This piece was written for FT Alphaville by Gregor Macdonald, an independent energy analyst and investor based in Amherst, Massachusetts.
How goes uranium? Coming out of the previous recession, the uranium story tracks that of most other commodities this decade: a spectacular rise into 2007/08 that looked every bit the secular advance. Uranium’s overall percentage gain well exceeded that of other headliners like gold, copper, and oil.
At the starting gate in 2003 refined uranium, or yellowcake, was trading at just $7 a pound as a hangover of national stockpiles was available to feed demand. By the spring of 2007, growth in power generation and production setbacks at mines had pushed prices to nearly $140.
Now spot uranium prices have fallen to the $50 level. Alas, the uranium supercycle proved all too cyclical.
While this makes uranium appear as just another busted asset, some meaningful developments took place over that five year span. First, countries like Canada and Australia liberalized both their uranium mining laws domestically and their trading relationships with other countries, such as India. Leadership on the delicate export issue came primarily from the US. Second, power generation in Asia which had rested on growth in coal-fired capacity began to turn towards nuclear. In the 2004-2007 period we began to see contracts open up for construction of nuclear power in China. And finally, the means to invest in both uranium and the uranium sector became alot easier for the public.
Uranium Participation Corp, a closed end fund trading on the Toronto Exchange, became a way to hold physical uranium. Also, ETF providers like Van Eck in the US created vehicles to invest in baskets of uranium miners. Lastly, a big bang of sorts occurred in the Spring of 2007 when the NYMEX started offering futures contracts on their electronic exchange. In doing so, a rather arcane era of weekly, sealed-bid uranium auctions was largely swept away.
But that’s not to say volume and liquidity grew to any notable level at the NYMEX. While volumes were respectable for about a year, the credit crisis and global market mayhem took their toll. The electronic market, although it continues to offer monthly contracts all the way out to 2014, is currently very thin.
The global recession meanwhile is presenting a rather obvious problem to any new price advance. Power generation in both the OECD and in Asia is currently being served with much cheaper coal and natural gas. With industrial demand for power down notably in China and the US it’s become opportune for a number of nuclear generators to go offline for maintenance.
In addition, construction costs for new plants have skyrocketed. Some recent studies have also suggested the energy return on investment for new nuclear, after construction time and materials, may actually take years. In this regard nuclear power has been somewhat hurt in the same fashion that solar and wind power have been impacted by the fall in fossil fuel prices. Unless the global economy kick-starts demand for oil, coal, and natural gas on its own, the next price advance will likely have to come from new government-led policy initiatives. And that may happen. Because despite the serious problems surrounding waste, nuclear power still holds a strong advantage in the debate over carbon and climate change.
Long oil? No, long the volatility of oil – Gregor MacDonald for FT Alphaville