Why the uranium price is set to soar
Accidents like Three Mile Island in the US and Chernobyl in Russia lead to the almost-complete collapse of the uranium market. But now, amid soaring oil, gas and electricity prices, nuclear power plants are making a comeback, says Kevin Kerr in the Daily Reckoning. And this time around the uranium to power them will be a lot more expensive...
The uranium market is one that is like a wild roller coaster, and many of the equities associated with it can make investors queasy from the ride. These equities are no different from many mining stocks; they have to be looked at very closely. Uranium trading was starting to become more stable, or so it seemed. Then, just as fast as it calmed down - bam! - it went right back up. The uranium price surged $5 to $29 in just two weeks last year.
After the market woke up and new buying came in, the ultra-precious metal's price climbed another $4, which set the highest uranium price since the early 1980s. The new speculation was triggered by growing expectations that China, India and Russia were planning to build new reactors and more reactors would cause a run on the limited supply of uranium. This speculation may well be right, if the International Atomic Energy Agency (IAEA) stats are even close to true.
According to a report by the IAEA, 130 new nuclear power plants may be built in the next 15 years. Who are the big players? The usual suspects, of course: China, India, Europe, Russia, etc. Nuclear power provides about 16% of the planet's total annual electricity generation and 34% of the European Union's needs.
Trust me, they need it - a lot. When my wife Katrin and I were in Estonia recently, it was frigid cold. Likewise, people are freezing to death in Moscow, right now. Nuclear power is a key component to economic survival in both Eastern Europe and the European Union.
I couldn't believe some of the stats for other countries that I found in a great nuclear energy report called Uraniumletter International:
"China: Announced that it plans to build up to 40 nuclear reactors within the next 15 years. Some experts feel this will increase the amount of electricity generated by nuclear power from 2.4% to 4%.
"India: Also getting aggressive and wants to increase mining of uranium ore at four mines, including the existing Jaduguda mine in Jharkhand. The country recently signed a nuclear energy agreement with the United States and could generate 40,000 megawatts of nuclear power in the next 10 years, compared with current production of 3,120 megawatts.
"France: Receives 78% of its electricity from nuclear power.
"Belgium: Gets almost 56% of its power from nuclear plants.
"Sweden: Close to 50% of Sweden's power is nuclear.
"Switzerland, Japan and the United States: Nuclear power provides 40%, 25% and 20%, respectively.
"Korea: Currently uses about 40%, operating on 19 nuclear reactors, and is expected to increase its dependence on nuclear power up to 60% in three decades.
"Asia: Nuclear energy is becoming more and more vital to the growing economies. Without it, Asia's bazillion factories would come to a grinding halt."
I'm not a historical scholar by any stretch, but I am a big history buff and the history of atomic energy fascinates me. In the 1940s, the US government began buying large amounts of uranium in the effort to produce the world's first atomic bomb.
I mean, a country didn't simply go down to Wal-Mart in those days and buy some. So, it was a major undertaking. Don't laugh, maybe someday we will all have little nuclear reactors in our backyards, and instead of going to get some more wood for the fireplace, you'll have to run to Wal-Mart to get a bag of uranium.
Nuclear power plants, as we know them, fired up in 1959. That was when the first privately funded nuclear energy plant came on-line, in Illinois. Fast-forward, and by the 1970s that number had exploded (pardon the pun) to 250 nuclear reactors that were planned across the United States - but the dream train of cheap, easy energy derailed a bit.
The disaster in Pennsylvania changed all that. I was just a kid, but I remember that accident. Three Mile Island was a nightmare. My wife Katrin was just a kid when Chernobyl happened. She lived in nearby Estonia. They had to stay inside for days, she told me.
Anyway, the Three Mile Island nuclear power plant accident came close to Armageddon in 1979. Remember that movie? The China Syndrome? In the movie, Jack Lemmon works in a nuclear power plant that is going to have a meltdown. This movie is the kind of hysteria that made the public fear nuclear energy, and basically put the brakes on new construction. People didn't want it near their homes, and I can't say I blame them.
Public ignorance and fear of nuclear power changed the course of nuclear energy, as we've known, it for a very long time. Starting in the 1980s, utilities were cancelling plants hand over fist. This resulted in the almost complete collapse of the uranium market.
And then, to beat down the market even further, uranium got hit square in the jaw. This second blow came when the Soviet Union fell apart in 1991. Enriched uranium that was removed from Russian bombs was blended down to reactor-grade fuel and put on the market. But, it gets worse.
The third punch came when the Clinton administration dumped 55 million pounds of 'yellowcake' (uranium in the form of a yellowish powder) on the market, via a government-owned uranium enrichment program. This was what really caused the freefall for uranium prices - until now.
American uranium production peaked in 1980 at 43.7 million pounds, according to the US Energy Information Administration. That was the proverbial nail in the coffin for the exploration of uranium. New research and development ground to a halt, as mines could no longer afford to operate, and exploration was basically a waste of time, energy and money. According to Uraniumletter International, Wyoming once had eight uranium operations, which produced 12 million pounds per year.
Today, things are different - a lot different. Wyoming now has none. Ouch!
I could go through each state and many countries around the world and cite examples just like that from reports I have read. It seems clear that because of these widespread shutdowns, the once-overflowing uranium supply dwindled in just five to 10 years.
Things didn't seem so bad during the 1990s; the lack of new supply from functioning mines has been supported by other sources. There were excess inventories, for example, and there was also the dismantling and recycling of nuclear weapons, especially from Russia. Also, reprocessed reactor fuel was added to the mix.
But many of those quick fixes are no longer available.
The president's State of the Union address was a rallying cry to uranium producers to get moving...finally, reality is setting in. The dwindling supply of oil and spiralling high prices of fossil fuels are driving interest in nuclear energy as the possible power source that will be used to meet current and future global demand.
Three Mile Island and Chernobyl, unless you lived there, of course, are distant memories to most Europeans and Americans. On their minds are the prices at the pumps and their home heating bills.
Bottom line: New supplies of uranium will come at a much higher cost, which in turn, will continue to put upward pressure on the future price of uranium.
By Kevin Kerr for The Daily Reckoning. You can read more from Kevin and many others at www.dailyreckoning.co.uk.
With 15 years of experience, Kevin Kerr is a true veteran of the commodities markets. A licensed commodities trader since 1989, he's worked the trading pits in Chicago and New York with legends like Paul Tudor Jones, and he's even traded commodity derivatives in London. Over Kevin Kerr's career he's dealt with everything from cotton to currencies to oil and natural gas. Today he is co-editor of Outstanding Investments, the natural resource investment advisory.