Uranium - Energy crisis puts nuclear back on (almost) everybody's radar

31st of August, 2022 - torck capital management AG

With all the recent events, it is high time for another update on uranium. Although the past few months have been heavily influenced by the immediate aftermath of the Russian invasion of Ukraine and uranium prices have fallen sharply, our view on the metal – expressed in our last three articles – remains unchanged. Not only is uranium’s positive outlook intact but is corroborated by the change of heart various countries all around the world are currently forced to make.

The current energy crisis that has come to haunt the West and the rest is rapidly changing the global picture. Not long ago, nuclear energy was off the cards for most governments, citing the 2011 events in Fukushima Japan as a major reason to lastingly turn away from nuclear power plants. However, now that energy prices are going through the roof across the board, numerous politicians of different countries have signaled a pivot, with some seriously announcing an undoing of their prior resolutions.

Increasingly, the energy production facilities of major countries have started to feel the pain of run-away energy prices. The prices of natural gas, oil, and coal, the three fossil fuels used to generate reliable power plants providing steady baseload power, have climbed to record levels this year. With consumer price inflation at elevated levels as well, politicians have become particularly sensitive to the growing disgruntlement among the general public. Thus, turning to alternative energy sources that would potentially alleviate electricity prices in the mid-to-long term seems like a credible move to soothe overall tempers.

Europe: Not everyone is on the same page

To illustrate the devastating extent of the current energy crisis in Europe, Germany is currently used as a poster child. In recent years, the country has adopted one of the strictest anti-nuclear strategies with the goal to shut down all its nuclear power plants by the end of this year. Due to the precarious energy crunch, some politicians have recently reignited the debate to keep at least three nuclear reactors open into next year.

 

As it stands though, German leaders seem to rule out the nuclear option to fill the country’s energy. While the closure of the three remaining nuclear reactors might indeed be postponed, Germany has announced different plants. In a “painful but necessary move”, they are turning to more coal power plants, having passed emergency legislation to reactivate discontinued coal-fired power plants in order to support electricity generation.

The United Kingdom (UK) is another European country that has been affected badly by the recent energy crunch. As a matter of fact, energy prices are rising much faster on the island than on the continent.

Contrary to Germany though, the UK has already announced plans for eight new nuclear power plants, which will help to boost electricity production. While these reactors will not be built in a day and the recent closure of UK's most productive nuclear power plant called Hinkley B does not help in this regard, UK’s reorientation towards nuclear energy is a testimony to the fact that the country wants to bolster domestic energy security.

To achieve this, the UK government has even overridden its own planning inspector, which advised against permitting the build-out of a twin-reactor plant. This planning permission was recently given. Once completed in the early 2030s, this nuclear power plant construction is said to cover 7% of the country’s electricity needs.

 

A complete turnaround in Japan

When it comes to Asia, we can once more see the Asian pragmatism at work. Governments in Japan and South Korea are moving away from their anti-nuclear policies, while China, India and Singapore are looking to build out next-generation nuclear reactors. Even cash-strapped Asian nations like the Philippines and Indonesia signal increasing interest in nuclear energy. The former has recently revived talks of nuclear power as the country’s energy imports have spiked, while the latter said to be planning its first nuclear power assembly, which it plans to operate by 2045. The only country that has not (yet) revised its course is Taiwan. The small Asian country is still committed to shutting down its nuclear reactor over the coming years.

The majority however is taking the opposite approach and is most likely encouraged by the example of Japan. In the land of the rising sun, the idea of turning to nuclear once more has been on the rise for a while. Just recently, on the 24th of August, the policy shift was made officially, when prime minister Fumio Kishida announced that the country, once stricken by a nuclear meltdown, would restart more suspended nuclear power plants as well as look at developing next-generation nuclear reactors. The prime minster also added that the government will be considering extending the lifespan of existing reactors. With its intention to go full nuclear again, Japan has truly made a complete turnaround.

Japan’s outright shift highlights how challenging the situation has become for energy grids around the globe. As such, the turnaround is not only a significant step for the country but a turning point for nuclear on a global scale. As a matter of fact, earlier this year, South Korea already front-ran its neighbor Japan. Having elected a pro-nuclear president, the country is currently looking to build out infrastructure that will make nuclear energy account for 30% of South Korea’s total energy production. At the same time, the new president has promised to turn the nation into a major exporter of nuclear equipment and technology.

Still, taken together, Japan’s announcement can be considered more significant than the series of other announcements recently made by major Asian economies such as China and India. While China currently has the biggest ever amount of nuclear reactors under the construction and India is also stepping up the game, having its largest power producer develop two massive nuclear power projects, Japan’s case is most likely to find more imitators in the near future.

Nuclear is getting support in the US

The still biggest economy, the US economy, has also started investing strategically in nuclear energy again. The latest boon for the nuclear sector has been the passing of the Inflation Reduction Act, a $750 billion bill to support health care, tax policy and climate endeavors. The latter includes nuclear energy and this fact was recognized by the bill as it reinforces nuclear energy's role as a climate solution.

This is indicated by the fact that within the bill there are a variety of incentives for the clean energy sector and the nuclear power plant industry in particular. There will be tax incentives for operating nuclear power plants, advanced reactors and funding for high-assay low enriched uranium (HALEU). Concretely speaking, the bill frees up production tax credits for existing nuclear energy facilities. These will help make those plants more competitive, more likely preventing them from having to close business too early. As has been estimated, the total value going to the nuclear sector amounts to about $30 billion.

What is most gratifying from the nuclear energy industry’s perspective: The bill goes to show that nuclear seems to be on par with renewables now as it is increasingly recognized as a zero-emission electricity generation source. With the clear backing from the US Senate, the nuclear energy sector is bound to receive stronger financial support from the government going forward, which will spawn continuous growth.

Geopolitics is still a major factor to keep an eye on

We rest assured that the world’s overall (re)turn to nuclear energy will be a major demand driver for uranium in the foreseeable future. In the short- to medium-term however, geopolitical tensions remain a major factor to keep an eye on.

Above all, the tensions between Russia and Kazakhstan represent the most pressing melting pot. The Central Asian country has long been considered an ally of the Russian federation. Back in January, when Kazakhstan was grappling with internal political riots, the Kremlin rushed to the aid of the Kazakh president and helped him retain power.

With the war ensuing in Ukraine however, Kazakhstan seems to have taken a stand against Russia and its actions. Kazakh authorities have not shied away from sending humanitarian aid to Ukraine as well as maintaining contact with the Ukrainian president. Such and other actions disfavoring Russia could be taken as a provocation – one that Putin and his supporters could act on.

After all, Russia has powerful means of exerting pressure on Kazakhstan and making the country pay for letting its relations with its northern neighbor go to waste: 80 percent of Kazakhstan oil exports pass through Russian territory using the Caspian Pipeline Consortium (CPC), of which Russia is the largest stakeholder (31 percent). Should the Kremlin decide to close down these operations on its home ground, Kazakhstan could stand to lose over 40 percent of its state revenues.

While Russia would surely have to loose as well, Kazakhstan would probably be even worse off, which is why Russia could potentially consider such a move. And indeed, in recent weeks, oil shipped through Russia ran into unexpected difficulties here and there, a incident that some have speculated was initiated by Russia in an attempt to flex its muscles.

Oil is by far not the only Kazakh export resource that Russia could wreak havoc with. The Central Asian country is also the third-largest exporter of uranium to Europe, which is why Kazakhstan and Europe are close partners when it comes to nuclear energy. Similar to oil, much of the milled uranium from Kazakhstan is going through Russia on its export route to the world at large. In plain English this ultimately means: Should Russia truly rain on Kazakhstan’s parade by blocking its trade routes, 40 percent of the world’s uranium supply could be at risk of getting disrupted. While there are alternative ways of shipping the uranium through countries like Uzbekistan, Turkmenistan, or China, these routes would be far more expensive.

But how likely is such a move by Russia? As Putin has shown by attacking Ukraine, anything seems possible. Hardly confidence-inspiring, moreover, was a social media post by former president—and now deputy chair of the Security Council—Dmitry Medvedev. In it he alluded to the fact that Kazakhstan could be next in line after Ukraine. Although the post was deleted later on and it was officially denied it ever existed, such a delicate social media comment caused concern after all.

What does it all mean for an investor?

We at torck capital management are of the conviction that despite a currently difficult market environment, uranium remains an asset to be owned. It is our belief that its demand will prove to be quite recession-proof with the tendency to even increase due to all the extensions and new power plants coming online in the near future.

About torck capital management

torck capital management is an asset management boutique based in Zurich. Well-established in the Swiss financial industry, our goal is for torck to become the leading boutique of choice for exponential opportunity investments. We aspire to both drive meaningful change with our investments and seize exponential return opportunities in times of market disruption. Our new “Energy Revolution Fund” – launched at the end of September 2021 – builds on the thesis that a worldwide clean energy transition will kick-start another “super cycle” of rising commodity prices, which was last seen in the early 2000s when China’s economic growth took off. With investments in hand-picked junior mining companies that ensure an adequate supply of minerals for the clean energy transition, we see the potential for our next exponential opportunity.

Follow our upcoming blog articles to learn more about how the clean energy transition will impact the demand for critical minerals and create a strong investment case for junior mining companies.