HardAssetsInvestor

Written by Julian Murdoch  |

March 23, 2010

How To Play Rising Uranium Demand

Details

Uranium-based nuclear power is responsible for 15% of the world's electricity—and that number's growing. So how can you play rising demand for nuclear fuel?

• Why China will drive future uranium prices
• How prices of uranium and nuclear stocks diverge
• Which nuclear ETF has performed best?

 

Uranium is still a niche fuel, but it's an extraordinarily important one. As of Feb. 1, 2010, the metal, which is crucial for the generation of nuclear power, was used in 436 nuclear reactors in 32 countries around the world, according to the World Nuclear Association (WNA). Those nuclear reactors are responsible for 15 percent of the world's electrical power generation, generating 2,601 billion kWh. And that number is only growing: Currently, 53 reactors are in construction, 142 are on order or planned and 327 are in the proposal stage. Even in the U.S., support for nuclear power is at an all-time high, according to a recent poll by Gallup.

But all of those reactors need fuel, and the WNA estimates that 68.6 thousand tonnes of uranium will be required just for the reactors already operational in 2010. As more reactors come online in the future, demand for uranium will rise—and so will prices.

 

Behind Uranium Prices

 

Uranium's had a bumpy ride over the past year, with prices wavering between $35/lb and $52/lb. As of March 15, the weekly spot price closed at $41.25/lb.

But uranium looks poised to head upward, at least for the foreseeable future. As Energy Resources of Australia (ERA), a subsidiary of Rio Tinto, which owns 68 percent of the company, recently stated, "The supply-demand fundamentals point to the likelihood of stronger prices in the longer term."

Supply has tightened recently, because with prices in the relatively low range of $40, only the most cost-efficient operations have been able to function in the current economic climate. Additionally, Mining Weekly reported ERA as saying, "The current spot price of around $40/lb was ‘unlikely to offer the necessary return' for several of the higher-cost projects under development." Which is just a nice way of saying their competition won't be producing much of anything until prices rise.

Just how high will prices go, no one can guess. But there's plenty of speculation about where demand will come from: China. (Of course.)

 

China's Nuclear Hunger

According to the WNA, only 11 nuclear power plants currently operate in China, and in 2008, nuclear power was only responsible for 2.2 percent of China's electricity needs, well below the global average. But times are changing. As of the beginning of February, 20 new reactors were under construction in China, with another 37 planned and a further 120 proposed.

China is not currently a uranium-producing powerhouse—the top three countries producing uranium are Canada, Australia and Kazakhstan—so logic dictates that China will need to get the uranium from abroad for those new plants.

Elaine Wu, a Chinese nuclear analyst at Nomura investment bank, noted during an interview on China Radio International, "Uranium is going to be the key focus for China because China is not endowed with a lot of uranium resources. Currently even at 8 gigawatt capacity, China has to import about half of its uranium needs."

Sounds like a market getting ready to take off—so how do you take advantage of it?