Uranium Poised for Rebound as Reactor Construction Booms
Source: Yuriy Humber, Bloomberg (6/23/08)
The uranium industry's worst year is about to collide with a nuclear construction program in India and China that rivals those undertaken during the oil crises of the 1970s.The result is likely to be a 58 percent rebound in uranium to $90 a pound from $57 now, according to Goldman Sachs JBWere and Rio Tinto, one of the world's largest mining companies.
The result is likely to be a 58 percent rebound in uranium to $90 a pound from $57 now, according to Goldman Sachs JBWere and Rio Tinto, one of the world's largest mining companies. Uranium plunged 57 percent over the past year as an earthquake damaged a Japanese nuclear plant and faults shut down reactors in Britain and Germany.
Plans for India and China to end electricity shortages will have an effect from northwest Canada to the Australian outback and the flatlands of Kazakhstan, the primary sources of uranium. India will start up three reactors this year, with another six due in 2009, in India, China, Russia, Canada and Japan. Uranium demand worldwide will rise as fast as oil this year, or 0.8 percent, Deutsche Bank forecasts.
"The first wave of growth is going to come from the emerging economies," said John Wong, fund manager with CQS UK in London, which has $150 million of uranium investments. "People are starting to look at coal, at gas, at oil and seeing the energy prices go up, they wonder about uranium."
The yearlong decline in uranium contrasts with record prices for oil and coal, as Asian energy demand expands and concern mounts that carbon emissions will cause climate change to worsen.
The world needs to build 32 new nuclear plants each year as part of measures to cut emissions in half by 2050, the International Energy Agency, which is based in Paris, said.
Because malfunctions shut reactors in Japan, Britain and Germany, nuclear power production and uranium use dropped 2 percent in 2007, only the third time consumption has fallen since the 1970s, according to data compiled by BP. Prices are so low that some uranium mines are close to being unprofitable, according to Merrill Lynch.
"If you look at what is necessary to sustain increased production, to make the kind of projects that everyone is talking about fly, prices better not get much lower or those projects are going to fall over," Preston Chiaro, chief executive of Rio Tinto's energy unit, said. "I don't think that spot price is indicative of what prices will look like through the course of the year."
In India, Nuclear Power Corp.'s 220-megawatt Kaiga plant in the southern province of Karnatka and another at Rawatbhata in the northern state of Rajasthan are due to come on line this year. China started two units in 2007 and will bring on three more through 2011, said the World Nuclear Association. Iran plans to begin generation this year at its 950-megawatt Bushehr reactor, which is at the center of its conflict with the West.
"China is just on the verge of a second rapid phase of expansion," Ian Hore-Lacy, director of public communications for the WNA in London, said. "Each year China seems to raise their sights further."
Safety concerns remain the biggest risk to nuclear construction and a revival for uranium prices. Proposed reactors were canceled in the 1970s because of environmental protests, while accidents at Three Mile Island in Pennsylvania in 1979 and Chernobyl, Ukraine, in 1986 further eroded support. In Japan, new projects face delays as utilities improve earthquake resistance to restore confidence after the closure of Tokyo Electric Power's Kashiwazaki Kariwa and revelations that companies falsified safety records.
"It is worth remembering that this is an industry that can be brought to its knees overnight by one major mishap or one well-executed terrorist action," Paul Hannon, an analyst at the London-based commodities research company VM Group, wrote in a report this month.
Uranium demand was 66,500 tons last year, according to data from TradeTech, a consulting company based in Denver. Consumption may jump 55 percent to 102,000 tons by 2020, forecasts Macquarie, the biggest securities firm in Australia.
Annual uranium use is 69 percent greater than the 39,429 tons that was mined in 2006, according to the most recent data from the WNA. The balance comes from inventories and decommissioned weapons. A Russian accord to export fuel recovered from nuclear warheads to the United States expires in 2013.
"Secondary supplies are finite and rapidly being depleted," Deutsche Bank analysts wrote in a report. "Continual supply issues and the likelihood of increased demand from utilities should drive the spot price higher during the third quarter of this year."
Demand is set to increase as existing reactors are brought back on line, while nuclear energy gains converts.
South Africa, which is struggling to meet electricity demand, plans to award a contract for construction of a 120 billion-rand, or $15 billion, nuclear plant. In Britain, the Labour government wants more atomic capacity to reduce its carbon emissions.
The presumptive Republican presidential candidate, John McCain, said last week that he would push to almost double the number of U.S. nuclear reactors to lessen U.S. dependence on foreign oil. Barack Obama, the presumptive Democratic nominee, also backs nuclear power. There are 104 U.S. reactors operating, though the last to come on line was in 1990, according to the Nuclear Energy Institute.
Prices will have to increase if uranium production is to meet the rising demand, said Kevin Smith, head of uranium trading for Traxys, a commodities brokerage house in New York.
Cameco, of Canada, the world's largest uranium producer, reported it had spent 45 Canadian dollars, or $44, to produce a pound of uranium in the first quarter, compared with its average realized price of 40.85 dollars a pound. While Cameco, which also mines gold, still posted a profit for the quarter, lower uranium prices are a problem for other companies developing new mines, according to Smith.
"There are a lot of production projects that are feeling the pain," Smith says.