The Daily Reckoning

Uranium is one of the most cyclical and volatile materials that I have ever followed.

In the last 20 years the price of uranium has risen from 20 dollars up to 130 dollars, and dropped back down to 40 dollars, where it is now. It’s been all over the map.

It is also one of the most useful natural resource commodities. The energy density – how much energy you can produce per pound — is much greater than with other energy sources available. Water, natural gas, oil, or coal, don’t pack as much punch per pound. In some senses, it is the most efficient energy source in the world.

Nations can store enough material to run plants for decades. In case of crisis, it is the most strategic energy source on the planet. Countries like Japan, Korea, Taiwan, or Singapore are energy and storage-constrained, yet have high per capita energy use. For them, uranium is vital.

The One-Off Event That Shaped The Market

Fukushima, the meltdown that struck a plant in Japan in 2011, caused the green metal to plunge.

The trauma in Japan severely disrupted the market for uranium. Japan shut down its domestic nuclear industry. As a result, demand fell by 15 or 20 million pounds overnight. In addition, the utilities dumped their existing inventories. They couldn’t use uranium to generate electricity, so they sold it for whatever they could get.

So, while wiping out 15 to 20 million pounds in demand, they added 15 million pounds of supply – a 35 million-pound swing. That’s about 1/5th of the entire market — about 190 million pounds.

The price of uranium tumbled from 85 dollars a pound down to 40.

Very recently the Japanese have acknowledged the need for the green metal. Energy prices have spiked since they decided to shut down nuclear power. In some industrial applications, electricity bills have risen five-fold. Japanese demand has been responsible for essentially doubling the price of liquefied natural gas, as every spare cargo in the world has gone to Japan. Even the newly elected, staunchly anti-nuclear government has grudgingly acknowledged that phasing out nuclear is not an option.

The Japanese government responded to the disaster at Fukushima by vowing to phase out nuclear power, but their actions told a different story. Shortly after Fukushima, the Japanese government – through its foreign investment arm Jogmec — signed a joint-venture arrangement to explore for and develop uranium in Uzbekistan. Why would you spend money to explore for and develop something you weren’t going to use? This is the agency tasked with providing for Japan’s raw material needs.

We conclude that Japan’s use of nuclear power will resume. The 35-million-pound swing that you saw in the market was a one-off, not an ongoing event.

And don’t forget, before this one-off event, supply and demand were in a reasonable balance. At 80 dollars a pound, uranium produced more energy output to raw material cost than anything else. Meanwhile, producers made enough to explore for and develop new resources.

There’s the rub. New uranium is brought to market by the mining industry, which cannot afford its production costs at the current market price of 40 dollars pound. It takes much closer to 80 dollars a pound for mining of new supplies to be economic. Thus, until prices increase, miners won’t create the new supplies needed to keep up with current needs.

The Rest Of The World Needs Nukes

In the West, uranium is a political issue. It is unpopular in the United States, Germany and other developed nations. However, the rest of the world — emerging and frontier markets – is focused on attaining the same sort of lifestyle that the West enjoys. That is extremely energy intensive.

To reach our level of comfort, frontier and emerging markets will create demand for all energy sources — solar, wind, hydrocarbon energy, coal, and nuclear. Nuclear power production is increasing, but today’s price of 40 bucks a pound does not generate the supply to run those plants. The price needs to head higher.

Another thing you need to consider is that nuclear power still generates 18 per cent of electricity supply in the United States. Despite being politically unpopular, the long-term alternative to nuclear energy is not having the lights go on when you flip a switch – not an option in the United States.

Finally, Germany — which has also announced that it will phase out nuclear power — is faced with an interesting choice. They’re proposing, I suppose, to replace nuclear with solar energy. Well, one problem is that the sun doesn’t shine in Germany. Another is nighttime. Current technology simply does not allow solar energy to be a viable alternative to nuclear.

The German government is really involved in a political –and fairly cynical – ploy: reduce consumption of German-generated nuclear power but import it from France and Poland. Worldwide, the demand for nuclear power will continue to increase, and since mining is uneconomic at current prices, utilities will need to start paying more in order to satisfy their demand. In fact, meeting demand will require a price point of about twice the current price.

How To Play It

As you know, doubling the price of uranium would more than double profit margins for those that produce it already. Therefore, the companies that explore for and produce the metal should do well, in addition to the commodity itself.

Right now, uranium is a deeply unloved resource. As we have seen, it’s unloved for a variety of reasons. When you think about nuclear, you don’t think about a light going on; you think of Hiroshima, Chernobyl, Nagasaki, or 3 Mile Island.

But uranium is an essential commodity for the world to continue to enjoy the way of life that we experience now, which is energy intensive. Uranium suffered a price drop that the investment community thinks is an ongoing fact, but that is actually a one-off event. What happened in Fukushima, while tragic, will not alter the demand for uranium in the long term.

Uranium prices are set for a turnaround. As the idled power capacity comes back online, and the impact of Japanese selling is reversed, the market will return to pricing equilibrium, which we believe is around 80 to 85 dollars a pound. This is of course a wonderful move from the current price of 40 to 45 dollars per pound – and music to the ears of those that produce it.

Thank you for reading,

Rick Rule

Original article posted on Daily Resource Hunter

The Daily Reckoning

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