China's Coming Nuclear War

Jim Brown
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China is quickly finding out that being the largest economy on the planet is not going to be without its challenges. One of those challenges is the future nuclear war.

I am not talking about missiles and bombs but the fight to find and lockup enough uranium to power their proposed 245 nuclear power plants. China held its first Nuclear Symposium in late November in Beijing. Every company with ties to the nuclear power plant industry crammed the symposium in an effort to put their products in front of China's buyers.

China announced plans to spend $511 billion and build as many as 245 nuclear reactors over the next 20 years. That was nearly double their previous goals. Money is not an issue and compared to the rest of the world that is a big difference. China's growth is exploding. In November industrial output rose +13.3%, and stronger than analyst estimates. Retail sales jumped +18.7% and fixed asset investments rose by 24.9% year to date, also higher than expected. Chinese auto sales spiked +27% in November to 1.7 million vehicles. Think about that number. Sales for the year have already reached 16.4 million vehicles with 18 million expected by year-end. Analysts believe China will have 200 million passenger cars by 2020 from less than 85 million today. There are 199 million vehicles of all types in China today and that is expected to double.

One of the main problems holding China back is the lack of electricity. The majority of their power plants are coal fired and the coal comes from the more than 7,000 coal mines spread around the country and from imports. Their coal mining industry is not the same as in the USA. They are predominately small mines, very dangerous and privately owned. More than 700 miners are killed every year in coal min accidents.

China has to move into the next century and provide clean uninterruptible power if it wants to continue growing. Daily brownouts and power shortages currently force many factories and office buildings to rely on diesel generators for power. This causes diesel shortages, increases pollution and slows production.

China is not the only country with nuclear ambitions. India has plans to build 60 new plants, Russia 44, USA 31, Ukraine 22, South Africa 15, France 10 and there are dozens of other countries with projected plants in the single digits. There are currently 443 operational reactors worldwide.

The new plants will consume an additional 32,900 tons of nuclear fuel per year. That is a 50% increase over current demand.

Since China will be consuming the most they have launched a long-term effort to find, buy and contract for every available uranium resource on the planet. They are buying companies, creating joint ventures and signing long term supply contracts. For instance the French company Areva has agreed to supply 52 million pounds to China by 2020. Canada's Cameco just signed a deal to deliver 25 million pounds to CGNPC (China Guangdong Nuclear Power Corp) and another 23 million pounds to CNNC (China National Nuclear Corp) over the next ten years.

Kasakhstan's nuclear power company will deliver 63 million pounds to CGNPC by 2020. China has already stockpiled 17,000 tons of uranium over the last five years and may buy another 35,000 tons over the next decade to ensure enough supplies to get the first wave of new plants fueled and producing electricity.

China has been buying on the spot market and its imports in 2010 have been the equivalent of 25% of global uranium consumption. China is the number one reason the price of uranium has nearly double from its recession lows. With all this future demand we can expect prices to double or triple again over the next couple of years. Uranium is $61 a pound today and 50% higher than just six months ago. Uranium peaked at $139 in 2007 when Cameco suffered a flood in a new mine that took it offline for three years. The Cigar Lake mine, the world's highest-grade uranium deposit with 232 million pounds of yellowcake, was flooded in 2007 and after extensive renovation will not resume production until 2011.

Those million pound contracts mentioned above have already put a crimp in available supplies to other countries in the years ahead. Countries are being forced to bid for future supplies of a shrinking resource. China has beaten everyone else to the punch by stockpiling massive quantities and contracting for a large portion of the output from the major miners.

Miners have had problems producing previously contracted supplies and have resorted to buying uranium on the spot market to make up shortages in deliveries. The higher prices have boosted mining operations with 27 new mines in nine countries opening over the last ten years. These mines have added up to 65 million pounds to annual production but most are small deposits and they eventually run out and the mines are closed.

Current uranium demand exceeds current production by about 100 million pounds per year. The shortfall has been made up from existing government supplies left over from the cold war and from decommissioning nuclear weapons. Russia decommissioned over 20,000 nuclear weapons and that fuel was downgraded into fuel for nuclear plants. The supply of obsolete weapons has run out. They supplied about 50% of the nuclear fuel used in plants over the last ten years. The majority of U.S. plants have been using the fuel from Russian weapons for the last decade and few people were aware. The agreement with Russia, "Megatons to Megawatts" expires in 2013 but the supply of warheads is already depleted.

Analysts claim global uranium demand will be roughly equal to supply until 2015. After that there will be an annual shortfall simply because there are not enough mines. All the easily obtainable uranium has already been mined. Those that are left are located in unstable countries like Kazakhstan and Niger.

By 2020 analysts predict global demand will rise to 144 million pounds of yellowcake per year. That is nearly double the current output, which includes those nuclear weapons. There are currently no expectations for how that will occur since the production simply cannot ramp up to those levels. This will cause much higher prices and users are hoping that will cause new mines to open to augment supply. Unfortunately it normally takes 8-10 years for a mine with a reasonable sized deposit to come online. There WILL be a shortage of uranium.

Paladin Energy said current long term contracts are starting with a base price above $80 per pound with escalation clauses. However, even $100 a pound is a small price to pay for a plant with an initial cost of several billion dollars. Some analysts believe future uranium prices could rocket to $2,000 a pound and still be viable for a nuclear plant. They will just pass on the costs to their customers. In the volume of megawatts they produce the additional price per kilowatt is negligible but it will be a constantly rising adjustment.

Now is the time to invest in uranium and miners and hold those investments for the long term. Demand is exploding but production is not.

Jim Brown

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