Thursday, March 31, 2011

The Nuclear Saga Continues

After 3 weeks of intense battling with the nuclear reactors, our heros at Fukushima aren't really winning. In fact the situation is going from bad to worse. Radioactive substance is found in almost 100 different types of food, seawater is contaminated, tap water in Tokyo cannot be drunk, the area around Fukushima would probably be unlivable for the next 20 to 30 years.

The final outcome might be similar to Chernobyl, ie pouring a few hundred thousand tonnes of concrete to entomb the reactors. Even that is just a temporary fix. Ukraine now needs financing for a permanent structure to seal Chernobyl and has difficulty getting it.

The key company in question, Tokyo Electric Power or Tepco, meanwhile fell 80% over the last 3 weeks and it looks like it's going to zero. The reasons: cleanup, decommission, compensation costs is likely to wipe out its entire equity. Even bondholders might need to bear the brunt.

Tepco is also a sad case of becoming a political sacrificial lamb. Its public track record has been dismal. The co was run by ex-bureaucrats "descending from heaven", who are there to enjoy retirement rather than to run a company. Experts warned the company about inadequate measures, both Fukushima and also another nuclear plant that was affected in the past, but were brushed aside. And of course, the most unforgivable mistake: mis-reporting the radiation levels! Man, wake up your idea!

So while the earthquake, theoretically speaking, was a natural disaster and hence Tepco should not be asked to pay for compensation to the farmers and the fishermen, the Japanese govt would likely let it shoulder the bulk of the cost. Not to mention, the govt itself is really tight on budget. It cut the child allowance to raise money for the handling this disaster. Sorry kids, no milk for you until you are 18, and we have to send you to study in University of Heidelberg, where education is free.

But even without the compensation costs, the other big ticket stuff like decommission of the plants, replacement fuel cost and other nitty gritty are likely to put a huge dent into the equity. Assuming the market is correct, these should add up to like USD 20 plus billion, roughly equivalent to the fall in value of its market cap.

For the retail shareholders who held this stock for its dividend, tough luck. Suddenly, almost the entire capital is gone! I guess this truly highlights the risk of equity investing, or rather, any kind of investing. Things can go really, REALLY wrong! Hence it's always prudent to just put money you can afford to lose.

The bigger lesson: diversify. Make some kind of rule, like never put more than x% of your net worth into one investment or something. While it will be difficult to hit the jackpot, at least, if something like Tepco happens, the kids still can have their milk or go to a school of their choice.

With the nuclear story going down the chute, the smart money is pouring into LNG, oil and coal. This is the sad outcome: the world will become a hotter place. Well if we get to tap on more of LNG, it's not so bad bcos it's still the less carbon intensive among the three.

But LNG requires huge infrastructure: the gas pipes, the LNG tankers, the terminals to store them, liquification and gasification equipment etc. It would take some time for Asia and some of the emerging countries to build this up. Meanwhile the LNG stocks have gone to the moon in recent days. Check out Woodside Petroleum of Australia.

I guess in time to come, the world would realize that it still needs nuclear energy. Nothing is as cheap, reliable and scalable in a big way. Hopefully we won't have to wait 25 years after Fukushima. Or we would be wearing a lot more dry-tech T-shirts and using a lot more Ice-Type face wipes!

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