is uranium down for the count?

Is Uranium Down For the Count?

* Chris Munford

Published 8/15/2011

In the 1970s, it was Three Mile Island. In the 80's it was Chernobyl. Now it?s Fukushima. Each time, the viability of nuclear power was called into question and the uranium industry took a hit. After the first two disasters, uranium prices declined for years afterward.

This time it?s liable to be quite different. For one thing, nuclear power is a much greater part of the global energy infrastructure now than in the past. Approximately 14% of the world?s electricity is generated using uranium as a fuel source. That is not going away easily, despite justifiable safety concerns. Further, uranium demand in coming years will be driven by the huge increase in nuclear generating plants now under construction or on the drawing board, primarily in Asia.

The Fukushima disaster certainly will give regulators pause (and hopefully will make them consider carefully where new plants are built and how existing plants are protected). The disaster also will slow the proliferation of nuclear energy projects in some regions. The overall effect on the uranium industry, however, is shaping up to be far smaller than some have suggested.

Not that uranium oxide (U3O8) prices haven?t been affected?they?ve fallen about 21%? from a monthly average of $65/lb on a spot basis in February (the earthquake and tsunami in Japan occurred on March 11), to an average of $51.50/lb during the week ended August 8.

In fact, far greater damage to U3O8 prices was caused by the 2008-2009 global financial crisis than by the Fukushima disaster. Prices had peaked at about $136/lb in June 2007 and then lost more than two-thirds of their value, bottoming in June 2010 at slightly below $41/lb. They had finally begun to rise again, gaining more than 50% in only eight months prior to the Fukushima disaster.

The announcement in early May that Germany would phase shut all of its 17 reactors by 2022 added to the downward pull on uranium prices and sentiment. In theory, this is of some concern to the uranium sector. Germany?s nuclear energy program is the world?s fifth-largest in terms of installed generating capacity (more than 20,000 megawatts), which supplies 26.1% of the country?s electricity needs (compared with 20.2% of US needs supplied from nuclear energy).

Will prices now retest the June 2010 lows as a result of all of these factors? Many industry observers and participants think not, and there is ample evidence to support that view.

The rapidity of the price recovery from June 2010 through February this year illustrated the perceived underlying strength in uranium. There was a realization during that period among buyers and investors that demand for uranium is relatively inelastic and that competition for available supply is virtually certain to increase.

Oil, to take just one comparison, is periodically overproduced or underutilized. Supply is contributed by many countries and myriad small and individual sources (wells and oil fields), making it relatively easy for supply to be quickly increased (think of OPEC). High oil prices inevitably lead to reduced use, whereupon supply is tamped down (again, relatively easily and quickly), and oil prices fall. Oil prices thus exhibit much greater volatility over time than uranium prices do, because electricity usage is generally much more stable and slow-changing than oil consumption. Available uranium mine supply can be reduced, but it takes years to access and develop new mine supplies. Meanwhile, most uranium fuel sales are on a long-term basis and contracts often extend years into the future.

Further, to shut down a nuclear power plant (or reduce regular purchases of uranium fuel) is not nearly so easy as idling a few oil pumping stations. And excess oil can be stored, after all, while electricity by and large cannot. Ultimately, you can shut down a $1 million oil rig and wait for better prices next week, but halting construction on a $1.5 billion nuclear plant designed to consume uranium for the next 30-50 years is a different proposition?one not governed by short-term trends.

Even in the case of Germany?which gives the appearance of taking a 20-year view as it ostensibly shuts down its entire nuclear program?it is by no means certain that a phase-out will actually occur.

What nearly all media reports left out concerning this topic is that Germany has done this before. In 2000, a different German government made the same announcement. The lost generating capacity was to be made up from new alternative (clean) energy sources. The country then embarked on what was arguably the world?s most ambitious alternative energy drive to date, plunging into wind and solar energy projects and supporting them with generous subsidies.

Years later, the result was that all of this effort had generated only enough additional energy to take the equivalent of a single nuclear generating plant off-line. This presumably brought the current German government to the realization that the they couldn?t afford to lose their nuclear plants unless they wanted to build dozens of (relatively dirty and backward-looking) coal-fired generating plants. So the Germans reversed their stance on nuclear energy several years ago, only to reinstate the nuclear ban after the Fukushima disaster as political rivals (the Greens, of course,) gained in regional elections held soon after the Fukushima disaster.

In short, Germany?s periodic decisions to do away with nuclear energy have more to do with the country?s political makeup than the perceived dangers of uranium-based power plants.

Germany is not alone. Sweden, in response to the Three Mile Island disaster in the USA in 1979, said it would idle its 10 nuclear plants by 2011. That decision was later reversed, although the country, which gets a whopping 37.4% of its electricity from nuclear plants, has no immediate plans to build more reactors.

As climate expert David Lewis put it in a recent article posted to TheEnergyCollective.com: ?As awareness of climate change dawned, the difficulties of creating a low carbon economy that can grow without using nuclear power caused opposition in Sweden to diminish to the point (that) the new policy is to allow more reactors to be built.?

It?s no surprise, then, that the announced German phase out coupled with the likely knock-on effects of Fukushima, are not making much of a ripple when it comes to long term or even shorter term predictions.

Credit Suisse analysts noted last week that Canada-based Cameco Corp., the world?s largest uranium miner, has significant exposure to Japan?approximately 18% of the company?s total uranium contact book and 12% of its 2011 fiscal year sales. Yet Cameco has said it expects Japanese utilities to take the majority of their contractual deliveries and reiterated sales guidance of 31-33 million lbs for fiscal 2011. While Credit Suisse said it expects some of this material to become available to the market, it does not sound as though Cameco is overly worried about a decline in sales.

Cameco in its uranium market outlook revised its projections downward, but only marginally. The company said that, based on Germany?s phase-out decision and the current posture of Japan's nuclear program, global uranium consumption could fall to 225 million lbs of U3O8 by 2020 compared with the previous projection of 230 million lbs. This is a difference of slightly less than 2.2% over ten years?and that?s if Germany follows through with its phase out. Cameco also expects that global U3O8 consumption could fall be 175 million lbs over that period, down about 2.8% from the company?s earlier forecast of 180 million lbs over ten years.

Average prices for 2011, meanwhile, are expected to be the highest in three years and are forecast to rise further next year. Credit Suisse projects that the spot U3O8 price will average $59.15/lb this year?up from $45.63/lb in 2010 and $46.80/lb in 2009?and will shoot to $65.00/lb in 2012. In other words, assuming this forecast is correct, prices will have recovered all of the ground lost since the Fukushima disaster (spot prices in the first quarter this year averaged $64.10/lb.

Why would uranium prices rise again so soon? Prices fell for years following the 1979 Three Mile Island disaster, only to be driven down further when Chernobyl occurred in the mid-1980s. In fact, aside from occasional market perturbations and moderate short-lived spikes, uranium prices endured an inexorable 20-year decline and bottoming period.

But the reasons were different. Uranium prices took a hit from earlier nuclear disasters, but one of the main reason they declined so steeply and stayed low so long was the huge amount of reprocessed nuclear fuel that entered the market from decommissioned warheads following the dissolution of the Soviet Union in the early 1990s. Even before that, uranium demand was reduced as a result of ground-breaking arms reduction (versus arms stability) treaties of the 1980s between the USA and the Soviet Union. The program is finally winding down and this significant additional supply source is coming to an end.

Another reason uranium prices were held in check during the 1980s and 1990s was that the United States, where the greatest number of nuclear plants had been built up to that time, largely lost interest in nuclear energy for a quarter-century following the Three Mile Island accident. Only in recent years has that begun to change and there are currently four new US reactors on the drawing board.

China and India, meanwhile, were not much in the picture in previous decades but are now at the leading edge of what amounts to a global trend in favor of nuclear energy. China and India together currently have at least 29 nuclear power plants under construction and another 70 planned. These two countries alone will boost the number of operational reactors in the world by about 23% over 20 years or less. China is on track to have more reactors in operation by 2020 than any other nation except the United States.

They are not alone. Russia has 24 nuclear plants under construction or in the planning stages, South Korea has 11, and Canada has six. Even Japan has two plants under construction and 12 more in the planning stages, although this is obviously subject to revision at this point. In all, however, the number of reactors in service is projected to increase by approximately 48% over the next 20 years to an estimated 650 reactors.

Chris Munford researches and writes about commodities, with an emphasis on metals and energy. He is based in the New York area.

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