Natural Resources

Is the uranium price about to go nuclear?

Nuclear Power Plant Cattenom, France - Stefan Kühn

How are we going to keep the lights on without pumping more carbon dioxide into the atmosphere? Many people are realising that nuclear power is the answer. The supply of uranium is already tight. New demand is likely to drive up the uranium price from its currently depressed level.

Uranium has had two bull markets in the past. Once in the 1970s when the price went from $8 per pound to over $100 per pound. And then between 2001 and 2007 when the price went from $10 per pound to nearly $140 per pound. (Uranium is priced in pounds, which are equivalent to 0.454 kilogrammes each.)

The uranium price then collapsed to $40 by early 2010, followed by a significant recovery to $70 by early 2011. Many countries still had plans in place to build large numbers of new nuclear reactors – most notably China.

But then disaster struck. A large earthquake off the coast of Japan caused a massive tsunami of water which devastated the east coast of the country. This deluge breached the sea defences at the Fukushima Daiichi nuclear power plant.

The reactors were shut down, but the sea water prevented pumps on the lower levels of the complex from circulating cool water through the reactors. This is needed for several days after reactor shutdown to prevent overheating. The result was that several of the reactors on the site went into full meltdown.

In the aftermath, Japan announced that it would close all nuclear power plants permanently. Germany followed suit, and China put new projects on hold. Uranium prices fell again.

That was then. But now nuclear power is back on. According to a recent article in The Economist, China is back to constructing large numbers of new reactors, followed by Russia and India. Germany’s decision to withdraw is essentially a political hoax. This is because it will have to import nuclear power from neighbouring countries such as France and Poland to meet the supply gap. Even in Japan, the new government has begun re-commissioning nuclear power as it tries to get the economy growing again.

The International Energy Agency projects that global demand in 2035 will be 84% higher than in 2009, mainly driven by emerging markets.

There is a simple reason for this. Nuclear power is needed. World demand for electricity continues to grow. The International Energy Agency projects that global demand in 2035 will be 84% higher than in 2009, mainly driven by emerging markets. That’s an annual growth rate of 2.4%.

This reality is colliding with global political pressure to move away from carbon intensive power sources, which are the main causes of climate change.

Despite massive government subsidies, “alternative” energy is not enough to fill the gap. This includes solar, wind, tidal and wave power. Put simply, not everywhere is suitable for these power sources. The sun doesn’t always shine brightly (especially at night!). The wind doesn’t always blow. Tidal and wave power need suitable coastlines close to centres of demand.

Nuclear power, fuelled with uranium, is the only feasible low-carbon power source to fill the gap. It’s a perfect way to provide reliable base power supply, 24 hours a day. Governments, concerned for their countries’ energy security, are waking up to this.

So why is electricity demand likely to grow so much? There are two main reasons.

The first is that hundreds of millions of people living in the growing economies of the “emerging markets” suddenly have enough money to buy their first appliances. Every day, for the first time, people are turning on their new televisions, fridges, air conditioning units, electric heaters and so on.

The second reason is that there is a slow but steady revolution happening in the transport sector. This has started in developed countries but is likely to spread to developing countries in future.

More and more vehicles are being powered by batteries that run electric motors, as legislation pushes people into less polluting forms of transport.

More and more vehicles are being powered by batteries that run electric motors, as legislation pushes people into less polluting forms of transport. Even Porsche has recently announced a hybrid 918 model, with a V8 petrol (gasoline) engine as well as an electric motor.

This is no surprise when cities like London have already announced that they will ban all vehicles except those with low or no emissions by 2020. How will all those investment bankers and hedge fund managers get to work!

These car batteries need to be re-charged from the power grid. And it makes no sense to have a clean car if the power source is dirty coal or oil fired power stations. Nuclear energy is the logical solution.

Why the uranium price needs to rise

Global demand for uranium is currently 170 million pounds a year and projected to rise to 220 million pounds a year by 2022. By then it’s expected that there will be 94 new reactors around the world. Of those, 64 are already under construction.

Future uranium demand is highly predictable. This is because new nuclear power plants take years to plan and build, and cost a great deal of money. You can see them coming…

There would be no point building a power plant and then not putting fuel into it. In fact the fuel cost is a tiny part of the overall cost of producing nuclear power. The main costs are the capital intensive construction and then the safe decommissioning at the end of the reactor life. This means that uranium demand is not sensitive to price changes. The number of operating reactors is the main factor, and this is stable and growing.

In the face of this growing demand, global supply of uranium is currently only 140 to 150 million pounds. This leaves a big shortfall once current stockpiles run out. In fact many experts believe the uranium price needs to double just to meet current demand levels, from $40 per pound to $80 per pound.

Uranium has been in a bear market for some time, supply is insufficient to meet current demand, and demand is increasing…

So there’s a clear opportunity for investors here. Uranium has been in a bear market for some time, supply is insufficient to meet current demand, and demand is increasing. The uranium price may need to rise over 100% in coming years for the market to find equilibrium between supply and demand. That’s the point where higher cost miners can turn a profit and stay solvent.

The easiest way to invest in uranium is via the stock of Cameco Corporation, which trades on the stock exchanges in Toronto (ticker code: CCO) and New York (ticker code: CCJ). It’s the largest pure play uranium miner in the world, by far, and consistently profitable despite the currently low uranium prices.

There’s no knowing exactly when uranium prices will go nuclear, but there are many reasons to believe it has to happen eventually. OfWealth expects significant investment profits for early investors in the third uranium bull market.

Until next time OfWealthers,

Rob Marstrand,

robmarstrand@ofwealth.com

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.