China as a Nuclear Power Play

China is aggressively preparing 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 (14 percent of world energy consumption) now 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 $500 billion over the next 20 years.

Roughly 40,000 megawatts of nuclear capacity are now being built on four continents, with China accounting for a quarter of that total, well ahead of #2 Russia and #3 South Korea. 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.

Global Nuclear Capacity

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 $135 per pound in 2007, after the first new nuclear power projects began emerging. But uranium subsequently slumped back down to $40 a pound, as above-ground stockpiles flooded into the market.

Uranium Price

Looking forward, however, rising demand for nuclear power seems likely to produce rising prices for uranium. In fact, some analysts expect the uranium price to reach $80 a pound by 2011.

Watch this space.


Romeo Dator
for The Daily Reckoning

The Daily Reckoning