold a plasma of two hydrogen isotopes in place, and heat to high temperatures so that the atomic nuclei fuse, releasing energy. 

JM: So this is the famous tokamak machine invented by soviet scientists in the 1950s. It looks a bit like a donut.

TH: Yes that's the one. Homer Simpson would certainly approve of it.

JM: Undoubtedly! But he hasn’t been working on it, it’s been some of the world’s brightest scientists working on it for half a century. What makes it so difficult to do?

TH: Well these experiments are done at temperatures of over 100m degrees, so they are quite energy consumptive and the biggest challenge to making fusion commercial is how to sustain the reaction and prevent it from extinguishing.

JM: How long have they sustained the reaction for?

TH: The record for longest confinement at high temperatures, achieved by a Chinese reactor, is 17 minutes.

JM: Ok this sounds like it’s very far away from being commercial.

TH: Indeed. But after decades of experiments on Nuclear fusion, there has been quite a lot of progress. For instance, just over a year ago, there was a pretty big breakthrough at an American lab called NIF, that used a different fusion method instead of magnetic fields.

JM: I read about this. They fired the world’s largest laser at a fuel capsule the size of a peppercorn and managed to get the equivalent of 3 hand grenades of nuclear fusion energy. 

TH: Sounds like quite an experiment doesn’t it?! What caused the headlines was that they managed to get more fusion energy out, 3 MJ, than the laser energy they put in, 2MJ.

JM: Wow that’s quite result. Sounds too good to be true.

TH: Well yes it is too good to be true because that ignores the amount of electrical energy used to make the laser light, which was 400 Mega joules.

JM: Oh… that’s quite a long way from energy breakeven then.

TH: Yes a long way but science normally advances through a series of small breakthroughs so this was a step in the right direction. The biggest step towards commercial applications is probably ITER, this intergovernmental project that is building the largest tokamak ever in the south of France. But it is overbudget and is taking a lot longer to build than people thought, now expected 2035 rather than 2025 that was originally planned.

JM: I suppose you encounter quite a few engineering issues when you are right at the bleeding edge of technology. 

TH: Indeed. On the more optimistic side, the private sector has come to the party in the last decade saying they want to do this much faster than the big govt projects. As recently as 2010, there were only 10 private fusion companies, now there are over 4x that number all trying to either develop a new technology or create simpler designs that are more efficient.

JM: So the pace of innovation may improve in the coming decades. If it became commercially viable, the investment implications would be enormous wouldn’t they?

TH: Yeah they would. With a clean and cheap source of energy that was inexhaustible- well you could do almost anything! You could produce as much hydrogen fuel as you wanted. You could pull carbon from the atmosphere. You could desalinate as much water as you wanted.

JM: That would make irrigation very cheap. You could turn deserts green with crops!

TH: Yes that’s right. And on that cheery note of all our problems being solved one day. Why don’t we move on to the news. James what do you have for us this episode?

JM: Funnily enough a news story that caught my eye this month does indeed concern water shortages. It’s the famous Panama Canal- it’s running out of water.

TH: Really? How can it run out of water? Doesn’t it connect two oceans?

JM: It does indeed connect the Pacific and the Atlantic, but it does so via an artificial freshwater lake 26 meters above sea level. Every ship that traverses the canal has to go through a set of locks to move up to the lake and then back down on the other side. The lake is the source of the water for each lock and because the ships are huge, the volumes of water are huge. The lake is now running low on water, after the second driest year in the canal’s 110-year history. This has meant reducing the number of ships using the canal by a third.

TH: So this is another key global artery not operating at full efficiency, just as another one, the Suez Canal, is running at reduced capacity because of the attacks in the red sea?

JM: Exactly. A good rainy season could change the dynamic, but weather experts are also wary of what this year’s El Nino weather effect could mean. And El Nino aside, it is thought that lower level of the lake feeding the locks is itself probably a symptom of climate change. Meanwhile, in economic term, this spells more supply chain pressures and extra costs for the traded goods that would use the canal, ultimately feeding through to consumers.

TH: Definitely something to monitor. 

JM: And particularly so for Global Infusions listeners. You mentioned the Suez Canal not running at full capacity. Well, that has led to shortages of tea, with the likes of Tetley’s, Sainsbury’s and Yorkshire Tea reporting concern about its availability.

TH: Yes that is particularly concerning, but I have faith that our well-informed listeners have deep stores of tea in reserve just in case. 

JM: Yes I’m sure you’re right. And if not, this is a reminder to stock up.

TH: Where I’m more worried for our listeners is what accompanies their cups of tea. My first news story concerns an important ingredient for many of the best cakes, and one that can easily go past its best. Of course I’m referring to chocolate.

JM: Ah yes, I read that the cocoa has recently exceeded its 46-year peak price. Not the thing you want to read in the run-up to Easter!

TH: That’s right, at time of recording, cocoa bean futures are trading at over $6,700 a ton, that’s up over 160% in the last 12 months alone.

JM: What has caused the change in price?

TH: A perfect storm of short-term supply problems compounding existing long-term ones in west Africa. Two thirds of the world’s cocoa beans are produced in Ghana and the Ivory Coast. And the Pacific Ocean weather phenomenon of El Nino that you just mentioned has had knock-on effects further east. It’s brought unseasonably heavy rainfall followed by a dry heat. On top of that the region has been blighted by disease in the last year: one called swollen shoot virus and another called black pod disease. The result is that the global crop is 11% smaller than last year’s season.

JM: Gosh, you weren’t lying when you said it had been a perfect storm, quite literally. So what are the long-term structural issues?

TH: Basically, decades of underinvestment have finally caught up with growing chocolate demand. The last big wave of tree planting was in the early 2000s. But now the cocoa trees are old, you get lower yields and they are more susceptible to disease. The key thing to understand is that 90% of the world’s cocoa is produced by small holders, each owning less than two hectares of land, and they haven’t had the incomes to be able to reinvest because the price has been too low.

JM: So it’s a classic cycle of low prices leading to high prices through supply declines. But higher prices will in time bring on more supply.

TH: Unfortunately, the market won’t correct as fast as it should because the local markets in west Africa are tightly controlled by their governments who set official prices. The idea is to smooth out big price fluctuations for local farmers, but the reality is that they often get less on average than they should. And in this situation the farmers will miss on the current high prices.

JM: That doesn’t sound promising for anyone, except perhaps South American producers. I will savour my chocolate easter egg in a couple of weeks’ time knowing prices are likely to be dearer in the future.

TH: Yes more expensive and smaller sizes. Shrinkflation is the classic way the likes of Mondalez will try to protect their profits.

JM: Ok, next up from me is the sad news of the death of Lord Jacob Rothschild, aged 87. With the surname Rothschild, he was perhaps unsurprisingly able to start his career at the family bank NM Rothschild. But he ultimately struck out on his own, establishing RIT – Rothschild Investment Trust – in 1980. It is today one of the largest investment trusts and has produced strong long-term results for its band of many loyal, long standing private client investors. Lord Rothschild was also early to spot and back emerging talent in other fund management businesses. Along the way he was even involved in the attempted takeover of BAT, and co-founded St James’s Place, now a FTSE100 financial services group.

TH: He was also a leading figure in the arts world?

JM: He was. He chaired London’s National Gallery and the National Lottery Heritage Fund, and was closely involved with the Courtauld Institute of Art. At the family property of Waddeston Manor in Buckinghamshire, he has many interesting commissions to add to the estate’s extraordinary collection – a new house in the grounds won the presitgious RIBA House of the Year award in 2015, and in the grounds of the main property is a sculpture of two huge candlesticks, each made from empty bottles of Chateau Lafite Rothschild.

TH: Sounds like a remarkable legacy!

JM: Yes, he has left a lasting legacy in both the worlds of both business and the arts. oh and I almost forgot – he oversaw the restoration of Spencer House in St James in London. Once the seat of the Spencer family the former princess of Wales Diana – it is now back to former 18th century glory. I attended the RIT AGM there last year – a very special place for a corporate AGM.

TH: Yes, very special. Next up from me is a quick follow-up to our last podcast on weight-loss. It’s a fast-evolving area so I guess it’s unsurprising there is already news. Last week, Novo Nordisk announced promising initial results for its next generation obesity treatment, a drug called Amycretin. 

JM: What makes it different to its existing drug Wegovy?
 
TH: Firstly, it stimulates two gut hormones, not one. And secondly, it's an oral drug rather than an injection.

JM: Widespread adoption is far more likely in that case. A pill is always going to be more popular than an injection. How effective is it?

TH: 13% weight loss in just 12 weeks, which isn’t too far off Wegovy at all. And while this isn’t the only oral treatment that they are developing, this is the first pill that might be competitive with injectable medicines. But bear in mind it was a very small study so one shouldn’t get too carried away at this stage.
 
JM: But it still sounds like a positive development and at the very least it’s a signal that suggests Novo Nordisk may be able to maintain their lead in this nascent market.

TH: Agreed. And on that note, Thank you for listening to Global Infusions – a podcast that believes that the best discussions are had over tea and cake (If you can still buy it that is). We hope you've enjoyed your cuppa and our thoughts on nuclear energy. Please do subscribe through Apple or Spotify and with that we wish you goodbye!

JM: Goodbye!