China will take the nuclear option

A lack of alternative, viable energy sources means China will continue its nuclear programme, argue Apac Resources' Andrew Ferguson and UBS's Peter Hickson.
Peter Hickson, global basic materials strategist at UBS
Peter Hickson, global basic materials strategist at UBS

The future is bright, and it will be electrified by nuclear power. China's ambition for sustained high economic growth without further ecological and environmental degradation, means that the country will continue to have faith in uranium as an energy source.

Simply, China has no option but the nuclear one, according to Andrew Ferguson, chief executive of commodities investment and trading firm Apac Resources.

Ferguson joined Peter Hickson, global basic materials strategist at UBS, on a panel chaired by Patrick Loftus-Hills, head of UBS’s Asian industrial group, at the Swiss bank’s annual Apac Journalist Forum in Hong Kong yesterday.

Both men were former mining engineers before being seduced by the attractions of lucre in the investment world. They also share a positive view about nuclear energy, despite the public relations fall-out from the continuing crisis at Japan’s Fukushima plant.

China has 13 new reactors about to come online, and a further 14 that are being built, said Ferguson. Yet, only 2% of China’s energy is supplied by nuclear power, and even after those plants start operating, the percentage will be just 4%. He compared that with the US, where 20% of the energy is sourced from nuclear power, and France where the proportion is 80%.

And China’s nuclear policy won’t change. Reports of the Chinese authorities suspending the nuclear programme during the Fukushima crisis in Japan is “just noise”, Ferguson insisted. However, one positive consequence of the crisis is that China is likely to “over-engineer” its reactors to ensure their safety.

It seems China has no alternative to taking the nuclear route -- its current energy sources are inadequate, insufficient and unsustainable by any definition -- and that will drive demand for uranium during the next decade.

According to Hickson, 80% of China’s energy is derived from coal. Even with its official projections of a 25% expansion in nuclear power and 20% growth in alternatives such as wind energy by 2020, coal will still account for 70% of its energy sources.

This is unacceptable to China's policymakers who, under the recently announced 12th five-year plan, are committed to reducing emissions. By consolidating often dangerous and environmentally damaging “village-scale” mines, the quantity of shafts will be reduced, Hickson said.

In addition, labour costs are rising and taxes and royalty charges are set to burden the sector. To put it mildly, “the Chinese coal industry is challenged”. And China can’t rely on cheaper replacement stocks from Australia or Indonesia, where costs are also escalating. So, “nuclear energy will keep the lights on”, said Ferguson.

He criticised some sections of the media for recent “sensationalist reporting”, failing to highlight the vast improvements in nuclear technology since the 40-year-old Fukushima plant was constructed and for not emphasising the lack of direct or indirect casualties.

Ill-informed public opinion following the Three Mile Island meltdown in 1979 led to a retreat by the nuclear industry and an unnecessary slump in demand. In the 1980s and 1990s, the price of uranium drifted as low as $10/lb, as the nuclear industry first “fell asleep” after Three Mile Island, and as new sources of the material were found when the cold war ended.

In the early years of this century the price surged as China’s growth ambitions spurred expectations for most commodities, spiking as high as $136/lb on the back of feverish speculation. Since then, the price has steadily fallen as the market froth has dissipated.

Almost all uranium mines, with the exception of a couple in Malawi and Namibia, have been running for 40 years, so initial excavation and development spending costs have long since been absorbed. A term price of at least $75/lb would be required to incentivise new producers to tackle the expensive political and geological obstacles they would inevitably face, said Ferguson.

Currently, Kazakhstan drives supply growth, and is the world’s biggest uranium producer with around one-third of global mine supply.

The price of uranium has increased 60% since the third quarter of 2010, driven by the Energy Resources of Australia buying to fill production shortfalls, and by China-led stock-piling, according to UBS. It stabilised at $70/lb in February, and then collapsed by 30% within a week after Fukushima.

UBS estimates a price this year of $55/lb, rising to $60/lb by 2013 as a supply shortfall looms. Of course, there are risks even to this forecast, which is below the figure that might attract new industry entrants. One key risk is the possibility that China, Japan and the US may retreat from their commitment to nuclear energy.       

Besides uranium, Ferguson and Hickson are also bullish about other commodities, notably iron ore, coking coal and other minerals used in the steel-making process. Supply will be constrained by the huge costs of building delivery infrastructure and other logistics, they say. They also like grains, as diets change and arable land becomes scarcer.

Again, China and its rapidly expanding economic growth will continue to be the main driver of demand. The biggest risk for all commodity prices, it would seem, is if China becomes less of a one-way bet.

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