Investors
might want to consider an investment in uranium. Financial analysts of the energy sector, need to consider what is going to supply the electrical needs of growing economies around the world. Oil is going to get prohibitively more expensive. Natural gas in the form of LNG (Liquefied Natural Gas) will be in great demand. Given the rising expectations of hundreds of millions of people in Asia, it is uncertain that supplies will match the demand for more energy.
Coal has environmental issues not only in the extraction process but when it is utilized for energy production. In many developing countries air quality and ecological degradation has become major political and economic factors.
Hydroelectricity has already reached close to its full potential in a number of countries. Although it is a renewable source of power there is an environmental impact attached to further development of this energy resource.
Many individuals will claim that solar power and wind power are the way to meet the coming shortfall in energy needs. There are several factors that one needs to consider. Power generated by both solar and wind require certain weather conditions. In areas of the world where sunshine is not plentiful, you will need other sources of energy to make up shortfalls when they occur. The same is true with power generated by wind. When there is no wind there will be no power created.
In the future, technology will allow increasing efficiency in alternative sources of energy like solar, wind, tidal, biochemical, and others.
Another promise for the long term is fusion energy produced with hydrogen. Development of hydrogen energy can supply the world with fuel that will be abundant, cheap and safe.
The question one has to answer at the moment is what will the world rely on for an energy source in the interim?
The answer is obvious. It will be fission energy. The required input here besides water for cooling is uranium.
Uranium
One can argue about safety and environmental concerns, especially after what has happened in the United States (Three Mile Island), Russia (Chernobyl) and more recently Japan (Fukushima).
Prices are down to near $28.00 USD (United States Dollar) a pound today. The cost to mine this pound of uranium is close to $70.00 USD.
The last time these same market conditions existed was in the late 1990’s. At this time, uranium was selling for $10.00 USD yet the cost of production was $20.00 USD. This negative 50 % operating margin could not last, because uranium was needed to power the nuclear plants in operation at the time.
In the year 2000 uranium was still selling for $10.00 USD by 2007 the market price had increased to an amazing $130.00 USD.
The present situation with uranium just like in the 1990’s cannot last. With the miners of uranium losing money on every pound produced they will soon cut back production, which will in turn reduce the available supply.
Although nuclear power is not popular with the public, it generates a great deal of reliable electricity. In France for example, it is the source of close to 80% of electrical power generated there. In the United States it is close to 20% of the daily power generated.
Nuclear Power Plant
In Germany the decision made after the 2011 nuclear accident in Japan, was to decommission all of their nuclear power plants. The end result was more power coming from low grade coal and higher prices for electricity. Although the country is pursuing alternative energy aggressively it will not meet the demands of industry and the consumer in the near future.
In the rapidly growing economies of the developing world, nuclear power offers a sensible source of electricity. It will become more affordable as fossil fuels become prohibitively more expensive.
Uranium prices are near seven year lows which will provide new impetus for a market correction. As of June 17, 2014 U308 was selling for $28.25 USD. A year ago it was selling for over $40.00 USD. The low was reached last month when the price was $28.00 USD. As recently as February uranium was still selling for $36.00 USD a pound.
The decline in prices have caused a number of mining companies to halt or postpone numerous projects. These companies will wait until it is profitable to expand production again. Keep in mind though, it usually takes 5 years or more to bring a new uranium mine on line. So expansion of production will have to come from existing mines. This may very well lead to a supply shortage in the next few years.
Uranium Mining
The reason this writer is bullish on uranium is based on what is occurring in China. The nation of China is attempting to deal with the growing threat of pollution, but also recognizes the growing need for more energy. At present China has 29 nuclear reactors under construction. This comprises 40% of all global building of atomic energy plants.
China uses more coal than almost the rest of the world combined. This has led to major problems with air, water and soil quality. The Chinese government made the decision to generate more power from nuclear energy in 2009. Back then, China’s share of the global nuclear capacity was 3%. By 2035 it is projected to be close to a 20% share. This will be a increase in excess of 600% in 25 years.
The demand for uranium in energy production, continuing scientific research and development, as well as military needs, will maintain a consistent need for this metal for the foreseeable future.
Although Germany is in the process of closing all of it’s nuclear power plants, other nations are going in the opposite direction. As Germany moves to close it’s remaining 17 nuclear power plants, Saudi Arabia has instead decided to construct 17 atomic plants by 2032.
One would of suspected that after the Japanese nuclear accident at Fukushima in 2011, that the need for uranium would of declined. The truth is uranium consumption actually increased, as a result of 7 new power plants being brought online in the world between 2011 and 2012. It takes time to build these kind of electrical plants and is a major investment which therefore, is not easily put on hold or stopped. In addition, the amount of energy produced at the other 440 plants around the world, was increased during this period.
At present there are 432 nuclear powered energy plants throughout the world. 72 additional plants are under construction across 13 different countries. 62 of these are expected to be completed by 2016. A further 464 reactors are being planned or proposed. This will double the amount of nuclear plants in operation over time.
The number of power plants is projected to increase 33% by the year 2030, with a 60% increase in energy produced from nuclear energy.
There is a rapidly expanding industry in India as well. The electrical needs for industry and consumers here will ensure demand for uranium, as more nuclear powered plants are constructed.
Demand for uranium is obviously increasing yet the supply of uranium being mined is not. How is this situation possible? The shortfall is being made up with above ground stockpiles. These however, are rapidly being depleted.
Mined Uranium Ore
The largest source of the surplus was through the HEU Agreement, which ended in 2013. This 20 year understanding between Russia and the United States supplied the U.S. with 24 million pounds of uranium on an annual basis. The uranium was from dated nuclear warheads from the former Soviet Union. The uranium was being reprocessed for commercial use, as the older missiles were being retired and dismantled. This source alone, had constituted between 10% and 13% of the annual world supply of uranium.
Another upward pressure on prices of uranium will be the restarting of Japan’s nuclear power plants. Prior to the 2011 nuclear accident, 12% of world demand for uranium came from the operation of the 55 atomic plants in Japan. Of the total, 10 of these electrical plants are expecting to be fully operational by this summer.
As stated earlier, of the 72 nuclear plants under construction worldwide, 29 of them are being built in China. Russia is building 10 additional plants and India 6 more. As expected, emerging markets will be the biggest driver in future expansion of nuclear power.
Overall, uranium is at present undervalued, and demand is about to spike. Production will take time to ramp up again. The result will be limited available stocks of uranium. This will mean a major increase in prices for uranium. Investors who get into the market now, will see good returns on their investment in the near future.