China as a Nuclear Power Play

China as a Nuclear Power Play

By Romeo Dator
Co-manager, China Region Fund (USCOX)

Like all major economies, China is preparing for its energy future to accommodate rapid growth and the movement of more and more Chinese to cities. The foundation of the nation’s electricity generation plan is coal, but with loud calls coming from around the world for China to cut its output of greenhouse gases, a significant portion of new power will be nuclear.

From an investment perspective, this shows massive potential opportunity both in terms of infrastructure and natural resources, including uranium. Some analysts say the price of uranium, while soft now, could double over the next couple of years in recognition of future market tightness.

China’s nuclear capacity is now less than 9,000 megawatts, but the country has more than a dozen more plants either under construction or in the planning stages – according to figures from the brokerage CLSA, the capacity could grow fivefold by 2015. The official target is 40,000 megawatts by 2020.

Such an ambitious program raises the question of how to fuel all of the new plants that China wants to bring online in the next decade. Where will all of the uranium come from to handle this new demand?

China is not alone in its nuclear plans. Two decades of languishing interest in nuclear power after the Three Mile Island and Chernobyl incidents has reversed, and now too many nuclear energy is viewed as a relatively “green” energy with greater cost-benefit potential than solar, wind and other alternatives. Of course, the long-term storage of radioactive waste remains a stubborn obstacle to fuller acceptance of nuclear power.

Earlier this year, the International Atomic Energy Agency (IAEA) projected that global nuclear capacity would grow from about 370,000 megawatts (14 percent of world energy consumption) now to as much as 540,000 megawatts by 2020 and 810,000 megawatts by 2030. In dollar terms, capital expenditure on nuclear plants could total more than $500 billion over the next 20 years.

Roughly 40,000 megawatts of nuclear capacity are now being built on four continents, with China accounting for a quarter of that total, well ahead of #2 Russia and #3 South Korea. The chart above shows the global breakdown – even the United States is in expansion mode – and the chart below shows that China will be second only to the U.S. in terms of future capacity when projects at all phases are considered.

China has uranium reserves within its borders and it is aggressively lining up supplies in Central Asia, Africa and Australia to make up any shortfall. Government officials in Beijing say that more uranium mines are badly needed to satisfy future global demand for the resource – in China’s case, a Reuters story says the country can supply only a third of the 10,000 metric tons annually required to meet its 2020 nuclear capacity target.

The World Nuclear Association says the world’s measured uranium resources are sufficient to last 80 years at current usage rates, with the largest untapped deposits found in Australia, Kazakhstan, Russia and Canada. But just looking at China makes it clear that usage rates are soon to see a sizable increase. Like other resources, more uranium deposits may be economically viable at higher prices.

Uranium prices shot up to more than $135 per pound in 2007, after the first nuclear power projects began emerging, and are now around $45 per pound after a brisk supply response.

Some analysts see the price falling below $40 as new supplies from Asia and decommissioned Russia weapons come onto the market, but by 2011, price forecasts go up to $80 per pound as demand takes hold as the key price driver.

Romeo Dator is the co-manager of the U.S. Global Investors China Region Fund (USCOX). For more insights and investment research from U.S. Global Investors, visit www.usfunds.com.