Uranium has been in a free fall since the Fukushima incident two years ago. Western governments have since been denouncing the use of nuclear power and cheap natural gas has also made that a more viable option for global power supplies. However, with increased energy demand globally, and lack of exploration to increase supply, a bull market is setting up for uranium. As a result, now it time to invest in uranium.
On the demand side, the use of nuclear power is growing despite reductions in nuclear power use in Western nations. The closing of plants in the UK, Germany, and the US are being more than compensated by the additions of nuclear plants in Russia, China, South Korea, and other emerging markets. Sixty-two new nuclear plants will be completed by 2016, and the total demanded output for nuclear power would exceed the pre-Fukushima highs in 2011 by 2015. Back then uranium prices were double current levels at $80 per pound.
Japan is also planning on restarting its nuclear plants that have been shut down since the Fukushima accident. The Japanese have really no choice, because they have no domestic production of fossil fuels, and the devaluation of the yen caused Abenomics has shot up the price of energy imports. In order to maintain energy security, Japan needs to nuclear power as a major source of energy to compensate for the lack of available oil and gas from allied nations. As a result of these developments, the International Atomic Energy Agency predicts nuclear-power production will rise between 35% and 100% over the next 20 years. The World Nuclear Association, a trade group, estimates total demand for uranium will rise by about 60% over that time.
Supply of uranium has become stagnant due to low prices. The cost of production of uranium is $35 per pound while global average cost of mining uranium is between $75-80 per pound. Commodities can stay below the cost of production for a while because it takes time to wear off excess supply. However, uranium has been trading below mining costs since March 2011, and decreased production will create a supply shortfall as more nuclear plants start to go online over the next two years.
Overall, nuclear energy will continue to be a significant part of the global energy grid, and uranium's supply excess has worn out due to years of low prices. New plants in emerging markets and the revival of Japan's nuclear strategy are the bullish catalysts that will boost uranium prices in the intermediate term. If prices just reach break-even costs of productions investors would double their money at current levels, which makes uranium an excellent value proposition. The best way to invest in uranium is through the Global X Uranium ETF (NYSEARCA:URA), since the futures market is over the counter and illiquid.
Disclosure: I am long URA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.