Investing in uranium: The nuclear energy power of the future

Concern over declining supplies of oil and gas, and the greenhouse effect of burning coal has put nuclear power right back in the spotlight. And this is one reason why the price of uranium, the basic ingredient of nuclear power, has quadrupled over the last four years...
Tom Bulford - Other articles Wed 20 Dec, 2006
Given the hysteria that accompanies any discussion of nuclear power in this country, it may come as a surprise to know that France generates three quarters of its electricity from this source. While we worry about future energy supplies, other countries seem to have no such misgivings. Today there are 440 nuclear power reactors in 31 countries and together they provide 16% of the world’s electricity supply. Another 30 are currently under construction in 11 countries, notably China, South Korea, Japan and Russia, and a similar number are proposed.
Investing in uranium: Uranium price quadruplesConcern over declining supplies of oil and gas, and the greenhouse effect of burning coal has put nuclear power right back in the spotlight. And this is one reason why the price of uranium, the basic ingredient of nuclear power, has quadrupled over the last four years. It’s a move that is generating plenty of bullishness for producers and would-be producers of uranium. So let’s learn a few basic facts about nuclear power and uranium... Recently you may have seen that ministers from the European Union, the USA, China, India, Japan, South Korea and Russia gave the go-ahead to a £7bn 10-year project to build an experimental nuclear fusion reactor in the south of France. The project will attempt to produce power by fusing atoms of deuterium, an element that can easily be extracted from sea water, and tritium, which comes from a fairly commonly occurring metal, lithium. If it works – and it is a big if – it could lead to commercial production of power by the second half of this century, in a manner that is both cleaner and safer than that produced by today’s reactors.
Investing in uranium: Bomb making and ice-breakersToday’s nuclear reactors do not work by fusion, but by fission. This means the splitting of uranium atoms. The process was first developed during the Second World War as a way of making bombs. After the war, attention turned to more constructive purposes. Nuclear electricity production is foremost of these, but 56 countries now have nuclear reactors for civil research. These are a source of neutron beams, used for scientific research and the production of medical and industrial isotopes. Nuclear reactors are also in use to propel 150 ships around the oceans, including eight Russian ice-breakers. So concern about radioactive waste has clearly not prevented the use of nuclear reactors, and now its economic and environmental attractions suggest that this use could be accelerated. The basic economic attraction of nuclear power plants is that, while they are very expensive to build, their fuel costs are low compared to coal, oil and gas. One kilogram of natural uranium will yield about 20,000 times as much energy as the same amount of coal. Less than 20% of the cost of producing nuclear energy is down to the cost of uranium. The rest is all spent on plant construction and operation, and the extraordinarily expensive business of decommissioning old plants.To illustrate that nuclear power production is relatively insensitive to the underlying input cost, the World Nuclear Association has calculated that while a doubling of the price of uranium adds only 7% to the price of electricity, a doubling of the gas has a 70% impact. This cost structure of high capital costs, but low fuel costs, also means that it makes sense to keep nuclear power plants running at high capacity, while coping with demand fluctuations, by varying the output of fossil fuel power plants.
Investing in uranium: Cheaper, cleaner and more efficientThe rising prices of oil, gas and coal in recent years has made the economics of nuclear power production more attractive. But producing nuclear energy is complex. The uranium has to be processed, enriched and fabricated into fuel elements. And afterwards there is the problem of disposing of the radioactive spent fuel. The main wastes produced by burning uranium in a nuclear reactor are very hot and radioactive, but they are modest in quantity. Handling and storing them safely is quite straightforward, so long as they are shielded from human exposure, and cooled. Shielding can be by water, concrete, steel or other dense material, cooling is by air or water. For instance, when spent fuel is removed from a typical reactor, it is done under water and the spent fuel is transferred to a large storage pool where it may remain for up to 50 years. During this time its radioactivity progressively decays and diminishes, so that after 40 years, one thousandth of the initial radioactivity of spent fuel remains, making it much easier to handle and dispose of. Despite this lengthy and expensive process, most studies – and there have been several – conclude that nuclear electricity now costs less than that generated from coal or gas, except perhaps in places like Australia where low cost fossil fuels are close at hand. To this economic advantage we now have to factor in nuclear status as a clean energy.
Investing in uranium: Comparative studies have so far failed to attribute any value to the fact that nuclear produces no carbon emissions, and quite how this will be factored into comparative cost studies is a problem for economists. But this merit can only enhance the attractions of nuclear. Add in concerns about security of supply, and it is little wonder that nuclear power is gaining adherents. Uranium is the raw material for nuclear power generation, and The World Nuclear Association, (www.world-nuclear.org) predicts demand for uranium out to 2030. Its central case in what is a very wide range (on its most pessimistic assumptions demand actually declines) has demand going from today’s 68,000 tonnes to 110,000 tonnes in 2030. This amounts to a less than stellar 2% per annum growth in the demand for uranium. This slow rate is influenced by the increasingly efficient use of uranium, which over the last 20 years has seen a 25% gain in the amount of power produced from a fixed amount of uranium. However, primary production of uranium will have to rise faster than 2%. This is because at present, about 45% of supply is coming out of stockpiles built up by the Russians and Americans during the Cold War. These are now diminishing fast, and are likely to be empty within 10 years. So... increased demand for uranium must be met by a disproportionately large increase in primary production from the mines.
Investing in uranium: Uranium price soarsAt present, 73% of uranium production comes from just 10 mines. The largest three, the McArthur River mine in Canada, and the Ranger and Olympic Dam mines in Australia account for 38% of global production. But already the hunt is on for new reserves, and exploration expenditure has quadrupled, albeit from a very low base, over the last five years. Fortunately uranium is a relatively common metal and, expressed in terms of their contained energy value, oil is about 300 times more expensive to find than uranium. So although the price of uranium has shot up to about $60.00 per tonne from $10 in 2000, this tells us more about the possibility of a tight market in the immediate future... and probably of a speculative element in the price, than it tells us about the likely long-term equilibrium price for uranium.On this score, a study by International Nuclear Inc, suggests that a price of no more than $20 is required to economically meet needs in the foreseeable future. So, while today the market mechanism is working by driving up the spot price of uranium and encouraging exploration for new supplies, the likelihood is that the price will settle back in a few years time once production has increased to the required level. Regards,Tom Bulfordfor The Daily Reckoning