For much of the last decade, the metal to own has been gold. Enjoying steady price increases until 2008, its value soared with the bursting of the commodity bubble and the onset of the financial crisis. But with an ounce of gold now worth around $1,200, compared to between $250 and $300 10 years ago, some investors are starting to consider cashing out. Where next for maximum return?
The answer could be uranium. You might not want to wear it around your neck (or hide it in a shoebox under your bed) but there are compelling financial reasons for buying uranium futures.
One is that uranium is crucial for nuclear energy (when bombarded with slow neutrons it generates the heat in nuclear reactors). China is currently constructing 24 nuclear power plants, or 40% of the total being built globally. There are plans for at least 60 new reactors by 2020, according to Xu Yuming, executive director of the China Nuclear Energy Association. The average 1,000-megawatt reactor costs about $3 billion, according to the World Nuclear Association, and needs about 400 tonnes of uranium to fire up.
So it should be no surprise that forward thinking companies are making moves to ensure a steady uranium supply. Over the last month, China’s second-largest builder of nuclear power plants, China Guangdong Nuclear Power Group (CGNPG), signed agreements with two major suppliers – Canada’s Cameco and Australia’s Paladin Energy. And last week, East China Mineral Exploration bought a controlling 51% stake in junior Australian miner, Northern Uranium. The Rmb100 million ($14.7 million) investment marks an upping of the ante, as it puts cash into an exploration company, as opposed to a functioning mine. Northern Uranium has mining rights to an area focused on the Gardiner-Tanami project in Western Australia. It has already carried out extensive geological surveys but, as part of the deal, the Chinese partner will invest a further Rmb200 million to fund exploration costs.
China’s own uranium production is small by global standards (mining is dominated by eight countries that account for 94% of the market, with Kazakhstan, Canada and Australia by far the largest producers). The gap between Chinese reactor requirement for uranium and its domestic resources could grow to as much as 30,000 tonnes by 2030, reports 21CN Business Herald.
That means that – as with other commodities – major Chinese buyers are looking at locking up a share of supply further afield. “China’s high demand for uranium may induce speculation in the international uranium market, leading to soaring prices,” Yan Qiang of the Chinese Academy of Geological Sciences told 21CN “The future supply should not be overly dependent on the spot or futures market. Shares acquired from investments in foreign mines should become the main source of uranium.”
Beijing’s investment strategy is to target countries that have large amounts of supply but little demand. The relevant government departments have ranked potential markets into three groups, reports 21CN. The top tier is not only uranium-rich, it also either has existing mining relations with China – such as Australia and Canada – or is nearby, such as Russia, Mongolia and Kazakhstan.
The most significant countries in the lowest group, however, are those that have their own ambitions for nuclear energy. Top of the list is India, which already has a comparable number of reactors to the Chinese, and is also developing a nuclear energy blueprint of similar scale to Beijing’s.
Together, the two countries will push an atomic expansion that analysts say is the biggest since the decade after the 1970s oil crisis. By 2015, a new reactor may start every five days, compared with an average of one every 17 days during the 1980s, according to the World Nuclear Association. And operators are are already stockpiling uranium resources, market insiders report. Investors will be hoping that this will set the tone for another phase of increasing prices.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.