Elemental: How some people are playing the uranium glut
With Japan shuttering its nuclear reactors and Europe pulling away from the nuclear power, the world has more uranium than it needs. But that's not stopping some people from betting on the radioactive element in the longer term.
"The industry in general is working through an oversupply situation due largely to the idling of reactors in Japan after the incident at the Fukushima plant," said Jeffrey Donald, a spokesperson for USEC, which supplies uranium to commercial nuclear plants in the U.S. and internationally.
The crisis in Japan also pushed Germany to hasten its move away from nuclear energy. Uranium now trades at about $36.50 a pound, the lowest level since January 2006. It has fallen more than 30 percent since the Fukushima disaster in March 2011.
Despite those low prices—or perhaps because of them—some investors are putting bets on a uranium turnaround.
Uranium Energy Corp, an exploration and production company, said it expects demand to pick up faster than production can respond.
"With the uranium prices falling so low post-Fukushima, they are well below the economic incentive level needed to see new mine construction," said Amir Adnani, CEO of Uranium Energy Corp.
As mines struggle because of the low prices, now is the time to buy them, Adnani said.
Uranium Energy Corp has made six strategic acquisitions since Fukushima, paying on average 80 percent less for the projects than their value before the accident.
Rob Chang, research analyst in metals and mining at Cantor Fitzgerald, said that purchase of mining projects has stepped up since Fukushima. "The environment is fantastic for acquisitions," he said.
All the acquisitions could gain value when demand revives, which could be triggered by the Japanese reactors' coming back—at least that's what investors hope.
David Talbot, senior mining analyst at Dundee Securities, said that he expects 8 to 10 Japanese reactors to come back online by year-end. Ten reactors have filed the necessary applications with Japan's Nuclear Regulation Authority, he said.
"Once they see Japan coming back online, I think, we will see more purchasing [of uranium]," Talbot said. "It has a lot to do with the psychological mindset of the investors."
Uranium Participation, an investment holding company that buys and stores uranium, is one way to get exposure to the commodity but not to the mines' operational risks, he said.
Shares of industry heavyweight Cameco have spiked in recent months, and uranium stocks will rise even faster when the commodity itself begins gaining, Talbot said.
Adnani pointed out that more reactors are under construction today than before Fukushima. Emerging markets are aggressively building reactors, he said, especially China, India and South Korea.
In the Middle East, Saudi Arabia has announced a plan to build 16 nuclear reactors, and the United Arab Emirates has broken ground on one of four planned reactors, Adnani said. He also expects Japan to start turning its reactors back on.
Skeptical in the short term
Demand for uranium is expected to grow less than 1 percent this year, leaving the industry with a net oversupply of 7 million pounds, said Nicolas Carter, senior vice president for uranium at Ux Consulting, a nuclear industry consultancy.
The world's net oversupply of uranium may reach 18 million pounds this year, according to Ux. The difference between demand (185 million pounds) and the supply from mining (155 million pounds) is covered by 48 million pounds from secondary sources.
Those sources include government stockpiles, as well as recycled uranium from a U.S.-Russia treaty that lets U.S. utilities acquire uranium from former Soviet nuclear weapons. That treaty is set to expire this year.
However, USEC is a buyer of that Soviet uranium, and Donald said that even the expiration of the treaty will not create a shortage in the near term. The market has been prepared for the change, so it is unlikely to have a big impact on prices, he added.
Exelon, a utility company with 10 power plants and 17 reactors in Illinois, Pennsylvania and New Jersey, said that it does not expect any uranium shortage soon and that it has planned its purchases with the cessation of the Russian treaty in mind.
With more than 60 reactors under construction worldwide and more than 150 planned, demand will pick up but not soon, Donald said.
"This oversupply in the market is being worked through, but it will be a few more years before demand returns to normal and starts to grow," he added.
Low prices on other fuels also have hurt the nuclear power sector, said Chris Gadomski, an analyst at Bloomberg New Energy Finance.
"In a post-Fukushima environment, with record-low natural gas prices and record-low coal prices, why would you expect the utilities to go ahead and invest in that technology [nuclear reactors]?" he asked.