|| ERIC FRY
Is nuclear power approaching its sunset, as one of my colleagues suggested recently? Or is it entering a new dawn?
The short answer is “both.” But since this answer is quite confusing, a longer answer is warranted.
Recently, my colleague Energy and Infrastructure Strategist David Fessler published an insightful article about a “nuclear sunset” in the U.S. (You can read the entire column in Energy & Resources Digest here.)
“There’s no question that nuclear power served America well for more than half a century,” Dave conceded. “But the 21st century is going to be one of energy disruption.
“There’s a ‘nuclear sunset’ taking place in lockstep with ‘the rise of renewables,'” he concluded. “At least now you can’t say no one warned you.”
Hold that thought…
Notwithstanding Dave’s prediction that nuclear power in the U.S. is flickering out, I have published more than one column during the last 12 months that has expressed a bullish outlook on uranium.
And based on that outlook, I have recommended investing in two different uranium companies, Cameco (NYSE: CCJ) and Uranium Energy Corp. (NYSE: UEC).
On the surface, Dave’s outlook and mine appear to conflict with each other.
But they don’t…
Dave’s comments refer to the decline of nuclear power in the U.S. My comments refer to the growth of nuclear power in the non-U.S. portions of the world.
Countries like China, India and South Korea are actively ramping up their installed nuclear power capacity. Altogether, 54 nukes are under construction outside the U.S. An additional 146 plants are “on order or planned,” according to the World Nuclear Association.
That’s a total of 200 nukes that are either under construction or planned, which happens to be about double the 99 nukes that are currently operating in the U.S.
So even if sunset is nearing for the U.S. nuclear industry, the nuclear dawn that is awakening in the rest of the world will be likely to produce a net increase in the number of reactors operating around the world.
That’s a big part of the reason why I expect the uranium price to move higher over the next few years.
Additionally, I suspect the demise of nuclear power here in the U.S. is somewhat exaggerated. It still provides 20% of the nation’s electricity, and, importantly, that electricity is the baseload variety, which means it powers the grid 24 hours a day, seven days a week.
Most renewables, by contrast, provide power that varies according to factors like wind conditions or sunshine.
Because of the key differences between baseload power and variable power, a diversified “portfolio” of power-generation sources is likely to remain the status quo in the U.S… at least for now.
Countries like China and India are also adopting a “portfolio approach.” For example, China is both the world’s largest builder of nuclear power plants and the world’s largest installer of wind power facilities. Incidentally, China is also the world’s largest builder of coal-fired power plants.
Clearly, the country has embraced a portfolio approach as well.
Longer term, meaning over the next two to three decades, renewable power sources are likely to provide a very large share of both U.S. power generation and global power generation.
But the road from here to there is one that seems destined to feature a growing nuclear power industry, at least for the first decade or two.
Please understand, I am not “rooting” for nuclear power or suggesting that it is somehow better than other power-generation sources. I’m simply observing what appears to be happening worldwide and deriving an investment thesis from that observation.
In other words, I have no idea if the Chinese and others should be building nukes; I am simply observing that they are. And, importantly, the rest of the world is building new reactors at a faster pace than that which the U.S. is decommissioning its old reactors.
Concerning Dave’s notion of a nuclear sunset in the U.S., the trend is certainly moving in that direction. Twenty years have passed since the last brand-new nuclear plant in the U.S. began operations. And during those 20 years, the net number of operating U.S. plants has dropped about 10% from 109 to 99.
However, in the rest of the world, the number of operating plants has increased from 326 in 1996 to 348 today. As a result, the net number of nukes operating worldwide has increased from 435 in 1996 to 447 today.
That’s not exactly a blistering growth rate… but neither is it a “sunset.”
Looking at the current state of the global power industry, the relative appeal of nuclear power is easy to understand. Coal-fired plants provide a whopping 40% of the world’s electricity, while nuclear provides only 11%.
Most countries would probably prefer to see those numbers flipped. That’s because most folks would rather breathe clean air today and deal with their glowing fuel rods tomorrow than breathe toxic air today and have no fuel rods to worry about.
Most countries are eager to end their heavy reliance on coal-fired power. That desire is driving the nuclear reactor construction boom that is now underway outside the U.S…
A recent report from the World Nuclear Association states that all parts of the world are involved in nuclear power development…
- China has completed construction and commenced operation of more than 30 new nuclear power reactors since 2002, and some 20 new reactors are under construction.
- In addition to the 22 reactors online, India has five power reactors under construction, including a 500-megawatt (MW) prototype fast breeder reactor.
- Finland and France are both expanding their fleets of nuclear power plants.
- Several countries in Eastern Europe (Bulgaria, Czech Republic, Hungary, Romania, Slovakia, Slovenia and Turkey) are currently constructing or have firm plans to build new nuclear power plants.
- Poland is developing a nuclear program, with 6,000 MW planned. Estonia and Latvia are involved in a joint project with experienced nuclear power producer Lithuania. Belarus has started construction of its first two Russian reactors.
To be sure, some countries intend to reduce or phase out reliance on nuclear power. But these are the exceptions.
So as the construction and christening of new nuclear reactors proceeds around the globe, demand for uranium will continue to increase.
The chart below shows that uranium demand has exceeded the mined supply for several years… and yet, the uranium price fell anyway. That’s because above-ground stockpiles of uranium (i.e., “secondary supplies”) managed to fill the gap between demand and mined supplies…
But as I have stated previously, the uranium market appears to be close to a tipping point that will drive prices higher.
The gap between supply and demand is on track to widen significantly both because mined supplies are declining and because demand is likely to rise. As this supply gap widens, nuclear utilities will not want to risk relying on unreliable and dwindling above-ground stockpiles to meet any portion of their needs. Instead, they will resume signing long-term supply contracts with mining companies like Cameco and Uranium Energy.
For the moment, however, most nuclear utilities are sitting on their hands. The low uranium price has lulled them into a state of complacency. I believe that worm will turn… perhaps very quickly.
As I mentioned in the special report I sent to all subscribers, “complacency” is one of the most bullish facets of the uranium market…
There is [an] influence on the market that has the potential to produce a “uranium panic.”
That influence is complacency.
Because the spot uranium price has been falling for such a long time, nuclear power companies have become complacent about securing long-term supplies. But that attitude could turn on a dime, driving prices much higher.
Typically, nuclear power utilities purchase their uranium under long-term contracts. But with spot uranium prices so low, many utilities are allowing their contracts to lapse and not rushing to lock themselves into new long-term deals.
For the moment, utilities can afford to be complacent about renewing their contracts. After all, a wait-and-see attitude works just fine when prices are falling. Not so well when prices are rising.
But once the spot uranium price starts inching up from its lows, utilities might become less comfortable with a wait-and-see approach… and start trying to lock down long-term contracts.
That could be easier said than done.
According to industry sources, about 25% of existing supply contracts will expire over the next two years… and about 75% will expire between now and 2025. That means most of the world’s nuclear utilities will be trying to secure new long-term contracts at the very same time that a wave of nukes will resume operating… or begin operating for the first time.
This resulting scramble to secure supplies could create a “uranium panic.”
Bottom line: I continue to believe that uranium is a buy.