EDF’s real problem is Flamanville not Hinkley Point
The cloud of doubt around EDF’s long-planned new nuclear plant at Hinkley Point in Somerset continues to grow.
The final investment decision has been delayed yet again. The start up date has been put back to 2026 – nine years behind the original schedule. A new contingency, amounting to £2.7bn, has been added to the cost of the project.
Now, in a remarkably frank interview the French energy minister, Segolene Royal has said that the company may have been “carried away” by its enthusiasm for the project and has joined the chorus of internal staff and engineers in warning of the risks to EDF’s finances from going ahead. But although Hinkley inevitably gets all the attention in the British press, EDF’s real problem is to be found in the half constructed plant at Flamanville on the Cotentin Peninsula on the other side of the English Channel.
The prototype development of the European Pressurised Reactor (EPR) at Flamanville began in 2007 and should have been operational by the end of 2012. In 2009, EDF in the UK told the British government that the experience of building Flamanville would be invaluable in reducing costs at Hinkley. It has not quite turned out that way. The Flamanville project is six years behind schedule and € 7bn over budget. The most recent problem has been the identification of weakness in the steel which makes up the reactor vessel. That weakness is now being investigated by the French regulatory authorities and it was quietly announced a few weeks ago that those tests were being extended by the French nuclear regulator the Autorite de Surete Nucleaire on the advice of its permanent group of experts.
The scale of the risks to EDF if those tests identify a serious problem is hard to exaggerate. Building work has continued around the reactor core despite the uncertainties. If the concerns prove to be serious the whole structure at Flamanville will have to be dismantled and work will have to start again. The costs would be overwhelming and would be compounded by the inevitable loss of confidence in all the other prospective EPR projects. That includes Hinkley but also extends to EDF’s aspirations in the Middle East and its ambitions in China. Two new plants under construction at Taishan are using the same reactor vessels. One can only imagine the reaction of the Chinese to the news.
If anything the situation in France is even more serious. France gets 75 per cent of its electricity from nuclear power but the existing stations are ageing and need renewal over the next two decades. EDF’s hope had been to use the EPR technology to build a set of large scale reactors to supply France through the remainder of the 21st century. If the EPR reactors can’t be made to work the identification and subsequent approval process for a replacement will take time and will open the door to alternative sources of energy supply including gas and renewables. The status of France as one of the world’s leading civil nuclear powers would be undermined.
The state of the reactor vessel is just the latest in a long series of difficulties encountered during the construction process at Flamanville. The doubts now being expressed about further investments in EPR projects such as Hinkley by the company’s own engineers and trades unions are not based on any ideological opposition to nuclear power – quite the reverse. Their concern is that the company, which is hardly in great financial shape after the forced merger with Areva, is taking a vast financial risk in proceeding with another EPR reactor project when the first such project is in deep trouble. They and Ms Royal are right to be worried. The company could hardly go out of existence – someone has to supply power to French consumers and businesses – but it might have to be broken up with a separate entity created to manage down the liabilities of its bad assets.
In these circumstances it would be impossible to refinance the company by selling stakes to Chinese or Gulf investors. The Chinese government in particular may well feel it has not been told the whole truth. That would leave EDF completely reliant on funding from the already hard pressed French state. What is clear is that if the news from Flamanville is bad EDF will not be investing billions of euros in Hinkley Point anytime soon.
To its credit the UK government is preparing a plan B, while continuing to claim that Hinkley will still go ahead. Mr Osborne wanted Hinkley but he is the ultimate realist. The gap in power supplies in the mid 20s is a challenge but it can be dealt with pragmatically. The lights will not go out.
The real problem for EDF is the corrosive loss of confidence in its technical capability. For the sake of its minority shareholders, who have seen their shares fall in value by almost two thirds over the last three years, as well as its prospective customers around the world EDF should now publish in full all the studies which have been undertaken on what has gone wrong at Flamanville.
A totally independent review is now essential. I assume that both the UK’s nuclear regulators, the NII, and Stephen Heidari-Robinson the Prime Minister’s powerful new policy adviser on energy issues have asked for all the relevant documents. But it is not clear if they, or indeed French ministers, have been given everything. Or even for that matter the leadership of EDF in the UK including the expensive team of project managers assembled to build Hinkley. The French trades unions and the engineering specialists with their deep roots in the company probably know more than anyone else. EDF should publish everything. Reputations can only be built through openness and transparency. If they won’t publish, we have to assume that they have something to hide.
Hinkley Point C: French energy minister questions future of EDF’s UK nuclear project over ‘colossal’ cost; Russia eyes entry to UK nuclear market
The influential French energy minister Segolene Royal has questioned whether state-controlled energy group EDF ought to proceed with its GBP 18bn (USD 26bn) Hinkley Point C nuclear-power plant in the UK, the Financial Times reported. Royal said the “colossal” sums involved lead her to question the long-delayed project’s effect on EDF’s balance sheet and to ask whether it ought to go ahead at all.
She added that she did not believe France’s nuclear sector would suffer as a result of withdrawing from Hinkley Point, although she conceded it could prove damaging to the government’s reputation, the item reported.
EDF, which is 85% owned by the French government, is building Hinkley Point with China-based partner CGN, the report noted. A final investment decision from France on the project is expected later this year, possibly in September, the report said.
No other French ministers have publicly expressed their scepticism about Hinkley Point, with some actively in favour, the item noted.
Meanwhile, The Guardian reported that in the event EDF’s current plans for Hinkley Point collapse, the Russian state-controlled nuclear company Rosatom might team up with France, and possibly a UK-based group such as Rolls-Royce, to enter the British nuclear sector with a reactor designed in Russia. According to Moscow-based sources cited in the report, Rosatom has recently held discussions with the Nuclear Decommissioning Authority in London regarding the disposal of uranium from decommissioned reactors. The Russian company is believed to be hoping to expand this and revisit earlier proposals for the construction of reactors in the UK, the report said, quoting a senior Russian source from the nuclear sector. The source described a deal as “doable” from a technical point of view but with a “tiny” prospect of actually happening.
The Nuclear Decommissioning Authority confirmed discussions had taken place with Rosatom, the report said. A spokesperson for the Department of Energy and Climate Change (DECC) strongly denied any plans are under consideration which might involve UK nuclear reactors being built by Russia, the item reported. The senior Russian source said Rosatom officials in London are in touch with DECC contacts, the report stated.
Financial Times, The Guardian
Closing Market Summary: Averages End Week Lower as Retailers WeighThe stock market ended a downbeat week on a lower note as equities pulled back following continued weakness from the retail sub-group. Additional focal points included the S&P 500 (-0.9%) breaching technical support at its 50-day simple moving average (2054.74), mounting selling pressure from the oil pit, a leg higher in the dollar, and weakness from the heavyweight financial (-1.3%), industrial (-1.2%), and consumer discretionary (-1.2%) sectors. The Dow Jones Industrial Averages (-1.1%) finished behind the S&P 500 (-0.9%) and the tech-heavy Nasdaq (-0.4%).
The major averages opened on a mixed note as investors weighed a positive reading of April Retail Sales (+1.3%; Briefing.com consensus +0.8%) against continued weakness in the retail space. Reports from Nordstrom (JWN 39.16, -6.07) and Dillard's (DDS 59.86, -0.78) capped off a bad week for the group as both offered below-consensus results for their quarters.
Equities were unable to find their bearings as a persistent downturn in crude oil and strength in the dollar kept pressure on the broader market. The S&P 500 (-0.9%) tested and defended support near its 50-day simple moving average (2054.74) in the late morning, but was unable to do so again when retesting that level in the early afternoon.
The major averages ebbed lower through the afternoon as heavily-weighted financials (-1.3%), industrials (-1.2%), and consumer discretionary (-1.2%) extended their losses to round out the leaderboard. For its part, WTI crude ended its week on a down note ($46.22/bbl; -0.9%), but still finished with a gain of 3.7% since last Friday's settlement at $44.59/bbl.
In the industrial sector (-1.2%), rail names ended with larger losses as Norfolk Southern (NSC 85.97, -2.21) and Kansas City Southern (KSU 87.97, -2.21) finished the day lower by 2.5% apiece. The industrial group showed broad-based weakness as construction machinery names and aerospace and defense names all ended with meaningful losses. Furthermore, the Dow Jones Transportation Average (-1.2%) erased its 2016 gain and is now flat for the year.
The financial sector (-1.3%) saw weakness in money center banks and real estate investment trusts (REITs). The largest losses among REITs came from those with primary holdings in retail properties. The names moved lower during the week as they traded lower with the SPDR S&P Retail ETF (XRT 41.04, -0.57). Simon Properties (SPG 196.49, -5.95) and General Growth (GGP 27.67, -0.46) extended their weekly declines to 6.8% and 5.9%, respectively.
Retail names continued to underperform in the consumer discretionary space (-1.2%). Nordstrom (JWN 39.16, -6.07) ended its day lower by 13.4%, finishing the week down 18.5%. Elsewhere, Macy's (M 31.22, +0.01) and Kohl's (KSS 35.74, +0.59) outperformed.
Conversely, health care (-0.2%) and technology (-0.3%) finished the day with the slimmest losses. In the health care space (-0.2%) biotechnology showed relative strength, evidenced by the 0.9% gain in the iShares Nasdaq Biotechnology ETF (IBB 253.90, +2.17).
Treasuries ended on a mixed note with the 10-yr note ending near its best level of the session. The yield on the 10-yr note slipped five basis points to 1.70%.
Volume was heavier than average with 854 million shares trading at the NYSE. The advance-decline line favored decliners at the NYSE by a 2-to-1 margin.
Today's economic data included Core PPI for April, Retail Sales for April, March Business Inventories, and the preliminary reading of the University of Michigan Consumer Sentiment Survey for May:
- The index for final demand was up 0.2% (consensus +0.3%), driven by a 0.1% increase in the index for final demand services and a 0.2% increase in the index for final demand goods.
- The Producer Price Index for April didn't upset the inflation apple cart.
- The index for final demand, excluding food and energy, was up 0.1% as expected.
- On an unadjusted basis, the final demand index was unchanged for the 12 months ended in April after being down 0.1% in March.
- Excluding food and energy, the final demand index was up 0.9% versus up 1.0% in March.
- The April Retail Sales report was much better than expected. Total retail sales increased 1.3% month-over-month (consensus +0.8%).
- That gain was fueled by a 3.2% increase in auto sales, a 2.2% jump in gasoline station sales, and a 2.1% uptick in sales at nonstore retailers.
- Excluding autos, retail sales increased 0.8% (consensus +0.5%) on top of an upwardly revised 0.4% increase (from +0.2%) in March.
- The retail sales gains in April were fairly broad-based. The only decline seen was in building material, garden equipment, and supplies dealers (-1.0%), which might have been impacted from the unseasonably cool spring temperatures. General merchandise store sales were flat, yet department store sales were reportedly up 0.3%.
- This is a good report that will feed favorably into Q2 GDP forecasts based on the recognition that core retail sales, which exclude auto, gas, building material, and food services sales, increased 0.9%.
- These sales factor into the computation of the goods component for personal consumption expenditures.
- Total business inventories increased 0.4% in March (consensus +0.2%) after an unrevised 0.1% decline in February.
- Manufacturers' inventories (+0.2%) and wholesaler inventories (+0.1%) were already known.
- Retailer inventories were the only unknown and they increased 1.0% on the heels of a 0.7% increase in February.
- The biggest driver of the increase in retailer inventories was a 2.3% increase in motor vehicle and parts dealers inventories.
- The only retail category seeing an inventory decline in March was food and beverage stores (-0.8%).
- The total business inventory-to-sales ratio was 1.41 in March, which was unchanged from February but up from 1.37 in March 2015.
- The University of Michigan's Preliminary Consumer Sentiment report for May brought some good news to the market as the index spiked to 95.8 from the final reading of 89.0 in April.
- The consensus estimate was pegged at 90.0.
- The uptick was attributed largely to an improved outlook among consumers due to more frequent income gains, a better jobs outlook, and the expectation of lower inflation and interest rates.
- Those views were reflected in the Expectations Index, which surged to 87.5 from 77.6 in April.
- The Current Economic Conditions Index also improved, rising more modestly to 108.6 from 106.7.
- In the same period a year ago, the Index of Consumer Sentiment stood at 90.7.
- May marked the first time in four months that there was an increase in consumer sentiment.
Monday's economic data will be limited to Empire Manufacturing for May (consensus 6.2) and the May NAHB Housing Market Index (consensus 59), which will be released at 8:30 ET at 10:00 ET, respectively. Separately, March Net Long-Term TIC Flows will be released at 16:00 ET.
- Nasdaq Composite -5.8% YTD
- Russell 2000 -2.9% YTD
- S&P 500 +0.1% YTD
- Dow Jones +0.6% YTD
Investors lose nerve as Value rally falters: 5 signs
SIGN 1) There was $10bn of net selling of Europe ex-UK ETFs since end January. SIGN
2) US investors have been persistent sellers YTD. Having piled into European ETFs after
the first QE (15), the reaction this time was to sell (Fig 9). This offloading of 'Europe'
has pushed the Europe vs US 'sector adjusted' P/Book gap to a new paradigm (Fig 14).
Where has some of the Equity ETF money been going? European Credit saw inflows of
close to €6bn over the same period. For IG and HY it was c. €4bn and €2bn
Value & Cyclical rally hits Reverse. Value gap back up near tech bubble highs
SIGN 3) Value rally wanes: from 11 Feb to 28 April 'cheap' beat 'expensive' by 8.5%.
Today that beat has halved to 4.4% (Fig 4). The valuation STRETCH within sectors has
shrunk only 5% since 11th February (having fallen by c. 20%, Fig 16). It is rare for it to
revert back so quickly. SIGN 4) Net selling of Cyclicals: there was material net buying of
Construction & Leisure and some nibbling on Banks (& Italy). But, 9 cyclical/commodity
sectors saw net selling led by: Tech, Chemicals, General Retail & Media.
Hedge funds lose faith: net leverage falls – again – to all time crisis low
SIGN 5). In our last/11th February Flow-watch, hedge fund net leverage fell to 2009
lows and looked ripe for a bounce back. It started to, but reversed its path and today it
has fallen further, to below 2009 levels (of 27%) to a mere 23%, something akin to
the all-time lows seen at the peak of the euro crisis, Figure 60.
What's bugging investors? Global aversion, European politics & absent profits
We updated our Global Risk Aversion Indicator – it is still near early 2016 highs (Fig 3).
Plus investment in US mutual funds look confused. Not only were equities and bonds
recently positively correlated, but purchases of both have hit zero – a first in the chart's
20-year history. For Europe: the UK referendum (23 June) and its potential impact on
Spain's election (26 June) are factors likely to affect moods. Plus profits have worsened
over the past quarter and are back to levels seen 10 years ago. Not a lot to sink your
teeth into, unless UK and Spain pass uneventfully & profits perk up