what the price explosion means for the nuclear industry

Horizon Nuclear Power, a company owned by Hitachi, confirmed that he was withdrawing from the construction of the £ 20 billion Wylfa nuclear Power plant over Anglesey in North Wales. The Japanese industrial conglomerate cited a failed funding deal with the UK government over escalating costs, and the government is still in negotiations with other actors to try to move the project forward.

The Hitachi share price is up to 10%, reflecting the negative sentiment of investors towards the construction of large, complex and highly regulated nuclear power plants. Governments being reluctant to subsidize nuclear power because of the high costs, especially since the 2011 Fukushima disaster, the market has underestimated the potential of this technology to tackle the climate emergency by providing abundant and reliable low-carbon electricity.

Uranium prices have long reflected this reality. Primary fuel for nuclear power plants slipped through much of the 2010s, with no sign of a major turnaround. Yet since mid-August, prices have jumped about 60% as investors and speculators scramble to grab the commodity. The price is around US $ 48 per pound (453g), after going as cheap as US $ 28.99 on August 16. So what is behind this rally, and what does it mean for nuclear power?

Uranium price

The uranium market

Demand for uranium is limited to nuclear power generation and medical equipment. Annual global demand is 150 million pounds, nuclear power plants seeking to obtain contracts about two years before their use.

While uranium demand is not immune to economic downturns, it is less exposed than other metals and industrial commodities. Most of the demand is spread over some 445 nuclear power plants operated in 32 countries, with an offer concentrated in a handful of mines. Kazakhstan is by far the largest producer with over 40% of production, followed by Australia (13%) and Namibia (11%).

Since more the mined uranium is used as fuel by nuclear power plants, its intrinsic value is closely linked to both current demand and the future potential of this industry. The market includes not only uranium consumers, but also speculators, who buy when they think the price is cheap, potentially raising the price. One of these long-term speculators is based in Toronto Sprott Physical Uranium Trust, which has bought nearly 6 million pounds (or $ 240 million) of uranium in recent weeks.

Why investor optimism could increase

While it is widely accepted that nuclear power should play a vital role in the clean energy transition, the high costs have made it uncompetitive compared to other energy sources. But thanks to strong increases in energy price, the competitiveness of nuclear power is improving. We are also seeing increased commitment to new nuclear power plants from china and elsewhere. At the same time, innovative nuclear technologies such as small modular reactors (SMR), which are in development in countries like China, the United States, the United Kingdom and Poland, promise to lower initial investment costs.

Combined with recent upbeat nuclear energy releases from the World nuclear association and the international atomic energy agency (The IAEA increased its projections for the future use of nuclear power for the first time since Fukushima) All of this makes investors more optimistic about future uranium demand.

The effect on the price was also multiplied by the problems on the supply side. Due to previously low prices, uranium mines around the world have been on hold for several years. For example, Cameco, the world’s largest listed uranium company, suspended production at its McArthur River mine in Canada in 2018.

Global supply was further affected by COVID-19[female[feminine, with production down by 9.2% in 2020, because mining has been disrupted. At the same time, since uranium has no direct substitute and is involved in national security, many countries including China, India and the United States have accumulated large stocks, which further limits the available supply.

Hold on tight

When you compare the cost of producing electricity over the lifetime of a power plant, the cost of uranium has a much lower impact on a nuclear power plant than the equivalent effect, for example, of gas or biomass: it’s 5% against around 80% in the others. Thus, a sharp rise in the price of uranium will not massively affect the economics of nuclear energy.

However, there is certainly a risk of turbulence in this market in the months to come. In 2021, markets like Gamestop and NFT have become iconic examples of speculative interest and irrational exuberance – mania-driven optimism rather than a sober assessment of economic fundamentals.

Soaring uranium prices also seem to be attracting the attention of passing investors. There are indications that stocks of companies and funds (like Sprott) exposed to uranium are becoming actions even for the r / WallStreetBets community on Reddit. Irrational exuberance may not have explained the initial surge in uranium prices, but it may mean more volatility to come.

So we could see a bubble in the uranium market, and don’t be surprised if it is followed by a downward overcorrection. Because of growing view As the world will need a lot more uranium for more nuclear power, this will likely spur more mining and release existing reserves into the market. In the same way that supply problems exacerbated the effect of increased demand on price, the same could happen in the opposite direction when more supply becomes available.

You can think of all of this as symptomatic of the current stage in the uranium production cycle: an overabundance of reserves has removed prices too low to justify extensive mining, and this is followed by a spike in prices that will spur to further extraction. The current rally can therefore be a vital step in ensuring that the next phase of the nuclear power industry is adequately fueled.

Amateur traders should be careful not to get caught on the wrong side of this change. But for a metal with a half-life of 700 million years, serious investors can perhaps afford to wait.