Uranium has never really had a good reputation, and after the Fukushima disaster in 2011 it seemed like the nail was firmly in the coffin for the industry. Japan shut down all its remaining 48 reactors after the incident and Germany announced they would retire all their 17 reactors by 2022.
Despite the public’s negative perception, nuclear power has been the world’s fastest-growing source of industrial scale energy in every decade since the 1950s. Many countries are still committed to nuclear, among them the US, China, France, India, Saudi Arabia and South Korea, to name a few. And four years after the Fukushima disaster the Japanese government is in full swing to restart their reactors.
Moreover, Germany’s green revolution is proving costly as electricity prices are rising and their carbon footprint is spreading. And the country is arguably “cheating” by importing nuclear-generated electricity from France.
Nuclear is seen as a bad source of energy, but the truth is that nuclear plants have low emissions and they provide a steady source of necessary base load power (steady source of reliable electricity). Nuclear energy is in fact the most environmentally friendly way to produce electricity on a large scale.
Electricity supply is one of the main factors driving prosperity and quality of life in a country, and currently around 2 billion worldwide do not have access to electricity. Emerging market countries, especially China and India, want to increase their citizens’ living standards and access to electricity is key to achieving this goal. Electricity produced from nuclear has on average one of the lowest costs in the world and as mentioned before it provides a reliable stream of base-load power.
It seems that there might be some energy left in the nuclear market after all.
The Nuclear Market Is Expanding
Today 437 nuclear reactors are operable around the world, and 66 new ones are being built. A further 168 are planned and 322 are proposed. Countries without reactors will soon build their first ones, including Turkey, Kazakhstan, Indonesia, Vietnam, Egypt, Saudi Arabia and several of the Gulf emirates. Despite its bad reputation, uranium is still the only fuel that can produce base-load electricity economically and without emitting greenhouse gasses.
In the U.S., six new reactors are scheduled to come online by 2020. That’s in a country that hasn’t begun construction on a nuclear plant since 1977, nor commissioned one since 1985. The U.S. is the biggest producer of nuclear energy in the world (comprising more than 30% of worldwide total). There are 65 nuclear plants in the country, housing just over 100 reactors, which generate 20% of US electricity.
France is heavily dependent on nuclear power. In fact, about 75% of its electricity comes from uranium. In China 17 reactors are in operation and 29 more are being built. The country wants a fourfold capacity increase by 2020, which is not surprising given the pollution problems in the country. In India 20 plants are in operation and they are adding 7 more. In Africa several countries are exploring the possibility of nuclear power as currently 90% of the population is without electricity.
And what about Japan? In 2012 Russia signed an agreement with Japan that guarantees the availability of uranium enrichment services for Japanese utilities. Japan, despite Fukushima, seems unable to give up on nuclear power. And after Fukushima the new facilities will be safer. Containment systems at Fukushima were 40 years old, generations behind today’s containment systems, and would soon have been a candidate for decommissioning. Today’s reactors are much safer.
Rising Demand And Limited Supply Will Drive Prices Up
The World Nuclear Association predicts that demand for uranium will grow 33% from 2010 to 2020. In 2011 the world consumed 160 million pounds of yellowcake. In 2024 it will be consuming 200 million pounds annually – if available. On the supply side uranium mines are few. Only 20 countries in the world have a uranium mine, and half of global production comes from only 10 mines in six countries. This means a shortage is likely coming.
The International Energy Agency (IEA) has estimated electricity demand until 2035 and according to their estimates electricity is projected to grow 69% from 2011 to 2035, under their New Policies Scenario. This scenario is IEA’s baseline scenario and takes into account new measures that countries have planned to implement in the future, such as reducing greenhouse gasses. Under this scenario nuclear increases 66% to maintain its current share of worldwide electricity production of around 11%.
In 2012 the world consumed 25% more uranium than was produced from mines (shortfall of 40 million pounds) and the yearly deficit is likely to rise to 55 million by 2020.
Rising demand cannot be rapidly met by increased supply. It takes minimum 10 years to go from decision to production on a uranium mine, and bringing a mine into production is more difficult than any other resource due to engineering challenges, safety requirements, permitting and environmental considerations. Tim Gitzel, CEO of Canadian uranium producer Cameco, believes that a price well north of $60-$70 is needed to get new players interested. Other analysts estimate that a price level of $80-85 is needed to bring new supply online. The spot price is currently around $36.
Why Is The Price So Low Given Supply/Demand Imbalances?
The uranium spot price peaked in 2007 at around $140 per pound and then later crashed down below $50. It started to resume its upward trend in 2010, but then the Fukushima disaster occurred and the price started a slow and grinding decline. The price kept going lower, reaching $28 per pound in May 2014. It has since recovered to about $36 per pound in June 2015.
Fukushima did not scare the world away from nuclear energy, however, and as mentioned above the world is currently consuming more uranium than is being produced each year, and has been doing so for the last 20 years.
But how is this possible? The answer is Russia. The country has been filling the supply gap for the last 20 years. After the Soviet Union fell, Russia agreed to down blend the equivalent of 20,000 nuclear warheads to reactor grade uranium, and sell it to the United States. The program was called Megatons to Megawatts and from 1993 to 2013 it helped fill the supply gap in the market. But the program has now ended. 2013 marked the end of 24 million pounds of secondary uranium supply entering the market each year (to put that into context, in 2011 the world consumed 160 million pounds). But even though the program has ended prices have not risen. There are several reasons why.
First, Japan previously accounted for 13% of global nuclear power generation, but that demand is now gone.
Second, at the time of Fukushima, Japanese utilities were holding three years of stockpiles, and they have since received a further two years of supplies that they committed to buying under long-term contracts. Japan dumped most of this supply on the spot market, which had a big impact on the price. Additionally, South Korea sold some of its inventory after Fukushima.
Third, the Fukushima disaster accelerated the retirement of other reactors, which added to one-time sales of uranium stockpiles. This was exemplified by the decommissioning of the San Onofre nuclear plant in California, which released about 10 million pounds on the market.
The fourth point is that in 2013 the U.S. Department of Energy shut down ConverDyn for most of the year for maintenance purposes. ConverDyn is the only U.S. plant that can convert yellowcake into uranium hexafluoride gas (UF6). Converting yellowcake to UF6 is a crucial step in producing fuel for reactors. Without a conversion plant supplies were building up so the U.S. Department of Energy started selling yellowcake and UF6, which depressed prices.
Finally, low-cost U-235 (enriched uranium that is used in reactors) from Russia is currently flooding the market. This might continue to about 2018, at which time all the cheap uranium will be gone.
A Closer Look At Japan
You can’t discuss nuclear energy today without mentioning Japan. Nuclear energy is currently not very popular in the country of the rising sun. This is not surprising given the Fukushima disaster, however according to the World Nuclear Association there were no deaths or serious radiation exposure that resulted from the disaster (the direct death toll of the tsunami, however, was around 19,000).
Despite the public’s negative perception the government is trying to revive the nuclear industry. After shutting down their reactors, electricity has become much more expensive and it’s hurting an already fragile economy. Japan is aiming to restart most of its 48 reactors, but there have been efforts to delay the process by local residents. It’s impossible to predict how many reactors will come back online, but currently the plan is for nuclear to provide about 20% of the nation’s electricity by 2030.
Japan is also endeavoring to significantly increase energy from renewable resources, however it will still be dependent on nuclear and imported fossil fuels. A diverse energy mix is sensible for any country, especially Japan who has few natural resources of its own.
From the chart above we can see that LNG imports have increased about 60% since the Fukushima disaster. According to an article from the Wall Street Journal dated May 13th 2015, businesses say that the rise in electricity costs makes it harder to run a factory in Japan. And it now seems that utilities will pass double-digit price increases on to their customers as the industry is becoming deregulated in 2016. Utilities have had to draw on their cash reserves over the last few years to pay for their higher cost of importing fossil fuels, however some are running low on cash and a price increase might be the only solution to avoid bankruptcy. According to the Finance Ministry the cost of importing fuel rose 25% in 2011 and 10% in 2012.
In an article dated 16th February 2015 by World Nuclear News, a report was cited saying around 90% of Japanese small and medium sized companies think their business would be adversely affected by rising electricity costs in the future. Companies said they might cope by reducing their staff, cutting salaries and reducing capital expenditures, measures which would negatively affect the Japanese economy.
Not only are higher electricity costs bad for businesses and the economy, but they can also be bad for the environment. Japan plans to continue its reliance on CO2-emitting coal to reduce the cost of importing liquefied natural gas. Japan previously had ambitious goals to reduce carbon emissions, but those plans have now been scrapped.
Germany’s Energy Revolution
The second country that comes up when discussing the nuclear industry is Germany. The country is aiming for what they call an “energy revolution”. Germany plans to shut down all its remaining (currently nine) nuclear reactors by 2022, and to wean the country off fossil fuels by mid century. The plan is to get 80% of the country’s electricity from renewable sources by 2050, however many people worry about the viability of this plan.
According to a Wall Street Journal article from 26th August 2014, the average price of electricity for German companies has jumped 60% over the past six years because the cost of subsidizing the renewable energy industry has been passed on to consumers. The price is now twice that paid in the U.S. Kurt Bock, the chief executive of BASF, the world’s largest chemical maker, said German industry is going to gradually lose its competitiveness. In fact, the company has decided to reduce its investment in Germany over the next five years from 33% of total investments, to 25%.
In a survey done by PWC nearly 75% of small and medium sized German industrial businesses say rising energy costs are a major risk. In a survey done by the Chamber of Commerce in the U.S. around 75% of American businesses operating in Germany also said the Energy Revolution made the country less attractive for business. German companies also say that rising costs are a reason to start investing abroad, according to the German Chambers of Commerce and Industry.
To date the beneficiaries of the Energy Revolution have been investors in wind and solar installations. Although the price of electricity has declined because of the added capacity, a surcharge is added to pay for the subsidies that the government has given to the renewable industry. The renewable energy surcharge has nearly tripled since 2010 and today accounts for approximately 18% of German households’ electricity bill. According to Germany’s economics ministry, the subsidies amount to about €24 billion a year.
And last, the departure from nuclear energy has increased greenhouse gas emissions in Germany because utility companies have turned to uranium’s cheap cousin, coal. The government says it’s temporary, but critics say that renewable power is unpredictable and it could force the continued use of coal.
The long-term fundamentals for the uranium market are very attractive. Despite the Fukushima disaster, most nuclear power generating countries are still committed to nuclear power, and today there are more reactors under construction than before the disaster. Japan and Germany famously planned to completely reduce their dependence on nuclear power, however Japan is planning on restarting its reactors while Germany’s energy revolution might be faltering.
Despite supply/demand imbalances, prices are depressed due to a short/medium-term supply glut. Prices might stay low for the foreseeable future, especially now that oil and gas prices have tumbled, making fossil fuel-generated electricity less expensive. But in the longer term uranium prices should go up and for savvy investors this might represent a valuable buying opportunity.
In Part 2 of Uranium: Where Do We Go From Here? We’ll offer a some more insight in to the Uranium market and the best way to invest in Uranium. Look for Part 2 of this article next week!
Contributions By Lars Haugen