Right now, I can’t think of a physical commodity with more upside and less downside than uranium.
Simply put, nuclear power delivers immense value to its users, there’s no substitute for uranium, and supplies are precarious while demand rises. Further, nuclear power produces zero carbon emissions, dodging a potential ESG headwind.
Here’s the bottom line with uranium. The situation has only two possible outcomes.
- Uranium prices don’t go up. Miners have no incentive to produce. Nuclear power plants run out of uranium, and the lights go out for billions of people.
- Uranium prices go up and incentivize enough production to meet the demand.
Which one is more likely?
The truth is that not only could the uranium price rise enough to incentivize production, but it could far overshoot—just as it has done in previous cycles—since it will take years for production to catch up with increased demand.
The key is to get positioned in the best uranium stocks before that happens.
The Uranium Market
Many people don’t like nuclear power, which is often seen as politically incorrect.
Some hear “uranium” and think “cancer.” Many get emotional because of its association with Hiroshima, Nagasaki, Chernobyl, Three Mile Island, and f*ckushima. As a result, uranium is the world’s most hated commodity.
This is why I’m excited. Crises and extreme sentiment don’t scare me. They attract my interest. Being a successful speculator involves turning mass psychological aberrations in your favor.
Combine this irrational sentiment with the compelling fundamentals of the uranium market, and you have the makings of an excellent contrarian speculation.
Demand
Nuclear power plants account for most uranium demand, which is inseparably linked to the uranium price and market cycles.
A nuclear power plant produces energy by splitting uranium atoms. The energy released boils water, creating steam that drives turbine generators. These plants use fuel made from uranium ore. First, miners extract the ore from the ground. Then, it’s enriched and made into fuel pellets.
According to the American Nuclear Association, one nuclear fuel pellet (about the size of a small gummy bear) has as much energy density as 3 barrels of oil, 2,000 pounds of coal, or 17,000 cubic feet of natural gas.
Nuclear energy generates about 10% of the world’s electricity (20% in the US).
Only uranium and hydrocarbons (coal, oil, and gas) can generate reliable mass base load power for modern civilization. Nuclear energy (uranium) is the safest, cleanest, and cheapest option—contrary to what many believe.
If we look at the deaths per terawatt hour (TWh)—the average annual electricity consumption for 150,000 EU citizens—of energy production among mass power sources, nuclear power is by far the safest.
Nuclear power is the cleanest energy source because it produces zero carbon emissions and doesn’t generate large quantities of pollutants. Nuclear power plants produce a small amount of radioactive waste, which is safely managed and disposed of with current technology.
It is the cheapest because uranium costs only a trivial part of a typical nuclear power plant’s operating cost—perhaps 2%. In other words, most nuclear plants probably have higher legal costs than uranium costs. So, the uranium price could double, triple, or more, and it wouldn’t significantly affect a plant’s total operating cost.
In short, the uranium price can go up without really affecting demand, which is an unusually favorable situation. Higher prices for something typically cause lower demand, all else equal, but not with uranium.
According to the World Nuclear Association, 33 countries use nuclear power with 440 operable reactors. Sixty reactors are under construction, another 92 are planned, and another 343 are under proposal.
Every year, the world’s active nuclear plants need around 175 million pounds of uranium to operate. This demand is inflexible, which means the power plants must obtain that uranium, or the lights go out.
Couple this inflexible demand with a precarious supply situation, where most production occurs in unstable regions like Africa and Central Asia.
Further, it typically takes ten years to bring a new mine online, including the whole process from permitting to production. As for existing mines, once producers take mines offline—often because the price of uranium has fallen below the cost of production—it’s hard to bring them back. Uranium mines don’t have easy on/off switches.
In short, it is difficult for producers to ramp up production during rising uranium demand. It often takes years for them to catch up. As a result, the only way for the market to resolve itself is through the price. That’s why the uranium price can have extraordinary spikes.
However, the uranium market often doesn’t just settle into equilibrium during these periods. The uranium price often overshoots where it needs to go to balance the market, creating an enormous bull market that turns into a massive bear market. This cycle has played out three times before, and I think it will occur again soon.
Japan
After f*ckushima, Japan shut down all 52 of its nuclear reactors. It has since decommissioned 19, leaving 33 reactors to be reactivated.
Japan shuttered its nuclear power plants despite a government policy that requires it to stockpile at least five years’ worth of energy supplies. This policy dates back to the early 1970s when a large regional war in the Middle East disrupted energy supplies and rocked Japan, which lacks its own energy resources. Uranium is the only feasible way for Japan to meet the terms of this policy. It’s impractical for Tokyo to stockpile five years’ worth of coal, oil, or gas.
Japan has made an emergency exception to this policy because of f*ckushima. But without energy security, it’s in a vulnerable position concerning its historical rival, China. That is especially true if geopolitical turmoil in the Middle East or Eastern Europe disrupts oil and gas supplies again.
It would be ironic to see Japan suffer from another oil shock during the period in which it suspended the very policy to protect it from one. That should incentivize Japan not to delay restarting its nuclear reactors.
Japan has already made some progress. So far, it has brought 11 out of 33 reactors back online. Further, 14 operable reactors are at various stages of restart approval. However, restarting idled plants is a long, complicated process.
While Japanese restarts are an important factor determining the market balance, it is not the only one. Even if the Japanese demand for uranium never returns, new nuclear power plants in China could create enormous new demand that will more than offset it.
New Reactors, Demand Creation, and China
Demand for uranium is set to increase drastically.
Currently, there are 440 operable nuclear reactors worldwide. Another 60 reactors are under construction, another 92 are planned, and another 343 are under proposal.
In other words, the number of operable reactors could more than double in the years ahead.
China accounts for the lion’s share of future demand, which could easily offset whatever happens in Japan.
Remember, Japan had 52 nuclear reactors before shutting them all down after f*ckushima. By contrast, China currently has 26 reactors under construction, another 41 in the planning phase, and a whopping 158 in the proposal phase. Beijing plans to have at least 150 new reactors completed by 2037.
China, which accounts for around 20% of global uranium demand, is expected to overtake the US (27% of demand) as the world’s largest uranium consumer by 2030 or sooner.
China needs nuclear power to support its growing economy and reduce its huge air pollution problem. Today, coal is still China’s primary power source, but it carries a high cost. Air pollution in Chinese cities is a serious health risk.
This is a big reason why the Chinese government aggressively pursues nuclear energy. In short, China has the most ambitious program for constructing new nuclear reactors globally, and the f*ckushima disaster hasn’t deterred it in the least.
The Chinese government rules by consensus, and they’re careful long-term planners. So when they make a strategic decision to include nuclear energy as a crucial part of their energy security, I have no doubt they are committed to seeing it through. They have the political will to pull it off and the financial, technological, and physical resources to do it.
Supply
Uranium is a naturally occurring element in the Earth’s crust. Though there are traces of it almost everywhere, the vast majority of uranium production happens in just a handful of countries.
Uranium mines provide around 128 million pounds of supply each year, covering about 73% of global demand. Tapping into inventories covers the rest.
Russia and its allies—like the former Soviet Republics of Kazakhstan and Uzbekistan—produce most of the world’s uranium. Other major producers, like Niger, are plagued by instability.
Kazakhstan exports most, if not all, of its production through Russia.
Namibia has two operating mines. China owns majority stakes in each of them.
Take the US for example. The US is the largest consumer of uranium, accounting for around 27% of global demand. Nuclear power generates about 20% of the electricity in the US.
Despite all the hostility, Russia still supplies the US with about 25% of its enriched uranium needs because there are no other practical alternatives.
Nonetheless, some US politicians are looking to ban Russian imports of uranium. Suppose that happened, how is the US going to replace 25% of its uranium needs? There is no other obvious supplier that large, which means they’ll have no choice but to bid up the price from other sources in a very tight market.
Further, Putin may not wait for the US to ban Russian uranium and decide to ban exports to the US before Congress acts.
It all adds up to a precarious supply situation in the face of growing demand.
Typically, it takes ten years to bring a new mine online, including the whole process from permitting to production. With the uranium price falling below the cost of production post-f*ckushima, there hasn’t been any serious movement to build a significant new mine for many years.
As for existing mines, once producers take mines offline—often because the price of uranium has fallen below the cost of production—it’s hard to bring them back. Uranium mines don’t have easy on/off switches. In the years after f*ckushima, producers shut down some of the most prominent uranium mines in the world.
In short, it is improbable that mine supply will increase quickly for these reasons.
Global Uranium Inventories
Mines produce around 128 million pounds of uranium each year, while the world consumes about 175 million pounds. Global inventories supply the difference—roughly 47 million pounds.
Getting accurate figures on global uranium inventories is challenging because governments and companies keep that information confidential. However, they will not allow inventories to become too low for energy security reasons.
Analysts estimate worldwide uranium inventories to be around 2-3 years’ worth of coverage. However, it is essential to stress that this is just an estimate—nobody knows how much uranium is in global inventories.
We know that utility companies prefer to keep at least 2.5 years of uranium on hand. So, if the inventory estimates are accurate, we could soon see power companies (and governments) scramble to secure their supplies in a tight supply environment.
Conclusion
Looking at the Big Picture for uranium, I see a precarious supply situation with growing (inflexible) demand from new nuclear power plants.
I think the stage is set for uranium prices to overshoot to the upside, just as we saw in previous bull market cycles with similar dynamics.
The key is to get positioned now in uranium companies with world-class resources in stable, mining-friendly jurisdictions.
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