by Tony Daltorio, Investment U Research
Thursday, April 1, 2010
Want an explosive reaction?
Just mention nuclear power and get set for some very passionate opinions.
Normally, those opinions center around one of two ideas… People normally either champion it as a practical answer to climate change. Or they cite the disaster at Chernobyl and the near-disaster at Three Mile Island.
But those debacles don’t seem to mean all that much these days. Instead, it seems that governments around the world are actually warming up to the idea.
In fact, the industry might break free of its previous stigma altogether sometime soon. And if it does, it will present a major profit opportunity for investing in uranium that many won’t want to miss.
Nuclear power’s main usage is to generate electricity, of course. And currently, well over 400 nuclear reactors operate in over 30 countries. The United States alone runs about 100 of them.
Together, those reactors produce around 15% of the world’s electricity. But authorities on the subject expect that number to increase significantly in the years ahead. The World Nuclear Association foresees governments around the world building hundreds more reactors in order to combat global warming.
The facts seem to agree…
- According to recent data, 50 reactors are already under construction.
- Formal plans exist for another 137, with another 295 reported proposals seeking approval.
- For its part, the British government has approved the installation of 10 new nuclear power stations.
- Germany, Italy, Japan, the U.S., India and China have similar campaigns underway.
Much of the growth of nuclear power is expected to be concentrated in emerging economies that are structurally short of power. That makes sense, considering how it presents an attractive, low-carbon option.
Not surprisingly, China is expected to lead the growth spurt. The New York Times states: “China is preparing to build three times as many nuclear power plants in the coming decade as the rest of the world combined.”
The country’s civilian nuclear power industry already has 11 operating reactors. But it plans on building as many as 10 new reactors every year for the next decade and a half.
That’s 150 new reactors altogether!
The Rising Demand for Uranium
Those new reactors will need fuel to fire them, which should lead to strong rising demand for uranium.
When priced and traded as an oxide labeled U238, uranium is commonly known as yellowcake. And as traders found out over the last decade, the price can be just as volatile as the actual goods.
Between 2003 and 2007, uranium prices rose from $10 per pound to over $130. Then the financial crisis happened, sending the commodity crashing back down to earth. It has hovered in the $40s ever since.
But prices should head higher in the not-too-distant future due to more than just rising demand.
In the past, much of uranium has come from decommissioned, Russian nuclear warheads. Yet that supply is dwindling. In addition, most of what is still left in the ground comes from politically unstable areas of the world.
That includes Niger and Kazakhstan, the latter of which currently produces about 20% of global supply.
The authorities there have already made it clear that they want the product to remain above $40 per pound. So they have effectively set a floor on the price. If it dips below that figure, they simply won’t sell.
Add all of that to rising demand, and the commodity should trade $10 or $20 higher in the next two years.
How to Begin Investing in Uranium
When it comes to investing in uranium, there are a number of ways to profit…
- Cautious souls who like to play it safe can check out broad-based ETFs like Market Vectors Nuclear Energy ETF (NYSE: NLR). It invests globally in the nuclear industry, devoting 35% of itself to uranium miners, 25% to nuclear plant builders and 25% to nuclear power generation. NLR allocates the rest as it sees fit.
- Powershares Global Nuclear Energy Portfolio (NYSE: PKN) provides another easy way to access the sector. So does iShares S&P Global Nuclear Energy Index Fund (NASDAQ: NUCL). Both of them devote decent amounts to uranium.
- Investors should also consider mining companies. Large, diversified miners such as BHP Billiton ADR (NYSE: BHP) offer the most prudent approach. But they can also opt businesses that deal primarily with uranium, including Cameco (NYSE: CCJ). And its junior competitors, while riskier, offer potentially bigger rewards.
Commodity investors can profit much more directly on uranium through the Toronto Stock Exchange under the symbol U.TO. Called the Uranium Participation Corporation, it invests all of its assets in either concentrated uranium oxide or uranium hexaflouride.