Downfall of Tepco May Hurt Nuclear Sales at Toshiba, Hitachi

Toshiba Corp. (6502) and Hitachi Corp. may struggle to find buyers for their nuclear reactors after the worst atomic disaster since Chernobyl damaged Japan’s reputation for safety, analysts and investors said.

While operator Tokyo Electric Power Co. is responsible for the Fukushima Dai-Ichi plant accident, the reactor makers will find it harder to win contracts since they typically bid with the utility, said Yuuki Sakurai, president at Fukoku Capital Management Inc. in Tokyo, whose $8.6 billion under management includes shares of Toshiba and Hitachi.

“Any plans to export all-Japan nuclear reactor projects will be delayed,” said Takeo Miyamoto, a Tokyo-based analyst at Deutsche Bank AG. “Improving the safety of the type of reactors involved in the Fukushima accident will take time and Tepco’s crisis management methods are being questioned.”

The record earthquake and tsunami that struck Japan on March 11 led to blasts and radiation leaks at the plant and caused shares of Hitachi and Toshiba, which built the reactors, to plunge the most in two years. The disaster will likely be a boon for Paris-based Areva SA (CEI) and Dongfang Electric Corp. of Chengdu, China, racing to build sturdier facilities, said Martin Prozesky, a London-based analyst at Sanford Bernstein.

Toshiba, which helped construct four of the six reactors at Fukushima Dai-Ichi, has dropped 17 percent in Tokyo trading since the earthquake. Hitachi, which built reactor No. 4 on the site, has lost 12 percent, and Tokyo Electric, known as Tepco, has plunged 78 percent.

Four Decades

The Fukushima plant, built four decades ago when Japan’s first wave of nuclear construction began, had its power and back-up generators knocked out by the tsunami that followed the magnitude-9 earthquake. A lack of power to cool the reactor led to explosions and radiation leaks and forced the evacuation of more than 177,000 residents within 20 kilometers of the site.

“The myth of Japan’s nuclear safety is dying,” said Yuichi Ishida, an analyst at Mizuho Investors Securities Co. in Tokyo. “Until now, Japanese reactor makers had a track record free of serious accidents.”

Before the Fukushima crisis, Japan’s most serious accident was a Level-4 radiation leak at Tokaimura in Ibaraki prefecture in 1999. The International Atomic Energy Agency describes Level 4 as an “accident with local consequences” involving “a minor release of radioactive material.”

The Fukushima disaster is rated 5, severity assigned to the Three Mile Island accident near Harrisburg, Pennsylvania, in 1979. The world’s worst nuclear accident on record was the level 7 disaster at Chernobyl, Ukraine, in 1986.

Toshiba plans to win orders for 39 units by 2015, the company, Japan’s largest supplier of reactors, said in December. Hitachi said in June it plans to get at least 38 new power plant contracts by 2030 and a third of global market share.

‘A Lot Longer’

“Both companies will take a lot longer to reach those targets,” said Yoshiharu Izumi, an analyst at JPMorgan Chase & Co. (JPM) in Tokyo.

Toshiba’s expectation for its nuclear business was underscored by its $4.16 billion acquisition of Westinghouse Electric Co. in October 2006. At the time, the company earned about 200 billion yen a year from its nuclear construction, maintenance and fuel business. Toshiba projected in May that the amount would surge to 1 trillion yen by 2015.

Annual sales at Toshiba’s nuclear business, mostly from plant maintenance, total about 650 billion yen, or 10 percent of its overall revenue, Izumi estimates.

Hitachi’s Business

Nuclear-related operations made up 2.3 percent of Hitachi’s revenue in the year ended March 2010. More than half of nuclear sales come from maintenance services, Izumi said. Hitachi said in June that it expects nuclear sales to surge 81 percent to 380 billion yen by the year ending March 2021, helped by overseas operations with partner General Electric Co. (GE)

Hitachi said it has no ongoing or pending overseas nuclear projects. It only produces the so-called Boiling Water Reactors used at Fukushima. Pressurized Water Reactors dominate new construction, with 55 of the 65 power plants under construction globally using the technology, according to the IAEA.

“We are currently putting all of our energies into cooperating with Tepco on containing the situation,” said Yuichi Izumisawa, a Hitachi spokesman in Tokyo, declining to comment on the outlook. Hiroki Yamazaki, a Toshiba spokesman, also declined to comment.

Shares of GE, which helped build the reactors at Fukushima, are little changed since the earthquake. The industry is shifting away from the company’s reactor technology, Nomura Holdings Inc. said in a March 25 report.

Increasing Demand

Global demand for nuclear power will climb given concerns about rising fossil-fuel prices, energy security and greenhouse gas emissions, according to the U.S. Department of Energy. Coal is the largest source of electric power production, making up about 40 percent of global supply. Nuclear power accounted for 14 percent in 2007.

Companies in Japan have been counting on demand in emerging markets, which lack experience in managing nuclear power generation and need the expertise of utilities, Fukoku Capital’s Sakurai said. “Without a reputation for operational competency, Japanese manufacturers won’t be able to sell.”

Japan’s government has encouraged the export of nuclear technology as a low-polluting form of large-scale power generation. Former Trade Minister Masayuki Naoshima led a delegation that included the heads of Toshiba and Hitachi to Vietnam in August last year and secured a contract in October.

Vietnam’s Partner

Vietnam will “tightly cooperate” with Japan and partners on the construction of nuclear power plants, the country’s Ministry of Foreign Affairs said in an e-mail on March 14.

Turkey will continue talks with a Japanese group led by Toshiba on building its second nuclear plant, Energy Ministry Undersecretary Metin Kilci said the following day.

China has the biggest nuclear expansion plan, with 27 reactors being built, according to the IAEA. Toshiba has been building four reactors in the country since April 2009.

China will start work on a nuclear plant this month using new technology that may be less susceptible to meltdown than Fukushima Dai-Ichi, according to Huaneng Nuclear Power Development Co., a unit of China Huaneng Group Corp., the nation’s largest power group.

New Generation

The fourth-generation helium gas-cooled reactor was designed and constructed by Beijing-based Tsinghua University, according to a research paper by Shouyin Hu on the IAEA website. China successfully tested an experimental reactor using the technology, China National Nuclear Corp., the nation’s biggest atomic plant builder, said in July.

“At the moment, China is still learning and gaining experience in nuclear reactor construction and operation,” Mizuho’s Ishida said. “But they have announced that they will be using their own technology, so in the future, it’s quite possible China will be bidding for projects and become a competitor to Japan in emerging markets.”

Areva’s new EPR reactors being built in France, Finland, and China have four independent safety sub-systems that can reduce core accidents by a factor of 10 compared with previous reactors, according to the company.

“All manufacturers will be challenged,” Sanford Bernstein’s Prozesky said. Still, “the climate change debate will not go away and nuclear power remains a legitimate part of the future energy mix,” he said.

To contact the reporters on this story: Makiko Kitamura in Tokyo at mkitamura1@bloomberg.net; Maki Shiraki in Tokyo at mshiraki1@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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