onsdag 13 juni 2007

The uranium price boom

The subject of this post is somewhat related to nuclear power, a controversial issue among renewable energy proponents. Uranium price is increasing, which will make the price of nuclear power increase. The price of uranium has increased from the 2001 bottom of $6.70 to $130. That's a 2000% increase. This might not look very spectacular considering the general price increase of metals and other commodities. According to some, the prices are inflated because of speculation. There are however underlying geopolitical reasons for the uranium price boom, with obvious connections between the price of oil and the price of uranium.

Here is a short background for the price fluctuations of uranium:
- interest in nuclear power declined somewhat in the 80's because of environmental and other concerns. This lead to a certain over-capacity in uranium exploration, and to falling prices.
- falling prices reduced the incentives for new exploration, with several producers leaving the business.
- interest in nuclear is increasing because of the fear of climate change and the need to reduce CO2 emissions from power generation from fossil sources.
- fear of dwindling future sources makes the price go up even further

Of course, the higher price allows exploring companies to re-open old mines and reconsider projects that were not economically feasible some years ago.
Nuclear power is still cheaper than power from solar or wind resources, in most cases (especially when not counting different types of subsidies). And in Europe and elsewhere there is certain aversion to large-scale hydro power projects because of environmental concerns.
The soaring uranium prices could make power generation from renewable sources more competitive - as well as fossil based generation, ironically enough. But will this happen anytime soon? Probably not. The reason for this is the low effect of the cost of uranium and the price of power. Uranium only counts for about 5% of the price of power. This means that if the price of uranium increases with 100%, the price of power would only increase with 5%. As a comparison, the price of power generated from fossil sources is more price sensitive, and so is the price of many biofuels. For instance, the price of feedstock represents 75%-80% of the price of ethanol.
Thus, the price of uranium could soar even more - but nuclear power would still be more competitive than renewable power, price wise. For uranium being as expensive as oil, considering the price of the power, the price uranium would need to increase even further. Thus, the price of nuclear power will stay relatively low despite the uranium prices, and decreasing inventories won't change that. The competitiveness of nuclear power and it's weak relation to uranium prices is a challenge for proponents of power from renewable sources.

Ps. The uranium boom and the space for further price increases may be an eye-opener for persons looking for investment opportunities. It should be mentioned however that this doesn’t necessarily leads to uranium mining stocks booming. A 100% increase in the price of uranium does not automatically translate to a 100% increase in profit for there mining company, or soaring share values. And there will be differences between individual companies.

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