How to profit from the world going nuclear

Uranium prices have been in the doldrums ever since Japan’s Fukushima nuclear disaster in 2011. Like the Three Mile Island nuclear accident in 1979, and the Chernobyl accident in 1986, it put a damper on sentiment toward nuclear power – and uranium prices were caught in the fallout.

But nuclear power will make a comeback. And that means uranium prices will too.

Economic growth requires huge amounts of power. So it’s not surprising that two of the global economy’s biggest growth engines, China and India, along with a few other emerging economies, account for 70 percent of expected increases in global energy demand.

Coal is the easy answer to energy needs. There’s lots of it and it’s cheap (probably too cheap, as we wrote recently). But China and India both already have severe air quality problems, which coal only makes worse. Natural gas, particularly when it’s cheap (as it is now), is also a relatively clean option, especially in the U.S.

Nuclear energy is another option. It’s (usually) one of the most environmentally friendly ways to generate electricity. It also doesn’t cost much to produce (once the reactor is built, at least). And it’s reliable – no sun or wind required.

China and India have noticed, and want nuclear to be a foundation of their future energy supply.

China wants to triple the amount of nuclear power it produces by 2021. And it wants nuclear power to produce 8-10 percent of its electricity needs by 2030, up from about 2 percent today. To get there, China is right now building 24 nuclear reactors, to add to the 30 already in operation. It’s planning another 42, and 170 more are in the proposal phase, according to the World Nuclear Association.

(By comparison, the U.S. has 61 nuclear power plants in operation (using 99 nuclear reactors), 5 reactors are being built and 5 more are planned by 2020).

India has 21 nuclear reactors operating, with six more under construction. It plans to build 60 more over the next ten years, and another 35 are in the proposal phase. Nuclear power now accounts for about 3.5 percent of India’s electricity, and the country’s government wants that to rise to 25 percent by 2050.

A lot of these power plants won’t be built. But some of them will. And all of them – new and old – need uranium.

The World Nuclear Association projects that by 2035, global uranium demand will run at 103,000 tonnes per year, compared to 66,000 tonnes needed today. They also predicted that the demand for uranium would grow 31 percent between 2013-2023.

In 2014, just over 56,000 tonnes of uranium was produced. The difference between supply and demand was made up by uranium taken out of disarmed nuclear weapons, existing stockpiles, and the recycling or re-enrichment of uranium. Excluding reprocessed uranium, production will need to nearly double over the next 20 years to meet future demand.

Since prices have been low for so long, some uranium miners have cut production. Many have sold off their assets, or gone bust.

The timing of supply contracts is also a big factor. When the price of uranium spiked in 2007 (see chart above), a lot of nuclear plants signed supply deals to lock in prices, and supplies, in case they continued going up. Many of these contracts were for ten years – so they’ll expire next year. When these contracts are negotiated, the chances are good that uranium users will have to pay higher prices than where uranium is trading at right now.

According to analysts, the breakeven price for most uranium miners is currently at about US$50/ pound, at best. That’s well above the current price of uranium of about US$29/ pound. Right now, miners can still breakeven thanks to supply contracts that locked in higher prices.

But the breakeven price for any new mines is between US$70-80/ pound. No miner will want to start any new mining activities if it’s going to run at a loss. So uranium prices have to go higher for new mines to launch production.

As a result, things look promising for uranium prices. There is growing demand, not enough supply and a raft of supply contracts coming up for renewal.

Unfortunately, if you try to buy and store actual uranium you may get some unwanted attention from the government or Interpol. But you can buy the Global X Uranium ETF (New York; ticker: URA). This exchange traded fund tracks the performance of a basket of companies that are active in the uranium industry.