Wednesday, August 4, 2010
Last month, I told you about a huge commodity story you rarely hear in the mainstream media.
The story centers on Asia's voracious new appetite for uranium, the fuel that drives nuclear electricity generation.
To recap, Asia is in the midst of a massive increase in living standards. And since access to a reliable supply of electricity is the hallmark of an advanced society, the region is building power plants like crazy. Many of these are nuclear.
China plans to build 60 new nuclear reactors within the next 10 years. China's high-growth cousin, India, will need 40 new reactors in the next 20 years. That would increase the number of nuclear power plants in the world by 23%.
This story is worth bringing up again because of an insight resource investor Rick Rule passed along a few weeks ago at the Agora Financial Investment Symposium.
Rick told the audience in Vancouver that operators have to lock in 10 years of fuel supply in order to receive financing for those new reactors. Banks want to know the new plants can actually operate long enough to pay back the loan. That's why we see Chinese and Indian power companies buying lots of long-term supplies of uranium.
Every other year since 1965, the OECD Nuclear Energy Agency teams up with the International Atomic Energy Agency to create the Red Book. It's the definitive work on world uranium resources, production, and demand.
According to the Red Book, the world spent $1.64 billion on uranium exploration and mine development in 2008. That's a 133% increase from 2006.
Even with that massive increase in spending, the world's low-cost uranium resources (under $50 per pound) declined 1.2%.
However, the Red Book reintroduced the "high cost" category, which includes resources in the $100 range. Those resources rose 16% from the year before.
That's incredibly bullish for uranium. The cheap stuff is in production. All that's left is the high-cost stuff. The same thing has happened in the oil industry over the last decade. The price of oil rose from the teens in the 1990s to settle around $80 per barrel today.
And there's more bullish news for the uranium price: Uranium mines are notoriously poor performers. Actual production is about 85% of planned production. In 2008, the numbers were even worse. The world's uranium mines planned to produce 60,000 tons of uranium. They could only manage about 40,000 tons.
To put that in perspective, China will use more than half that much in just 25 years. India will need half that much in 20 years. In order to meet the worst-case demand scenario laid out in the Red Book, we'd need to put half of all the uranium deposits known into production.
There's really only one conclusion to draw from the supply/demand data... uranium prices over the long term are heading higher.
The China trade is back on... top Chinese search engine Baidu hits new 52-week high.
Pipeline stocks continue incredible rally... new-highs list filled with pipeline MLPs.
Despite horrid demographics and massive government debt, Japanese yen at new 52-week high.
Oil continues to ratchet up... spot prices above $82 per barrel.