china as a nuclear power play

December 18, 2009
China As A Nuclear Power Play

By Romeo Dator, Co-manager, China Region Fund (USCOX)

China is preparing aggressively for its energy future in order to accommodate rapid economic growth for decades to come. The foundation of the nation's electricity generation plan is coal, but with loud calls coming from around the world for China to cut its output of greenhouse gases, a significant portion of new power will be nuclear. From an investment perspective, China's growing interest in nuclear power will provide enormous investment opportunities over the next few years. Some analysts say the price of uranium, while soft now, could double over the next couple of years.

China's nuclear capacity is now less than 9,000 megawatts, but the country has more than a dozen more plants either under construction or in the planning stages. According to figures from the brokerage CLSA, the capacity could grow fivefold by 2015. The official target is 40,000 megawatts by 2020. Such an ambitious program raises the question of how to fuel all of the new plants that China wants to bring online in the next decade. Where will all of the uranium come from to handle this new demand?

China is not alone in its nuclear ambitions. Earlier this year, the International Atomic Energy Agency (IAEA) projected that global nuclear capacity would grow from about 370,000 megawatts now, which is about 14 per cent of world energy consumption to as much as 540,000 megawatts by 2020 and 810,000 megawatts by 2030. In dollar terms, capital expenditure on nuclear plants could total more than US$500 billion over the next 20 years.

Roughly 40,000 megawatts of nuclear capacity is now being built on four continents, with China accounting for a quarter of that total, well ahead of Russia and South Korea which are in second and third positions. The chart below shows that China will be second only to the US in terms of future capacity when projects at all phases are completed. China, however, is advancing so fast that by that time it will probably have overtaken the US. China has uranium reserves within its borders and it is aggressively lining up supplies in Central Asia, Africa and Australia to make up any shortfall. But this shortfall is large and growing. According to a recent Reuters story, China can supply only a third of the 10,000 metric tons of uranium annually required to meet its 2020 nuclear capacity target.

The World Nuclear Association says the world's measured uranium resources are sufficient to last 80 years at current usage rates, with the largest untapped deposits found in Australia, Kazakhstan, Russia and Canada. But just looking at China makes it clear that usage rates are soon to see a sizable increase. Nevertheless, worldwide uranium production is unlikely to increase until uranium prices increase. Uranium prices shot up to more than US$135 per pound in 2007, after the first new nuclear power projects began emerging, but subsequently slumped back down to US$40 a pound, as above-ground stockpiles flooded into the market. It should be noted, however, that contract prices are well above spot price so it is probably fairer to look at US$60/lb as being a better price indicator.

Looking forward, however, rising demand for nuclear power seems likely to produce rising prices for uranium. In fact, some analysts expect the uranium spot price to reach US$80 a pound by 2011. A very experienced analyst in London explains why he is bullish with the aid of a chart of new nuclear power plants going up around the world. No surprise, China was pockmarked with more sites than anywhere.

"Current world uranium usage is about 200 million pounds," he says "but current world production is only about 100 million pounds per year. This uranium supply deficit is getting filled by uranium from decommissioned nuclear weapons from the Cold War. That's ending. Uranium is in shortage, and it's getting worse every month. Thus, uranium mining is due for a future boom." Just the sort of news we want for the beginning of 2010.