Nuclear energy – say what you will about all of the problems associated with it – does have the advantage of being a carbon-emissions-free energy source, as good or better than solar and wind power. From a pure climate change and air quality perspective, nuclear is pretty green.
But is nuclear energy going to play a larger role in electricity generation in the future? It is hard to tell. President Obama's recent signings of executive orders aimed at moving the country toward energy independence and addressing the issue of climate change made no explicit mention of nuclear's possible role, though many believe his appointment of Energy Secretary Steven Chu – a Nobel Prize-winning physicist who talked favorably about nuclear power during his confirmation hearings – speaks volumes.
Despite this potential pro-nuke policy stance, however, uranium – the commodity investor's play on a nuclear resurgence – has been ailing. What gives?
Uranium Price Performance
As we've covered now and then here at HardAssetsInvestor.com, while there is a market price for uranium, it is not traded like oil with a futures market that everyone can participate in. Uranium prices are determined (for public consumption) by the public information arising from private contracts between producers and suppliers. The prices that come from these transactions make up the "market" price that companies use as a benchmark for their own transactions. In this regard, it shares much in common with some other big industrial inputs, like iron ore and coking coal.
Compared with its historical stagnation, uranium ran up like crazy in the past year, going from around the $10 per pound mark to an all-time high of around $140. Current prices are a more modest $48 a pound as of January 26.
How can we explain this wild ride?
Demand is steady – as of November 2008, there were 439 nuclear reactors in operation, and that number hasn't changed much in some time. The industry is expanding a little – as of October 2008, there were 38 reactors under construction worldwide (stats here) – but most of those reactors are still years away from coming on line. For the most part, the excitement of 2007 seems to be just that ... excitement ... driven by expectations of a wave of new nuclear construction projects.
Supply Paradox
The prospect of new construction gets uranium investors excited because the uranium market is in a chronic situation of undersupply. The chart below comes from TradeTech, another uranium consulting group.
The gap in supply is made up for from old stockpiles and retired nuclear weapons. Some believe that any increased demand could tip the balance, and that there might not be enough supply to meet demand. Hopes (or fears) of that kind of scenario drove the spike in prices last year.
Back To The Nuclear Future
With energy prices down in general, however, hope for a fevered pitch of new nuclear plant activity has waned. Partially as a result, the market for uranium has stagnated: There isn't a lot of activity in the buying and selling of uranium at all right now, and prices are flat.
In a recent interview by The Gold Report, however, James Passin of Firebird Management LLC, thinks the situation could change:
It's very interesting that uranium, which led the energy complex on the way down, is now starting to rebound. The uranium price certainly appears to have bottomed. A lot of the uranium mines, which were for years touted as an important source of new production, are proving to be total disappointments. The billions of dollars raised by so-called uranium companies during the uranium bubble will result in very few additional pounds of production.
He goes on to include this caveat:
To increase the price significantly, though, we need a wave of nuclear reactor construction. With natural gas and coal prices checking back, the economic case for nuclear becomes less clear. However, the world politically has decided that it needs to diversify away from oil, away from hydrocarbons. Obama's advisors have made it clear that he is very interested in achieving mandatory carbon emission reductions. Any kind of realistic plan involving reduced carbon output in the United States is going to require embracing nuclear power aggressively. My feeling is that Obama will enthusiastically embrace nuclear power.
For now, however, Mr. Passin is in the minority; most analysts are forecasting prices to remain fairly flat in the near term. Analysts such as TradeTech and JP Morgan are figuring 2009 prices to remain in the low $50 per pound range, and only Deutsche Bank is currently coming in higher, at $70 per pound. (Forecasts from the various analysts can be here.)
Another Source Of Uranium
We tend to agree, at least in the short term. While mines may not be delivering enough right now, the latest Nuclear Energy Agency theory is that there is enough easy-to-get yellowcake uranium in the Earth's crust to supply the world's reactors for 200 years (at the current rate of consumption using current technology). Of course, if other technologies (seawater extraction and breeder reactors) become more economically feasible, that same fuel could last 30,000 to 60,000 years.
Talk about a price killer.
The only caveat – and the thing that could tip the balance – is if that supply deficit comes home to roost. The uranium bulls will point out that more than half of the uranium in the U.S. is supplied by USEC Inc. – a company that makes enriched fuel, a lot of it from old Russian warheads. (Check out the weapons-to-fuel counter in the bottom corner of their site – 14,010 warheads gone as of December 2008.) This recycling program is scheduled to be completed in 2013, which means utilities will need a new or additional supply of fuel after then.
Since it's a well-known deadline, we're skeptical that a huge supply shock will result from the closure of the program; a slow switch to alternative suppliers is more likely. If miners start now to ramp up supplies and discoveries, they should easily be able to cover the falloff from recycling.
If they do nothing, however – and if new plant construction drives up demand – it's possible to see a push on prices down the road. Particularly if Obama embraces nuclear, and demand starts to rise significantly as well.
PS: Investing
If you want to invest in uranium, you have a couple of options. First, you could take a look at this listing of uranium companies from Mineweb, but then you're buying the proverbial cow. Alternatively, you could invest in the Uranium Participation Corporation – an investment holding company that specializes in uranium assets.