Chernobyl and Uranium

Beat Ernie - Mon 22 Aug, 2005

...The accident at Chernobyl has since become known as the world's worst nuclear power disaster...Buy uranium, the fuel of any nuclear power plant...

I was just 10 years old when the disaster at Chernobyl happened. Somewhere in far distant Ukraine, an accident struck a nuclear power plant. The immediate effects on Germany and Western Europe seemed limited at the time. For me, only my beloved excursions into the woods to collect mushrooms were put on hold.

But the accident at Chernobyl has since become known as the world's worst nuclear power disaster. Three people were killed in the blast. Nearly 30 more died from radiation sickness. Ten more have died from thyroid cancer in the 19 years since, and many more have become seriously ill. Severe birth defects are still a regular occurrence.

So it's no surprise some Western countries have since decided to renounce the use of nuclear energy. Sweden's population voted against nuclear power generation in a referendum as early as 1980, in fact. Belgium and Germany have reached similar decisions to completely abandon nuclear energy. In Germany, the Green Party managed to re-write the Atomic Energy Act. It now aims "to orderly end the use of nuclear power for the commercial production of energy..." For the 19 operational plants remaining, there are specific limits on the amount of energy they can produce until they are finally shut down for good.

Chernobyl and Uranium: Ill-trained staff

Yet the accident at Chernobyl was not due to any shortcoming of nuclear energy per se. It was due to ill-trained staff ignoring basic safety standards as they operated one of the former Soviet Union's flawed nuclear generators. Understanding this fact today will prove crucial to meeting the world's soaring demand for energy. It could potentially triple your money, too.

Chernobyl used the Reactor Bolshoy Moshchnosty Kanalny (RBMK) - a design intended and used not only for power production, but also for producing weapon-grade plutonium. In comparison to Western-built reactors, the RMBK-type had significant drawbacks, partly responsible for the incident at Chernobyl.

For one, RMBK lacked the pressure and gas containment of the reactor unit. In addition to this, they showed severe deficiencies in the security and emergency cooling systems. Soviet experts at that time ere aware of these technical deficiencies in the RMBK. But no steps were taken to limit their use. In other words, the explosion at Chernobyl was the product of specific problems, oversights, laziness and political expedience.

Here in the West, meanwhile, the technical security of nuclear power plants has improved dramatically during recent years. The newly constructed reactor type, AP-1000, is one hundred times more secure than common reactor types, according to its manufacturer Westinghouse. This type of reactor makes an incident similar to Chernobyl technically impossible.

But the development of a nuclear power plant isn't cheap. One 1,000 MW power plant can cost up to $2 billion. And its development can take up to five years. A similar capacity coal power plant can be developed within three to four years for $1.2 billion. A gas power plant costs a measly $500 million in comparison and can be built in just two years.

Chernobyl and Uranium: The demand for nuclear power

It's unrealistic, however, to assume that more countries will follow Sweden, Belgium and Germany in completely phasing out the use of nuclear energy. In fact, quite the opposite. The demand for nuclear power is about to rocket.

Électricité de France (EDF) plans to build a new European Pressurised Water Reactor (EPR) in Flammanville. Without giving up their controlling majority, EDF has even invited several utility operators from Germany, Spain and Belgium to join the project. The new 1,600 MW power plant might begin operating as early as 2007. Meanwhile in Finland, Teollisuuden Voima Oy (TVO) has begun work on a new nuclear power project. Perrti Simola, president and CEO of TVO, said "Finland has opened the door to a new nuclear era! Many western countries will come behind us." That 1,600 MW EPR is planned to start operating in 2009. It will be Finland's fifth nuclear power plant.

Eastern Europe also continues to build more nuclear capacity. Bulgaria recently announced the development of two nuclear power plants. The first unit is to begin operation in 2011 and the second in 2013. And the USA currently operates 103 nuclear power plants. The superpower has gone through a wide-ranging consolidation process forced by the necessity to reach economies of scale. The ten largest providers control 61% of the entire sector. Under the Bush administration, plant operation life was recently significantly extended. In total, 74 power plants have been granted or will shortly receive a 20-year extension.

Chernobyl and Uranium: Asia

But it's in Asia where nuclear power dominates the development of new power plants. In India, where nuclear energy production accounts for just 2.8%, nine further power plants are currently being built. China is currently planning the development of 30 nuclear power plants. By 2020, their capacity is predicted to increase by 500%. Japan, Taiwan and South Korea are also planning additional nuclear power plants, and Russia has several plants in development. Over the next ten years, a total of 69 nuclear power plants are to be developed as 38 other are run down.

In other words, the anti-nuclear lobby is losing its grip on the future of power generation. Nuclear plants operate today in 31 countries. The world's 439 power plants meet 16% of its energy consumption. Those politicians and activists who want to exit nuclear power must have alternatives at hand. But the cost of replacing uranium-powered electricity plants is scarcely imaginable - most especially in environmental terms.

In research done for the French government, the investment bank SG Cowen calculates that to replace a single nuclear power plant, a wind turbine would have to be placed every 100 metres (90 yards) along the French coast. Consider now that France has a total of 59 nuclear power plants. Moreover, after years of struggle, the Kyoto Protocol is now in effect, requiring 141 participating states to reduce their joint emissions of the main greenhouse gases between 2008 and 2012 to at least 5% below 1990 levels. That reduction may seem small at first glance. But remember we are talking about 1990 levels. Since then, global greenhouse gas emissions have risen sharply, with only Germany being the exception, and even there, emission shave only fallen because in 1990 large numbers of struggling plants in former East Germany were closed down.

Chernobyl and Uranium: The Kyoto protocol

The challenges thrown up by the Kyoto Protocol cannot be overstated. Today, more than two thirds of global energy production is met through burning coal, gas and oil - and in the process, greenhouse gases are produced. In comparison, nuclear energy makes up 16% of global energy production. It's already reduced the greenhouse emissions Kyoto seeks to limit. If Great Britain gave up on nuclear energy altogether, for instance, the amount of greenhouse gases it pumps out would increase by 19%, based on the energy consumption figures from 1999. Indeed, because of the Kyoto Protocol, Great Britain is now working to reduce its 1990 levels by 12.5%.

In short, one nuclear power plant can reduce emissions of greenhouse gases equivalent to the amount released by 2.5 million cars. So while Germany is committed, on the one hand, to exiting nuclear energy production, on the other she's committed to reducing greenhouse gases under the Kyoto Protocol. These goals are clearly incompatible. Indeed, the Financial Times recently cited an analyst who said that in order for Germany to comply with both agreements, it would simply have to shut down a third of its industry!

Thankfully, there is a new level of understanding amongst the Green lobby. Keith Parker, chief executive of the Nuclear Industry Association, points to a statement by James Lovelock, one of the founders of Greenpeace: "Only nuclear power can halt global warming". Sir David King, Chief Scientific Advisor to the British Prime Minister Tony Blair, also confirms the necessity for nuclear power. He is certain the UK will need a new generation of nuclear power plants until renewable energy has evolved sufficiently to replace them.

Chernobyl and Uranium: Energy demand

Indeed, the World Energy Council accepts that worldwide capacity of nuclear power plants must triple by 2050, if the goals of Kyoto Protocol are to be reached and sustained in the face of ever rising Chinese and Far Asian economic growth. The International Energy Agency expects for energy demand to double worldwide by 2030. It's no surprise that of the 30 most recently completed nuclear power plants worldwide, 20 are found in Asia.

What's more, a large part of the global oil and gas reserves are found in regions that are politically unstable. The largest reserves are in Saudi Arabia, Iraq, Venezuela and West Africa. Of course, nuclear energy is dependent on a natural resource, too - uranium. But unlike oil and gas, uranium is found in stable countries like Canada and Australia. More than 50% of the world's uranium is produced in these two countries.

By now, dear reader, you might be asking yourself how you can best profit from this growth in nuclear energy. The investment options, however, are limited.

Big suppliers of kit such as Westinghouse - which provides the underlying technology to almost 50% of all nuclear power plants worldwide - are either not listed on the stock market, or the development of nuclear power plants is only one part of the business. A widely diversified corporation such as the German Siemens AG or the American Shaw Group offers little direct exposure to the nuclear renaissance.

Chernobyl and Uranium: Buy!

Your alternative is to buy uranium, the fuel of any nuclear power plant. But it can only be bought indirectly, as it is not an available market commodity. In contrast to gold, silver or platinum you cannot readily put a kilogram of uranium in your safe - and if you did, you would shortly be visited by the National Security Agency of your home country!

Now, a few Daily Reckoning readers might find the thought of making friends with the National Security Agency entertaining. But for the rest of us, I suggest taking a look at the shares of uranium producers. We have just recommended one such stock to members of the 'Profit Hunter' service. Its sales grow by $5 million every time the price of uranium rises $1 per pound.

Currently, uranium is quoted at more than $29 per pound. In 2004 alone, the price rose by 43%. As with all other industrial commodities today, low prices in the 1990s have left the extraction of uranium under-invested. And while worldwide uranium production rose from 93 million pounds in 2003 to 104 million pounds in 2004, this was gobbled up by global consumption of 180 million pounds per year.

Other commodity experts agree with our perspective. The analysts at JP Morgan just increased their target price for 2006 from $29.60 per pound to $32.50 per pound. Greg Barnes, analyst with Canaccord Capital - Canada's leading independent investment dealer - expects an average price of $30 per pound, up from $27 previously.

In short, uranium looks to be the future of the global energy market. Buy.


Beat Erni
for The Daily Reckoning

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