Nuclear Explosion

Jim Brown
 
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As winter fades we could be headed for a nuclear spring. Conditions are setting up perfectly for a boom in uranium demand.

Last week Japan's Prime Minister Shinzo Abe released a new Basic Energy Plan that included a restart of all their nuclear reactors deemed safe by the Nuclear Regulatory Authority. Based on initial reviews of Japan's 50 nuclear plants about 40 of them could be restarted.

Japan is in serious economic trouble. Before the Fukushima accident that severely damaged four reactors nuclear energy supplied 30% of the electricity for Japan. Without nuclear they are forced to import significant amounts of LNG at much higher prices. Even with the higher imports of gas, oil and coal the country is still lacking in sufficient electricity. They have to restart the reactors.

Abe has his back to the wall. Like Mario Draghi he is doing "whatever it takes" to keep Japan from suffering through another lost decade. That means massive QE and major devaluations of the Yen to make exports more attractive. Like in China Abe is resorting to massive infrastructure projects to keep citizens employed and push the country forward. All of these massive infrastructure projects require electricity and with fossil fuel plants running at maximum capacity that means nuclear reactors have to be restarted.

Before Fukushima Japan accounted for 12% of global uranium demand. With Japan being out of the uranium market for the last two years that 12% of unused uranium flooded the market and pushed uranium prices down by more than 50%.

Just resuming that demand would mean a significant increase in uranium prices. However, there is another factor that is also pushing prices higher. The Russian "Megatons to Megawatts" program brokered by President Reagan ended in December. That program took decommissioned Russian nuclear weapons and turned their nuclear material into fuel rods for generating electricity. That was a major source of nuclear fuel that disappeared in December. More than 500 metric tons of highly enriched uranium (90%) was converted to more than 15,000 tons of low enriched uranium (5%) and used to create fuel rods for power plants. This was the equivalent of 20,008 decommissioned nuclear warheads. The fuel from this program generated 10% of the electricity used in the USA. The disappearance of this source of uranium removed a large portion of global supply.

China is also facing a near permanent energy shortage. With their economy growing at 7.5% a year and moving from a rural society to a city society they require massive amounts of energy. Brownouts are common in China and pollution from coal fired plants is a major problem. China needs more nuclear energy and they need it today. They currently have 20 plants in operation and 28 under construction. They have between 60-100 in the planning stages. When you consider there are only 438 operating plants in the world today the addition of that many in China alone would be another 20% increase in uranium demand. Add to this the 10 new plants in France and another 10 in Saudi Arabia and the Middle East and uranium demand is going to soar in the coming years.

In 2014 and 2015 we are going to return to the point we were at in 2008 where uranium demand is going to outstrip supply. With prices so low over the last two years many development projects were put on hold. The uranium mining industry went into hibernation as the excess inventory from the Japan shutdown was consumed and prices returned to a point where it was profitable to mine it again.

By 2020 we could have 600 operating reactors. That would mean a +35% increase in demand and mine output cannot increase that fast. We are going to be facing a uranium shortage in the coming years and uranium miners are going to prosper. Uranium stocks surged last week on the news from Japan but that is just a blip on the longer term horizon. Do you have your uranium in your portfolio?

Market

Monday could be ugly at the open. The S&P futures are down -20 points late Sunday afternoon on the events in the Ukraine. A fear of war may be driving investors to take profits but that fear is unfounded. There are no military options for Europe or the West. The war is already over in the Ukraine. Russia won.

Once investors understand that the world or more specifically the USA is not going to war over Ukraine they will buy the dip. That could be Monday or a week from Monday but the dip will be bought.

Jim Brown

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