Is the sector about to come back to life?

Nuclear Power is currently a much needed source of global base load power. After the Fukushima disaster in 2011 the industry has had a severe slowdown; however signs of life are emerging as the world moves to a safer nuclear solution. The uranium metal price is accordingly showing some early signs of recovery. The chart below gives a great long term perspective, also showing uranium prices are still near historic lows.

Uranium price and production graph 1947 to 2018

Global nuclear demand and supply forecasts

Currently in more than 12 countries, 71 nuclear reactors are under construction, 165 are planned, and 315 are proposed. China plans to spend $2.4 trillion to expand its nuclear power generation by 6,600%. Demand side growth in new nuclear reactors continue to grow with ‘first fills’ for new reactors requiring three times the uranium up front as annual burn. is restarting idled capacity, and the primary producers are cutting back on production. The graph below shows the large increase in nuclear power plants that are expected to come from China. Nuclear forecast growth 2017 to 2026

World Nuclear.org quotes the International Energy Agency (IEA) 2017 report which states: “In the Sustainable Development Scenario, low-carbon sources double their share in the energy mix to 40% in 2040, all avenues to improve efficiency are pursued, demand goes into an immediate decline and oil consumption peaks soon thereafter. Power generation is all but decarbonised, relying by 2040 on generation from renewables (over 60%), nuclear power (15%) as well as a contribution from carbon capture and storage (6%) – a technology that plays an equally significant role in cutting emissions from the industry sector.” Nuclear is currently about 11% of electricity supply. “The IEA’s ‘New Policies Scenario’ sees installed nuclear capacity growth of over 25% from 2015 (about 404 GWe) to 2040 (about 516 GWe). ”

Global uranium demand

Morning Star expects global uranium demand to rise roughly 40% by 2025. They forecast that low secondary supplies will cause shortfalls and that this will affect price negotiations by 2019. To encourage new supply, expected price should rise to around $65 per pound. Marin Katusa’s research, shown below, forecasts a steady increase in global uranium demand, mostly due to China, India and . Katusa Research: Estimated global uranium demand.

Global uranium supply

In 2017, Cameco and Kazatomprom announced production cuts in an attempt to reverse the past oversupply problem. This is starting to have an impact on the market now.

According to the uranium report 2018 by Swiss Resource Capital AG: “Today only 90% of the global uranium demand can be satisfied by producing mines.”

As the uranium price starts to rise this confirms the above research thesis. That is, rising demand and falling supply is resulting in an increasing uranium spot price. CNBC: Uranium 5 year spot price graph

The recent upturn in uranium prices has many analysts and industry experts asking the question: “Is the Uranium sector about to come back to life?” An increasing group is beginning to build a strong case for a uranium price recovery, especially when given most uranium producers struggle to be profitable at today’s low uranium prices.

It appears to me that if demand continues to grow strongly then we may well be witnessing a recovery in the uranium sector after a nasty bear market since 2008. Politics will no doubt play a crucial role, as the various Governments decide if nuclear is appropriate for their country. Investors would be wise to take an interest now, as legendary mining investor Rick Rule said: “Bear Markets are the authors of Bull Markets.”

Uranium Demand Higher, Supply Lower Over Long-Term

We all know that China, , India and Brazil are deploying a large number of nuclear reactors. England and a few middle eastern countries like Saudi Arabia and the UAE also have big plans. Not only is the world’s population reportedly growing from about 7 billion to 9 billion + by 2050, the proportion of the population using significantly more electricity, i.e. middle-class citizens of the world– is growing as well. The world’s middle-class could rise from 4-5 billion today to perhaps 7 billion. On top of that, there’s the possibility (some would say likelihood) that the mix of base load power generation (coal, gas, nuclear, hydro, etc.) will shift towards nuclear. I’m certainly in that camp.

Only about 30 countries currently utilize nuclear power at all. That’s less than 20% of the world’s nation states. No matter how one slices it, there’s going to be a huge increase in the amount of uranium required. Cameco’s 10-yr forecast of uranium demand is a CAGR of 3.5%. Where will an additional 70 million pounds of annual supply come from? That’s a good question. There are many problems on the supply side, ranging from terrorist activity and resource nationalism in select African countries, to severe water scarcity concerns, to depleting reserves in key countries, most notably . While we may not be looking at, “Peak Uranium,” it appears that the low hanging fruit has been harvested in many parts of the world, especially the lower-cost supply.

Supply challenges could be more problematic than pundits realize

But, here’s where it gets interesting, virtually all of the talk about uranium revolves around when will demand pick up to move spot and long-term contract prices higher? Some pundits are calling for a shortfall in supply as soon as 2016, others say 2018-21. But, in looking at the data from the World Nuclear Association, a different worry surfaces in my mind. Of the top producing uranium countries (those producing at least 1,000 tonnes in 2013) are countries such as Kazakhstan, , , Russia, Uzbekistan, China, Malawi and Ukraine. This is not all that comforting. Yes, supply could keep up with demand over the next few decades, but I would not count on consistent growth or no supply disruptions from some of these countries. In addition, Russia has considerable influence in Ukraine and Russia’s power base is increasingly centered around its abundance of natural resources. Do I trust Russia (or China) to supply the world with uranium without fail for the next several decades? Has Russia ever used oil or delivery as a sanction or threat against another country? I’m not saying that Russia or China will be the aggressor in some sort of geopolitical event, just that $%^& happens!

Global demand is probably understated by the World Nuclear Association

Switching gears to the demand side, many commentators refer again to the World Nuclear Association’s list of global reactors that are; “operable, under construction, planned and proposed.” I think this data underestimates long-term demand. Consider this–3 of the top 10 populations on the planet have virtually no nuclear aspirations (yet). Indonesia, (5 reactors planned or proposed), Bangladesh (2 reactors planned) and Nigeria, (0 reactors planned or proposed). Japan is a top 10 populated country with zero reactors in operation. I believe that 20-25 reactors will return to service in Japan before the end of this decade. That’s as important as China and India’s aggressive growth plans for intermediate-term demand.

Compare Bangladesh to Canada with about 1/5 the population and 24 operable, under construction, planned and proposed reactors. I think that long-term demand will be greater than expected, especially as BOTH the World Bank and IMF have recently proposed curtailing or heavily taxing the construction of new coal-fired plants. Other global agencies and countries are following the World Bank’s lead in just saying no to coal. Therefore, countries like Indonesia, Bangladesh and Nigeria, will have to turn to nuclear in a much more meaningful way. Who will pay for third world countries multi-billion dollar nuclear programs?

Giant conglomerates and/or State sponsored entities in , Russia, China, South Korea, Japan and the U.S. are fighting for this business. Programs to build and operate nuclear facilitates can be very lucrative. For some countries it’s a matter of pride and power projection to get as many contracts as possible. Contracts including permitting, design, testing, building and maintaining reactors as well as selling the uranium, installing the fuel and removing spent fuel rods. Better still if the World Bank or IMF guarantees the loans from the third world countries!

Conclusion I believe that there will be a widening gap between supply and demand that may grow to levels not anticipated by market participants who rely largely on World Nuclear Association data. The WNA is an excellent source of information on all things nuclear, but it’s a snapshot in time. I believe that both supply will be lower due to some questionable countries as the world’s top producers and that demand will be greater due a number of the most populous countries with virtually no nuclear programs.

Graphics, special thanks to the World Nuclear Association — for more information, click here