By Jared Cummans
Bruno del Ama is the CEO of Global X Management, the New York-based ETF issuer behind several of the innovative exchange-traded products to hit the market in recent months, including the first ETFs offering investors exposure to Colombia and the Nordic region and the first and only uranium ETF on the market. He recently took time out of his busy schedule to talk about the nuclear energy industry, Global X Uranium ETF (NYSEARCA:URA), and more with CommodityHQ [see also Three Things Wall Street Journal Didn’t Tell You About Commodities].
CommodityHQ (cHQ): Obviously, the crisis in Japan earlier this year was a key event in the nuclear power industry, how does this look to impact nuclear power going forward?
Bruno del Ama (BdA): The Fukushima nuclear disaster was obviously very significant and had a profound impact on the nuclear industry as a whole. Most notably, Germany took the decision to pull out completely from the nuclear industry and close their 17 nuclear reactors by 2022. Other countries, the main example being China, used the event to reassess their nuclear program and how Fukushima impacted the significant nuclear build out they had planned. Their conclusion was to have some enhancement to their security and design plans, but generally they recognized that the Fukushima nuclear reactor was very old and that the reactors they were building were much newer and a lot safer [see also Seven Reasons To Hate Gold As An Investment].
Energy needs in emerging markets are growing very quickly as the living standards and energy demand of their massive populations increase. They therefore need energy sources from a wide range of alternatives and nuclear power is one of the most efficient sources of energy. As a result, China has decided go ahead with the ongoing build out of the nuclear reactors. They have 27 reactors under construction, another 51 planned, and 110 more reactors proposed, according to the World Nuclear Association. These are reactors that take a long time to be built, but in the context of 442 reactors operating today, that’s a huge increase [see also 13 Ways To Invest In Copper].
cHQ: Now that you mentioned China, what about some of the other countries in the region such as India or other large emerging markets? Do they continue to embrace nuclear power in the future as well?
BdA: Yes, very much so. A lot of the demand for new nuclear power plants comes from emerging markets and particularly the larger BRIC economies because they’re growing their standards of living and slowly catching up with per capita energy use in the US and other developed economies. Russia has 10 reactors under construction, 14 planned, and another 30 proposed, according to the World Nuclear Association. India is also very significant with 6 reactors under construction, 17 planned, and another 40 proposed. You also have a whole host of other countries that continue to build on their nuclear reactor capacities. That would include emerging markets such as Brazil as well as developed markets such as Canada and France [see also Can You Do Better Than GDX In The Gold Mining Space?].
cHQ: On the flipside, how have uranium prices, the prices of the actual metal, held up since the event? What about compared to other metals or the industry as a whole?
BdA: The uranium price history has been very interesting because it actually peaked at around $140/lb in 2007 and the price has collapsed since and didn’t appreciate to the extent that other commodities markets, such as copper, have appreciated over the last few years, leading to underinvestment in new uranium mines. About a year ago, uranium prices really started to increase from about $44-$45/lb. to a peak of $70-$75 per lb. When the disaster happened in Fukushima, the price took a significant beating and went down to a low of about $50 and has since stabilized in the range of $50-$55 per lb. Short term uranium demand was affected immediately in places such as Japan and Germany, which impacted the spot price for uranium as the market was trying to figure out what the new normal should be given the environment. Currently, it has stabilized around $50-$55 which is higher than what it was a year ago. That should give you a sense of the market, and our expectation is that prices should stabilize and build from current levels.
cHQ: How would you say the uranium miners are positioned in this environment? Compared to utilities companies such Exelon that used the processed fuel for their operations?
BdA: They’re very different businesses, from the miners perspective it’s a question of supply and demand for uranium. Because of the history of uranium prices that we’ve had, where uranium prices haven’t recovered significantly until recently just before the Fukushima natural disaster, there hasn’t been significant investment in new mines. That has constrained the supply of uranium. On the demand side, we have seen more nuclear reactors come online than have been decommissioned. We think there has been a one-time adjustment on the demand side of things with the number of reactors shutting down temporarily and permanently. Long term, the reality is that there is going to be a lot of new demand primarily from the emerging markets. Today, there is already an imbalance between supply and demand where the demand per uranium is already higher than the supply. The difference is being met from the decommissioning of nuclear warheads from the US and Russia. That program is coming to an end so that imbalance between supply and demand will be essentially adjusted through price mechanisms for uranium, which should have a positive impact on the profitability of uranium miners.
From a utilities standpoint, it’s a different dynamic. The price of uranium itself is an input although not the main operating cost of a nuclear power plant so to some extent short term will provide some relief because it lowers the cost of uranium. However, the operating and capital costs of power plants are the main drivers of profitability, along with any type of regulation with regards to electricity prices. To some extent, Fukushima increases the safety standards for power plants, and it may shorten the life cycle of those power plants or require additional capital improvements. Generally, the short term impact on the miners is much more significant because it’s purely driven off the price of uranium. Uranium prices have a lower impact on utilities, but when you think about it long term, the demand for uranium will play as a positive for miners, but higher operating and capital costs will impact the utilities side. In the long term, it’s a much more attractive market for uranium miners.
cHQ: So far in 2011, have you seen large outflows in the Global X Uranium ETF (URA) as a result of the tragedy?
BdA: No we have not. Contrary to what typically happens with ETFs, which serve as a pretty good barometer of investor sentiment, when you have a significant adjustment in price you tend to see a significant amount of outflows from that particular fund. The opposite effect was seen in this fund. Since Fukushima until now we have had about $130M inflows into the fund. From the investor’s point of view, it is an opportunity to invest in a market where the long term dynamics are very compelling. A decent amount of investors are putting their wallets where their mouths are and making significant bets into a turnaround on the uranium miners ETF.
A clear indication of this dynamic is the escalating price war to acquire uranium miner and URA fund component Hathor by uranium industry giant Cameco and mining conglomerate Rio Tinto at more than a 50% premium. This gives you a sense of the upside that industry insiders see at current valuations for uranium miners.
Disclosure: No positions at time of writing.