Tags: Energy Investing

Unloved Uranium is About to Get Much More Attractive

By , Contributing Writer, Money Morning •

Pity poor uranium -- there is perhaps no more unloved segment of the energy market right now.

Not only is it a commodity, but nuclear power has a stigma attached to it, thanks to the March 2011 Fukushima nuclear mishap in Japan.

Uranium has brought both joy and tears to investors over the past decade. After a 20-year bear market, the price of uranium (U308), bottomed in 2001 at $8 per pound. It then skyrocketed to over $100 a pound, only to fall back again.

Most recently, it peaked at $72 a pound in January 2011. The Fukushima earthquake and tsunami disaster a few months later put a pall over the industry and prices, resulting in the current price of $40.70 a pound.

Yet despite some countries slowing down their plans for nuclear power expansion and the negative mood hanging over the sector, uranium looks to be poised for a rebound in the not-too-distant future.

Why? Well, for one thing, the United Nations' nuclear agency - the International Atomic Energy Agency - said "The Fukushima Daiichi accident is expected to slow or delay the growth of nuclear power, but not reverse it."

The IAEA forecast impressive growth of somewhere between 23% and 100% in nuclear power capacity by 2030.

Emerging Market Demand for Power

The key to whether the high end of the forecast is correct - which would do wonders for the future course of uranium prices -- may very well lie in the demand for power in emerging economies.

Research and consulting firm Global Data thinks nuclear energy generation will jump 30% by the end of this decade because of nuclear power use in developing nations. It forecasts that nearly 200 new nuclear reactors will begin commercial operations by then.

Global Data's research is in agreement with Money Morning Resource Specialist, Peter Krauth. In a recent article, Krauth stated that this year alone 65 nuclear plants are under construction, with another 160 reactors in the planning stage and 340 more proposed nuclear plants. The vast majority of this activity is occurring in emerging economy nations.

Global Data's report, "Emerging Countries Will Power a New Nuclear Boom," points to the Asia Pacific region as leading the way in terms nuclear power generation.

Not surprisingly, China is setting the pace here. China plans to increase its installed nuclear power capacity this year alone by 20%, or 3.24 gigawatts.

In October 2012, the Chinese government released a white paper stating it had 15 nuclear power generating units working, with an installed capacity of 12.54 gigawatts. But that is a miniscule 1.8% of the country's total power output.

Another 30 nuclear units are already under construction, which is expected to add another 32.81 gigawatts.

Even if the country reaches its goal of 58 gigawatts of installed nuclear power capacity by 2020, it will still account for a just 4% of China's total power generating capacity. This is far below the global average of 14%.

That means a lot of possible upside for the number of reactors to be built, the demand for uranium, and the potential for uranium price increases.

Supply Constraints

Uranium is not just a demand story. The supply side looks pretty interesting, too.

Krauth notes that the World Nuclear Association said total consumption of uranium in 2011 was 176.7 million pounds and growing. But last year only 135 million pounds of uranium was mined. That's a deficit of about 41 million pounds.

An increase in the amount of uranium mined in the coming years is very unlikely.

Many smaller uranium firms have bit the dust. And even the larger, healthier companies are not expanding production. That's because for uranium mining to be economical, the spot price needs to be between $70 and $80 a pound, according to industry experts like the Sprott Group's Rick Rule.

Remember, the spot price is about $40 a pound currently.

What's more, in recent years supply deficits have been covered by the "Megatons to Megawatts" program. This program converted uranium in Russian nuclear warheads to lower-grade uranium for use in nuclear reactors.

But this program will end in 2013, and the Russians are very unlikely to renew the agreement. According to Krauth, the loss of this source of supply will create a deficit in the uranium market of 50 million-65 million pounds annually.

That's because all the reactors under construction, when added to currently running reactors, will push demand for uranium up to roughly 200 million pounds annually.

The complete mismatch between supply and demand tells us one thing: uranium prices have to go higher. Investors just need to be patient and position themselves for the upcoming rise.

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