Indexing the nuclear renaissance

The profit potential of the global nuclear industry is closely tracked by several financial services

The growth of nuclear energy over the next two-and-half decades will vastly shift energy use from carbon-based to carbon-free uses.  The key elements of this shift include significant change from fossil fuel sources for electricity generation to uranium for nuclear reactors.  It follows there will be greater use of electricity in industrial processing and heating.  Another aspect of the shift in energy use will be to use nuclear energy instead of natural gas for water desalinization.  especially in arid countries or those with high population growth and parallel pollution problems.  The transportation sector, which accounts for much of today's use of oil, will benefit with high speed electrified rail service for people and freight.  The growth of global markets for electric cars will depend more on battery technologies than electricity supply.

According to the World Nuclear Association, worldwide nuclear energy is expected to grow in substantially in 10 key countries by 2030. The World Nuclear Association outlook data [summary table below] for a conservative scenario indicates ten countries account for more than 116 GWE or four-fifths of the predicted growth in nuclear energy.  Another 43 GWe not reflected in this table are expected to be developed by 2030 in countries that don't have reactors now.   

Three nuclear energy indexes track company and industry performance

The question asked by anyone looking at this scenario is how soon can investors make a profit from new reactors?  To answer this question, three organizations are tracking various sectors of the global nuclear industry and the financial performance of the top firms in each sector.  [spreadsheet] Each of these indexes has its own methodology for selecting firms and tracking their performance.  Check the PDF file links for details.  The PDF file links in the text below are basic explanations of the indexes and do not reflect the exact composition of each index as of March 2010.
 

·       The S&P Global Nuclear Energy Index (Standard & Poor's) (PDF file) includes 24 of the largest publically-traded companies in the nuclear energy business. Each firm in the index must meet various financial tests in terms of attractiveness to investors, including market capitalization and liquidity (ability to sell your shares).  This index uses only two industry sectors: (1) nuclear materials, equipment, and services; and, (2) nuclear energy production. 

·       The DAXglobal Nuclear Energy Index (Deutsche Bourse Group) (PDF file) has the objective of measuring the performance of the biggest and most liquid nuclear energy companies in the world.  Of the six industry sectors it follows, four are related to the front-end of the nuclear fuel cycle, starting with uranium mining.  The other two are builders of nuclear power plants and suppliers of nuclear plant equipment.

·       The WNA Nuclear Energy Index (World Nuclear Association) (PDF file) is like the other two indexes in that it is global in its reach.  However, it has a more diversified scope in terms of industry sectors with more than 60 firms tracked by the index.   Companies selected to be included in each sector must pass certain financial tests with a focus on the percent of revenue derived from nuclear energy activities.  The five sectors are: (1) reactor designs, (2) construction , (3) nuclear fuel, (4) services, and (5) power generation.

Concentration of coverage

Of the three indexes, the S&P Index has the most concentration in terms of companies.  The top 10 firms in the index of 24 firms account for 68% of the coverage.  The index is lessdiversified than the others because of its division of the global industry into just two sectors.  In the past it was heavily weighted towards the front end of the nuclear fuel cycle, but now has a somewhat broader mix of suppliers and nuclear electric utilities.

The DAX Index also concentrates its coverage in the top 10 firms which also account for about 68% of the total coverage. However, unlike the S&P Index, the DAX Index is more diversified in the top 10 firms (68% of the index) with two reactor manufacturing firms and four electricity generation utilities. 

The WNA Index is the most diversified of the three indexes with the top ten firms accounting for just 37% of the total coverage.  It includes two equipment suppliers in the top ten.

Coverage by country is less revealing, but interesting  just the same. The United States, which has some of the most vocal anti-nuclear organizations among the countries in the three indexes, also has the most firms (10) represented, and the most companies among all three.  Japan is second with seven firms, and Canada is third with four uranium mining companies. 

Performance of the Indexes

In addition to specific methods for selecting firms, each index uses its own measurement system.  Below are image snapshots of the past 12 months as of March 15, 2010.  [Source: Index web sites]

* World Nuclear Association

This index shows considerable gains in the past year. The index is valued in U.S. dollars. It was reported on March 12, 2010, to be at $2,681 against a 52-week range of $1,757 (low) to the current price.  As the most diversified of the three indexes, it is least vulnerable to global financial swings.  It shows steady growth over the past year indicating a recovery from the Fall 2008 global financial crisis.

* DAXglobal Nuclear Energy Index

This index is denominated in Euros. After a rapid rise in March 2009, it has wobbled in a narrow range of 105-to115 Euros.  The portfolio of the DAX Index has roughly the same concentration the S&P Index in terms of the top ten firms. 

* S&P Global Nuclear Index Five Year Trend

With the most accessible five-year data, this index shows the impact of the global recession on the nuclear industry in Fall 2008 and modest recovery in 2009.  This chart is current for March 2010 although the legend at the bottom ends in December 2009. The index data points are at six month intervals.

Changes to portfolios over time

All three indexes are constantly analyzing company performance and market data. The companies in the top ten, or in the total index, will change over time.  For instance, last December the WNA Nuclear Energy Index added three new companies and deleted two others.  Significantly, all three of the new companies have interests related to the development of nuclear energy in the United Arab Emirates (UAE). They are Korea Power Engineering, Korea Electric Power, and Lightbridge (NASDAQ:LTBR), which is a consultant rather than a direct provider of components or materials.  In December 2009 the UAE awarded a $20 billion contract for 5 GWe of new nuclear reactors to a South Korean consortium.

Use of the Indexes

Investors use the indexes for several main purposes. The reason is a  decision by an Index to include a firm in its listings is a confidence building signal to investors about position (sales, revenue, profits, growth) of the firm in its sector and in the global nuclear industry.  Second, other large investment funds may look at the index for information on which firms to include in their portfolios. 

There are numerous Exchange-Traded-Funds (ETFs) that rely on these indexes and some even mirror them in whole or part.  Bloomberg notes the following about EFTs.

"ETFs are popular among institutional investors to make rapid and large bets on sectors such as oil, gold, waste-management and semiconductors. They also use ETFs to hedge their bets on stocks, bonds, commodities and other securities. In 2007, managers introduced ETFs for use in retirement accounts such as 401(k) plans, as well as life- cycle ETFs, which invest more conservatively as investors near retirement. For individual investors, ETFs offer a wider selection of indexes than mutual funds."

However, one conclusion that can be drawn from the data as of mid-March 2010 is that all three indexes show growth by company and for the top ten countries in the global nuclear industry. 

This blog will now start tracking  the indexes and publish regular updates as they become available.   

Disclaimer: This blog does not include recommendations to invest in EFTs nor a recommendation to use any of the nuclear industry indexes for investment decisions.  See your financial professional for advice.

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Idaho Samizdat is a blog about the political and economic aspects of nuclear energy and nonproliferation issues.  It covers the nuclear energy industry globally.  Additionally, the blog has regional coverage on uranium mining in the western U.S. and Canada.