Thursday, March 24, 2011

Japan quake rocks the uranium investment case

It was supposed to be another big "can't fail" commodity play like oil and precious metals, but since the Japan earthquake sent powerful shocks through the nuclear power industry investors who bought into uranium have cause to regret.

Before the horrendous disaster in Japan and the subsequent radiation leaks, I was seriously thinking of getting some, er, exposure to uranium. The bull case seemed pretty much irrefutable the more I looked into it:

- emerging market energy demand is growing remorselessly

- in particular, growing car use is making it ever more likely that the oil price will go stratospheric and usher in the age of the electric car

- if the world pays any attention at all to global warming fears, some of the new generating capacity will have to be nuclear. Many countries including the UK, India and China have nuclear expansion slated.

- once nuclear power capacity is built it will consume uranium for decades - the economics and science of nuclear practically lock in demand for uranium whatever the price (as was shown in 2007 and in the 1970s when the price was more than double its current level).

- one of the key sources of uranium to supply nuclear plants today is recycled material from decommissioned warheads. This is a finite source and will need replacing by new mining within a couple of years.

Lucky I did not pile into a uranium investment such as the large Canadian producer Cameco. The uranium price fell by 27% after the nuclear emergencies in Japan became news and Cameco's share price dived. Unsurprisingly given that nuclear has always been vulnerable to safety fears and is in any case always going to be a controversial choice of new power given how expensive it is and the issues surrounding nuclear waste disposal which have never been resolved. Germany has resolved to get rid of its nuclear capacity much earlier than planned and even China has paused its building of new plants.

Some sense a buying opportunity and indeed the uranium price has since rebounded somewhat. China and India are unlikely to scrap their nuclear plans altogether and in some ways Japan was the supreme "stress test" of nuclear power: if a Chernobyl was avoided in such extreme circumstances maybe that shows they are a risk worth taking. Just don't built them on the coast in an earthquake zone!

The real long term winners will be natural gas and renewable energy investments. The disaster will also underpin the already sky high oil price. Shares such as Shell, which is expanding and gets half its output from oil and half from gas, should be good long term plays even though their share price is close to an all time high.

From the Advoco website Contracting in Spain

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