Commodities | Sep 04 2006
By Greg Peel
2006 has become the year of uranium as one by one investment banks turn their attention to researching a commodity that for decades was not worth worrying about. The latest in the list is Deutsche Bank, and in an extensive report the analysts have come to the conclusion that the uranium price has higher to go yet.
Nuclear energy enjoyed a burst of popularity in the 60s and 70s before the Three Mile Island incident in 1979 and the Chernobyl incident in 1986 brought the whole industry to a virtual standstill. Now that emerging economies have forced the oil price to enormous heights, coinciding with the world waking up to the environmental impact of greenhouse gas emissions, previous apocalypse fears have been tempered. The world wants to go nuclear.
Deutsche notes uranium is actually a fairly common element mined all over the world. It is about as common as zinc and about 40 times more abundant than silver. In terms of recoverable reserves, to date Australia boasts 36%, Kazakhstan 14% and Canada 13%, with figures rapidly dropping through single digits after that. The US has only 4%, and China barely registers.
Production is a different matter, with Canada chiming in with 11,600t in 2005, compared to policy-restricted Australia at 9000t, and underdeveloped Kazakhstan at 4500t.
Deutsche notes that, at present, 16% of the world’s electricity is produced from nuclear energy. Few plants have come into operation since the 80s. There are currently 440 operating reactors in 31 countries. The US leads the world with 103 reactors, followed by France with 59, Japan 54, Russia 31, the UK 23 and Canada 18. There is no electricity-producing reactor in Australia.
Now there is a scramble to catch up. The World Nuclear Agency reports there are 30 new reactors presently under construction and another 70 proposed. Despite the rush, Deutsche reports global nuclear capacity is expected to grow only 1.3% while energy consumption growth will run at 1.2%. However, Australia is an example of a country yet to settle on its twenty-first century attitude to nuclear power, and similar reluctance here and elsewhere may abruptly reverse, suggests Deutsche.
The simple fact is that many other alternative energy sources such as wind and bio-fuels do not nearly match the energy producing efficiency of oil. Coal is very efficient, but far too polluting. Nuclear is shaping up almost as necessary evil. And reactor technology has come a long way since Chernobyl.
Merrill Lynch analysts point out that the uranium market is no different to all the other commodity markets which are experiencing delays to projects due to rising costs and labour shortages. Uranium has the added obstacle of arduous environmental permitting that has not become any easier in recent times. As a consequence, the market remains tight. In Merrills’ supply demand analysis, the gap between primary uranium production and global demand continues to widen.
The uranium market is still small, with about US$5 billion consumed in 2005, notes Deutsche, compared to US$57 billion worth of gold. The supply gap started to become apparent around 2002, when the price of uranium began to move. Recent supply disruptions (including a fire at Australia’s Olympic Dam, flooding at Canada’s Cigar Lake and, most recently, cyclonic rains in the Northern Territory) have only accentuated the problem.
The tripling of the uranium price in such a short time took everyone by surprise, but Deutsche notes today’s prices are not actually high by historical standards. In the energy crisis of the 70s, uranium hit US$145/lb in real terms, before Three Mile Island sent everyone running for cover.
Uranium supply comes from two sources – primary mining and secondary supply. Secondary supply includes the reuse of reactor material, and also the dismantling of Soviet warheads. Russia has an agreement to supply the US with enriched uranium from weapons, but this deal ends in 2013. By that stage, primary mining will have become a lot more important.
Primary mining is very concentrated, with only six companies producing 75% of the world’s uranium at present. Most of the planned mine expansion will also come from these companies, so the uranium market will be tied up nice and tight for a long time yet. Despite expansion plans, Deutsche reports production has actually been lower in 2006 than 2005 in both Canada (down 33%) and Australia (down 27%).
It is not a matter of rushing into new mines to solve the problem. Uranium projects can take up to 20 years to move from inception to production, slowed down by the onerous environmental impact assessments that authorities require and the public demands. But uranium demand will grow rapidly in that period.
Credit Suisse notes that Japanese company Toshiba was no slouch when it bought US reactor builder Westinghouse this year. Toshiba expects China to invest very heavily in nuclear power stations in the next 20-30 years. Asia is the hotspot of nuclear development, with India catching up quickly. This represents about three billion people emerging into an industrial world, and wanting power.
Credit Suisse suggests that the same thing that happened to oil – everyone underestimated the extraordinary surge in demand from the developing world – could happen to uranium. There will certainly be a boom market for the next ten years or more, the analysts predict.
The World Nuclear Agency forecasts that the number of reactors will grow by 15% over ten years, but Deutsche considers that number to be extremely conservative. There are currently dozens more projects across the globe that haven’t reached the approval stage. For example, the WNA is not accounting for any new reactors in the US or UK, but both have flagged intentions to step up nuclear power.
Deutsche has commenced coverage of uranium with a forecast for a uranium price of US$46/lb in 2006, US$59/lb in 2007 and US$63/lb in 2008. By 2009 the analysts expect prices to drift off as new supply comes on line, back to around the US$40/lb mark. However, by 2013 the secondary supply from weapons market will have dried up, and the price will turn northward once more.
In July, UBS analysts raised their 2006 uranium price forecast by 15% to US$44/lb, 2007 by 34% to US$57.50/lb, and 2008 by 50% to US$60/lb. They have set a long term mean regression price of US$27/lb. Don’t be put off by mean regression prices. They are there in order to avoid overblown company valuations more than anything else.
Until as recently as last month, ABN Amro analysts had set a 2010 regression price for uranium of US$25/lb. They then decided it was time to take a more in depth look at the market, and promptly raised their 2010 price to US$65/lb.
Investing in uranium has not been that easy to date, with very few mining companies offering pure exposure. Energy Resources Australia (ERA) is one exception, as one of the world’s largest producers, but even it is owned over 60% by Rio Tinto (RIO). Paladin Resources (PDN) is about to commence production in Africa.
But a recent development has turned a few heads. There are now (what are essentially) two uranium exchange traded funds listed on global stock exchanges – Nufcor Uranium and Uranium Participation Corporation. ETFs have contributed greatly to the recent surges in the prices of gold and silver, as the products have allowed small investors and large funds alike to finally invest directly in commodities.
Deutsche reports investor trading accounted for 25% of the spot uranium market in 2005, or 3% of all trade. (Most trading is conducted through long term over-the-counter contracts). 2006 has not yet seen quite as much interest, but it is early days in uranium’s awakening. ETFs have enormous power to significantly increase trade, and provide exposure for the world’s biggest investment funds.
Deutsche points out that uranium won’t come under the same sort of upward pressure as the likes of gold and copper, as the material can be reused. However, the analysts suggest the use of ETFs is “a harbinger for the increased level of investor interest”.
In the meantime it is not just immediate need that is pushing the uranium price but also stockpiling. Given the complex nature of the nuclear reaction process, reactors must always have material on hand to keep the reaction running. Power companies cannot risk running out of material, and as such Deutsche notes there has been a threefold jump in contract sizes as companies scramble to get in ahead of any medium term deficit in supply.
Uranium is set to become an increasingly important part of the twenty-first century.