China's rise as an economic superpower has been a major investing theme over the last decade. Whether discussing the growth prospects for manufacturers of water heaters or smartphones, the world's most populous country represents untapped potential that cannot be ignored. And the same can be said for the nation's energy consumption.
The International Energy Agency predicts that China's energy consumption, already at the top of the global leaderboard, will more than double between now and 2040. While growth is expected from nearly every energy source, many investors have focused on the country's investments in nuclear power as the key to its energy future. After all, atomic energy is largely seen as a direct replacement for dirtier coal, and could help to alleviate air pollution concerns.
However, the home-grown nature of China's nuclear industry and poor market fundamentals for uranium result in very few opportunities for individual investors. That's why those looking to cash in on rising energy demand in the market should focus on companies cashing in on liquefied natural gas (LNG) instead of nuclear power. Here are a few stocks you should consider.
Why China's nuclear growth is difficult to invest in
On paper, the expansion of atomic energy in China appears to be an incredible opportunity. The country has 38 nuclear reactors in operation today and 20 under construction according to the World Nuclear Association. That represents 35% of all reactors under construction globally. When all reactors are online the nation will own some 88 gigawatts of nuclear power capacity.
It's exactly the catalyst many investors have been looking for to boost the prospects of the world's largest publicly traded uranium miner, Cameco (CCJ -2.12%), which has been reeling from greatly reduced uranium demand following reactor closures in Japan, the United States, and Germany. The company's shares are down 34% in the last three years despite efforts designed to lower operating costs and wait out the storm, such as closing major mines and reducing output at others.
Unfortunately, China's nuclear growth may skip over Cameco. That's because the country is sourcing most of its uranium supply from Kazakhstan, the world's leading supplier. Kazakhstan has a long history of oversupplying the market, and with all of its increased future production going straight to China, there may not be much upward pressure on global selling prices.
That puts investors in a tough spot. Aside from Cameco, there aren't really any reputable stocks allowing investors to tap into the global uranium or nuclear industries, and certainly not China's atomic energy growth. The country is developing its own reactors and nuclear power infrastructure supply chains, which it then expects to export globally.
Long story short, there's just not a great entry point for individual investors in this much-discussed trend. That's why investors should instead turn their focus to China's LNG imports instead.
LNG presents better opportunities for investors
Most analysts predicted eye-popping growth for global LNG in recent years as new production capacity came online, but reality has trumped even the most bullish projections. In 2017 global LNG trade outpaced projections by 26%. The main catalyst: Chinese imports, which came in just shy of 40 million metric tons (mtpa) last year. That compares to just 10 mtpa in 2010 and 20 mtpa in 2015.
To be fair, some of the incredible increase was driven by an unusually cold winter in the country's north, which hints that investors shouldn't necessarily expect a repeat in 2018. But gas demand in China has grown every year this century. And until the country's own shale gas production can begin contributing in meaningful volumes, China will continue to rely heavily on LNG imports, which accounted for over 20% of total gas consumption last year.
That's good news for investors, who will find no shortage of opportunities in the country's growing appetite for LNG, unlike China's ambitious plans for nuclear power.
Some of the largest energy companies in the world have invested heavily in LNG, which is expected to be one of the fastest growing energy sources over the next several decades. Royal Dutch Shell (RDS.A) (RDS.B), which began commercializing LNG in the 1960s, is well positioned, with major projects dotted across the globe. That includes Australia, the world's second-largest LNG exporter, which is also among the closest major LNG sources to the coveted Asian market. If projects there can keep costs low, then it's a no-brainer supply for Asian countries.
Royal Dutch Shell is nearing the start of its majority-owned Prelude project, which is a floating LNG project located about 125 miles off the coast of Australia. At full tilt Prelude will produce about 3.6 mtpa of LNG, which could supply all of Hong Kong's annual natural gas demand. That's relatively small for a liquefaction facility, but the company's total global liquefaction capacity totaled an impressive 30.9 mpta at the end of 2016. Every little bit helps.
The oil supermajor also operates over 90 LNG carriers, representing about 20% of the global fleet. Simply put, investors looking to own a piece of the booming LNG market can't go wrong with Royal Dutch Shell.
Buying its way to the top
Already a leading LNG market force, Total SA (TTE -2.80%) recently made a splash by agreeing to acquire LNG upstart Engie. The move will make the French energy giant the world's second-leading LNG company ranked by expected 2020 capacity. It also included an equity stake in the Cameron LNG facility on the American Gulf Coast, which will sport a total capacity of 15 mtpa with its first three trains. The site could support further expansions to 25 mtpa. There's also an equity stake in Driftwood LNG, which is earlier in development, but could eventually export over 27 mtpa after beginning operations in 2023.
Assuming the acquisition closes, it will play a large role in Total's long-term global LNG strategy. It should also treat shareholders pretty well: integrated LNG operations are expected to deliver $3 billion in operating cash flow by 2020. That's supported by liquefaction capacity sprinkled across the globe, from the United States to the West Coast of Africa to Australia to the Persian Gulf.
America's undisputed LNG champ
The early leader in American LNG is Cheniere Energy (LNG -0.53%), which could own over half of the country's 9.5 billion cubic feet per day of export capacity by the end of the decade. Suffice to say, it should remain king along the Gulf Coast for the foreseeable future.
As a leading global exporter of LNG, it was only a matter of time before Cheniere Energy cozied up to the Chinese market. In early February 2018 it did just that by announcing a long-term supply agreement with China National Petroleum Corporation. The deal calls for shipping 1.2 mtpa to China from 2023 to 2043 from the company's currently operating Sabine Pass facility, and later from its Corpus Christi liquefaction plant, which is still under construction. Shipments will begin this year.
The deal underscores the predictability in Cheniere Energy's business model, which relies on having the great majority of its export capacity committed in long-term supply agreements at mostly fixed prices. That will be sorely needed to pay down its giant debt load (LNG terminals are incredibly expensive to build), but with a time horizon spanning decades, that is unlikely to be a major problem for shareholders.
LNG is the real opportunity in China's energy growth
Despite all of the discussion surrounding China's nuclear ambitions and how the nation's investments in atomic power could lead to the long-awaited nuclear renaissance, the opportunity is unlikely to trickle down to individual investors. Luckily, China's LNG imports are growing even more quickly than its nuclear capacity as the country seeks to replace coal-fired industrial energy consumption and meet growing demand for residential heating. Throw in a dearth of investing opportunities in atomic energy, and it's easy to make the case that investors eager to cash in on China's long-term energy growth should turn their attention to the supercooled gas instead.