In summer 2010, Russia rocked the uranium market when it said it would load fuel into Iran’s first nuclear power plant on Aug. 21. It escalated U.S. concerns that the Kremlin would consider exporting more of its uranium to China and India rather than to the United States. The move was further alarming because the United States had asked the Russians to delay starting the plant until Iran stops enriching uranium. This, as well as other fundamentals, suggest the uranium market is poised to go nuclear.
Despite its importance to the world economy, uranium is unfamiliar to most commodity traders. What are the key fundamental drivers? First, getting exposure to uranium is not as simple as buying or selling, say, stock indexes or gold. The commodity has a thinly traded futures market on the New York Mercantile Exchange (Nymex). There are no listed options.
On the spot market, uranium fetches roughly $60 a pound, quite a bit off the $148 a pound seen on May 8, 2007. The decline in uranium from the 2007 highs has been because of widespread speculation that the Russians would flood the market.
True, Russia is a major player; however, it’s not the only player. On a macro-level, it’s also critical to keep an eye on Kazakhstan. According to the World Nuclear Association, the former Soviet Republic state became the world’s largest uranium producer in 2009 with nearly a 28% share of the market. That share is expected to rise to 30% by 2015.
There is reason to be cautious. In recent years, Kazakhstan’s government and foreign oil companies have feuded over production agreements. This suggests the Kazakh government could look to slow down and diversify its reliance on energy, including uranium, to encourage future economic growth. Supporting this theory is the expectation that uranium prices should be closer to $75 a pound to provide incentive for new projects around the world.
Also, according to the CIA World Factbook, China was the top destination for Kazakhstan goods in 2009, while Russia and China were the top two importing partners of Kazakhstan. Hence, economic prosperity could lie more to the East than the West for Kazakhstan. This means that despite any further growth in uranium supplies by Kazakhstan, output likely will go to Russia, China, Japan, South Korea and India as opposed to North America, where U.S. President Obama is a stated proponent of nuclear energy.
Time to buy?
To determine whether now is the time to get long uranium, keep in mind that the Energy Information Administration (EIA) said the demand for electricity in the United States is expected to increase by 20% by the end of the next decade (see "Power surge"). Uranium demand may be bolstered by one noted benefit of nuclear power plants: They produce no greenhouse gases. This has been a hot topic for years, made even more timely in the wake of the BP oil spill and global warming activists publicizing that the average coal plant can dump nearly 4 million tons of carbon dioxide into the air each year.
On the demand side, some estimates suggest China will buy nearly 5,000 metric tons of uranium this year, or double what it currently consumes. Consider that China’s uranium demand may climb to 20,000 tons per year in the next decade — that is more than one-third of the 50,000-plus tons mined the world over in 2009.
And Russia? Prime Minister Vladimir Putin has been targeting Russia’s use of nuclear power to jump to 25% by 2030 from roughly 16% now. Some suspect that Putin will seek greater ties to China for Russia’s uranium because of cooling relations with the United States and China’s newcomer status to the nuclear party; China derives only 2.3% of its electricity from nuclear power, compared with the United States’ nearly 20%.
Among the highest nuclear power users is France. The country gets more than 75% of its electricity from nuclear energy.
U.S. policymakers likely are considering proposals that would impose charges on entities that emit carbon dioxide, the most common greenhouse gas, with cap-and-trade legislation more realistic in 2011 with a newly elected Congress. Despite many Republicans being opposed to cap-and-trade, some members likely will be persuaded by the public outcry against crude oil’s environmental dangers from the BP oil spill. Such cap-and-trade policies could artificially increase the cost of generating electricity with fossil-fuel and further encourage the use of nuclear power. If cap-and-trade is not tied to alternative energy sources, the program only will drive up energy costs for the U.S. consumer. At roughly $10-$25 per metric ton, carbon dioxide charges probably would make nuclear generation more competitive with existing coal power plants. For more on the bullish case for uranium, see "Uranium prices poised to rise" (see ).