Report
Chinese Demand Rides to Uranium's Rescue
China's voracious appetite for growth has been the savior of many commodity markets over the last few years, and now it's coming to the rescue of another mineral: uranium.
While much of the world questions the future of nuclear energy following Japan's earthquake and tsunami, China is pushing ahead with plans to increase its nuclear generating capacity to a level that will make it the world's fourth-largest consumer of uranium this year behind the U.S., Japan and France.
China's dramatic pace of nuclear-plant construction is set to more than make up for the postquake drop in Japanese uranium demand and will easily soak up any surplus production from new mines coming on stream.
The price of uranium, the ore used to fuel nuclear-power plants, had been experiencing something of a renaissance since high oil and gas prices—plus environmental concerns over pollution from traditional fossil fuels like coal—sparked a revival of the nuclear sector.
Before the earthquake crippled Japan's Fukushima Daiichi nuclear complex, spot uranium was trading at around $73 a pound, and analysts were preparing to upgrade their price forecasts for this year and next.
But the post-Fukushima closure of more than a quarter of Japan's nuclear reactors cut spot prices by 30% in a week to around $50 a pound, and questions over the future of the sector have been hotly debated ever since.
Not so in China. Warren Edney, senior mining analyst at UBS, said China plans to increase its 13 operable reactors with an additional 110 by 2018, with 27 already under construction.
Nuclear power currently makes up less than 2% of China's generation. The reactors need to be built to meet the country's 12th Five Year Plan's targets on emissions and power generation. The aim is to raise the percentage of electricity produced by nuclear power to 6% by 2020.
There are 62 nuclear reactors in construction globally, of which only 3% are from Group of Seven countries. State-run projects like those in China continue to be pushed through, whatever the backdrop, while privately run projects can struggle from access to capital and can be swayed by negative public opinion and lobbying.
German Chancellor Angela Merkel's government reacted to the Japan crisis by suspending a plan to extend the lives of Germany's 17 reactors pending a three-month safety review, and committed to an accelerated exit from nuclear-power generation. The government also temporarily suspended the country's seven oldest nuclear reactors. The Italian government reacted to the Japan crisis by slapping a two-year moratorium on nuclear development and scrapped further elements of the program this week.
It couldn't be more different in Russia, where 10 reactors are under construction, 14 are planned and a further 30 are proposed, as well as in India, where five are under construction, 18 are planned and 40 have been proposed. Opposition to projects in all of these countries is restricted.
"The fundamental difference between reactors from the G-7 and those from growing economies is that the reactors in growing economies are state-run entities that have very little input from the public," Amir Adnani, the chief executive of U.S.-based uranium producer Uranium Energy Corp., said in a recent interview.
Kazakhstan, meanwhile, is driving uranium supply growth. The country already produces around a third of the world's supply of the ore, known as yellowcake in its powder form, and is slated to boost production further this year. Other major supply increases are planned in Australia, Namibia, Malawi and the U.S. But once more, China looks set to provide strong price support.
"China is more than capable of mopping this surplus up, and in 2011-2012 in particular, is expected to be willing to continue stockpiling Kazakh uranium, keeping the market ex-China tight, so prices in these years should hold up," said Macquarie Bank's Max Leyton.
Barring a game-changing event like another nuclear-reactor crisis, uranium prices look likely to be well-supported for the next few years.
Analyst consensus is for spot prices to average $60 a pound this year, and the market's fortunes further out are even better. On Wednesday the price was at about $57. Mark Pervan, head of commodity research at ANZ Bank, said he expects uranium to average $60 a pound in 2011, rising steadily over the next several years to peak at an average of $80 in 2014. Japan may have provided a short-term jolt to uranium prices, but the new generation of nuclear plants slated for the world's fastest growing economies is still intact.
Write to Andrea Hotter at andrea.hotter@dowjones.com