Kristjan Velbri's  Instablog

As of May 15th 2009, the price of uranium (U3O8) was $51 per pound, down 62.5% from an all-time high of $136 in 2007 (see chart, click to enlarge). From a low point in September 2008, however, uranium has managed to rise around 28%. It appears that the price of uranium has bottomed out and is headed into another bull market phase. This, however, has little or nothing to do with Obama's stimulus plan or Bernanke's magic dollars. It all comes down to the basics of free market capitalism - supply and demand.

Nuclear Renaissance

Although anti-nuclear organizations gained a large enough momentum to kill the development of nuclear power in several countries around the world (Italy, Sweden, Austria), there is renewed hope for the nuclear industry. In the face of impending electricity shortages, global warming, air pollution, geopolitical problems and fossil fuel price increases, the nuclear industry has once again been given a chance to prove itself. Around the world, countries are taking another look at nuclear power. The more active of them, like China and India, are already constructing new power plants.

As of 2007, the IAEA reported there are 439 nuclear power reactors in operation in the world, operating in 31 countries, providing 15% of the world's electricity. Although the share of nuclear power in the overall electricity production has been dropping and will very likely continue its decline, the number of nuclear reactors is set to rise in a healthy, not too slow, not too fast, pace.

New reactors

During this century alone, China has connected 8 new nuclear reactors to its power grid, which brings its total to 11 reactors. Additionally, China has ordered 100 new reactors from Westinghouse Electric to be in operation or under construction by 2020. Italy, formerly opposed to nuclear power (they banned it in 1987 by referendum), has now decided to embrace nuclear power. Other European countries, some of which are worried about the flickering natural gas supply from Russia, are also looking into developing their nuclear capacity. The same is happening in the United States. According to the IAEA, a total of 45 new reactors are already under construction worldwide.

The problem with supply

The world demand for uranium has outrun the supply of newly mined uranium for well over 10 years (see chart, click to enlarge). The difference between supply (of newly mined uranium) and demand has been matched by decommissioning old nuclear war heads under the famous Megatons to Megawatts program, of which the US counterpart is USEC (USU). The agreement between the United States and Russia provides US nuclear power plants with uranium from dismantled Russian nuclear weapons. The current program, which is scheduled to end in 2013, provides 50% of nuclear energy produced in the United States. Although it would be possible to extend the program, the Russians have said that they are not interested in it (part of it has to do with securing the transport of uranium in Russia).

In the recent years, however, the uranium industry has been looking into expanding its production capabilities:

The uranium market has demonstrated recent strength, with major new investments and expenditures for exploration increasing more than 254% over the two-year period from 2004-2006. Over $774 million was spent globally on exploration in 2006.[IAEA]

With new capital investments coming online, the uranium industry is factoring in growing demand from new reactors as well as the possible expiration of the Megatons to Megawatts program. Taking all that into account, the market is still set to remain tight - developing new mines takes time, especially so when one has to overcome political will (more precisely, the lack of it). This makes uranium mining companies one of the best places to put your money for the long term.

Next time I will be writing about specific companies to invest in. Add me to your follow list to receive the update.

Disclaimer: No Positions!