Depending on whom you speak to, opinions are mixed about uranium: some see it as the most viable alternative to non-renewable energy resources, and others view it as a potential source of ecological disasters. However, uranium has many uses and some countries have made a long-term commitment to use it. Out of 500 new nuclear reactors that are planned globally, China and India claim about half of them. The next two countries with significant projects are Russia and the USA.
How about Japan? According to a research report issued by Resource Capital Research, Japan has 55 nuclear reactors and accounts for 10-12% of the global uranium demand.
After the earthquake, 4 reactors were shut down, diminishing the global demand by less than 1%. This sounds encouraging for uranium players, but let’s don’t forget that nuclear energy is not the most popular source of electricity nowadays. The nuclear accident of 1986 in Chernobyl and the recent accident at Fukushima made nuclear energy unpopular again. Going forward, governments worldwide face a dilemma: rely on polluting (coal or oil) and renewable (water, wind) sources of energy or build nuclear plants.
On one hand, a nuclear plant is expensive and takes years to build, which strengthens the local economy. On the other hand, nobody wants to have a nuclear plant in his or her backyard. In response, some countries are scaling back. The German chancellor, Angela Merkel said that nuclear energy is at this point “politically unacceptable,” and plans to use renewable energy to replace nuclear by 2022. However, the new proposal has to be approved with a two-thirds majority to become law.
The Swiss parliament is also examining a proposal to shut down the country’s nuclear reactors by 2034. They are producing 40% of Switzerland’s electricity needs. At the other end of the spectrum, Saudi Arabia plans to proceed as planned and build 16 new nuclear reactors in the next 20 years for electricity and desalination.
What is Uranium?
Uranium is a radioactive metallic element used primarily for fuel in nuclear power plants. Today 15% of world’s electricity comes from nuclear power. The other electricity sources are: coal 42%, natural gas 21%, hydro & other 18% and oil 6%. Unlike oil, uranium is abundant, and the available technology can extend its use 60-fold if demand requires it. Furthermore, a good portion of the market’s supply comes from secondary sources such as stockpiles, including material from dismantled nuclear weapons. To give you an idea about how efficient uranium is: it produces 500,000 MJ/kg as compared to 45 MJ/kg that crude oil produces.
However, uranium has some other applications: radioisotopes. They are used in the medical field for diagnosis, research and treatment, for example radiotherapy and sterilizing syringes. Radioisotopes play a role in the preservation of food, from killing parasites to preventing root crops from sprouting. Radioisotopes are also used in smoke detectors.
Who Supplies It?
Uranium rich countries are Australia, Canada, USA, Kazakhstan and Namibia. As the world’s major producer and exporter of uranium, Australia supplies about a quarter of the world demand, and the nation down under is known for having low extraction costs compared to those other countries. Even other major suppliers, such as Canada and South Africa purchase uranium from Australia on occasion. Australia is a member of the Nuclear Non-Proliferation Treaty (NPT) as a non-nuclear weapons state.
Who Uses It?
Nuclear power reactors are heavily concentrated in Western Europe, United States, Japan, China and India. It’s interesting to note that France gets 75% of its electricity from uranium, while other European countries such as Belgium, Hungary, Switzerland and Ukraine get about 30% electricity from nuclear reactors. By comparison, the USA gets about 20%. As you can see on the graph below, China and India produce only a small percentage of their energy from nuclear reactors, however, as mentioned previously, this situation is about to change in the next two decades.
Looking Ahead
There are a few major issues that governments and the private sector face, and investment in nuclear energy can provide the solutions:
1) Double electricity demand by 2030 (according to International Energy Agency). United Nations population growth projections are 8.2 billion by 2030, compared to 6.6 billions currently. It is estimated that population growth combined with increasing standards of living will drive up the energy especially in developing nations
2) Shift to clean energy
3) Increasing fuel (oil, gas, coal) prices
4) Uncertainty about renewable energies
The World Nuclear Association expects a 33% increase in uranium demand over the next ten years. Demand beyond 2020 will be dependent on the rate that old nuclear plants will be replaced; however, a 16% growth rate is projected for the 2020-2030 period. The pace of nuclear reactor replacement may accelerate in the aftermath of the nuclear accidents in Japan. It is important to note that four of the failed reactors were more than 30 years old. According to Victor Gilinsky (former US NRC commissioner) two lessons surfaced: “the older reactors have been built to lower safety standards than required today” and the regulators “must enforce up-to-date safety standards more forcefully.” This is an important issue since 75% of all reactors operating today are over 20 years old and 25% are over 30 years old. Other countries have followed suit: Germany shut down temporarily 7 out of its 17 reactors.
Investing in Uranium
Uranium has been traded on an exchange only for the last four years on Nymex (New York Mercantile Exchange). The symbol is UX. It is financially settled and not very liquid. Gene Clark of TradeTech believes that the illiquidity is due to the lack of “a liquid spot market and the absence of a linkage to the physical market for the commodity, with the Nymex futures market being purely a financial instrument, it runs the danger of diverging significantly from the physical market."
The weekly data chart below shows the steep ascent in 2010, followed by a 20% price decline in 2011. Most uranium companies have been negatively affected by the aftermath of the earthquake in Japan, as the tide turned against nuclear energy again. Generally speaking, the faith of a commodity-producing company is tied to the price fluctuations of the commodity itself. If the company is able to sell the commodity at a higher price, its profitability ratios improve. If demand slows down or there is oversupply, the commodity’s price plummets and the company’s bottom line suffers. Producers can protect themselves by hedging: for example, selling uranium futures contracts, purchasing puts or entering into over-the-counter transactions such as swaps or forward contracts. The share price is affected not only by the price of the commodity and company fundamentals, but also by the outlook for the industry.
Although there are no uranium futures contracts on the ASX, you can trade physical uranium via futures brokers who are able to trade in the US, such as MF Global. Another option is to invest in uranium stocks on the ASX, where there are two major categories of players: producers and explorers. Producers are big, well-capitalised companies, which operate in Australia or abroad. Some of Australia’s major producers are:
• BHP Billiton Ltd (BHP) – the world’s largest mining company, responsible for about 39% of Australia’s production
• Energy Resources of Australia Ltd (ERA) (Rio Tinto has a major stake in this company) – the world’s fourth uranium producer and Australia’s largest, producing about 53% of Australia’s total uranium output
• Rio Tinto (RIO) - diversified mining company, the third largest in the world
• Paladin Resources (PDN) – uranium exploration and mining company
The explorers, on the other hand, are small to medium size companies that operate all through Australia (Northern Territory and Southern Australia) but also overseas: Spain, Peru, Namibia or Tanzania searching for uranium, copper, cobalt, gold or zinc. Some of the explorers traded on ASX are:
• Extract Resources (EXT
• Mantra Resources (MRU)
• Aura Energy (AEE)
• Arafura Resources (ARU)
• African Energy Resources (AFR)
• Berkeley Resources (BKY)
• Encounter Resources (ENR)
• Bannerman Resources (BMN)
• Toro (TOE)
• Cauldron Energy (CXU)
• Deep Yellow (DYL) and
• Marathon Resources (MTN).
In a report released in March 2011, Resource Capital Research believes that the uranium price is going to be volatile in the near term, but remains optimistic about mid-term to long-term prospect of uranium, considering the above mentioned trends and also official comments from major consumers, such as the USA. The US Department of Energy Secretary Steven Chu reaffirmed that the US government is committed to expanding its nuclear electricity capacity and improved safety standards.
Find more info about uranium and its key players at:
Eight undervalued uranium plays - TheBull.com.au
Portfolio Watch: Top uranium stocks
Australian uranium companies - AustralianUranium.com.au
Trading commodities via CFDs
ASX - resources sector
>>Back to the newsletter to view other articles - June 13th 2011
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