Iit is, Through well, a familiar story. A metal that was previously only traded in a sleepy corner of the commodity markets is becoming crucial for the energy transition. Limited supply and geopolitical wrangling meet predictions of ever-increasing demand. Prices are rising because investors foresee a crisis. The only wrinkle in the story is that this time the metal isn’t used in electric vehicles or solar panels; it is used in the decades-old technology of nuclear reactors. Uranium prices are rising.
Hoarding uranium oxide – which, once processed and enriched, is the main fuel for nuclear bombs and reactors – may seem like a strategy more suited to supervillains than investors. But speculators now have a number of ways to gain fame. Stock market darlings include Yellow Cake, a company that buys and stores this stuff, whose share price has risen 160% in the past five years, and Sprott Physical Uranium Trust, a fund that does the same and has been a has achieved a return of 119%. launching in 2021. Hedge funds have also gotten in on the action, reportedly stockpiling the metal and buying options on uranium from banks.
According to UXC, a consulting firm, spot market prices have more than tripled from $30 per pound in January 2021 to a recent peak of more than $100, the highest in 16 years. An initial surge was fueled by speculation that Western governments would impose sanctions on Rosatam, a Russian company. A coup in Niger in July led to a new increase. Then in September, Kazatomprom, the world’s largest supplier, warned that a shortage of sulfuric acid would reduce production.
At the same time, Western countries are trying to build their own supply chains, as Rosatom currently has more than half the world’s enrichment capacity. In December, America, Britain, France and Japan pledged a combined $4.2 billion to build facilities to separate uranium-235 isotopes, the only naturally occurring material that can undergo fission, from the more common uranium-238 .
The world needs reliable, low-carbon electricity and nuclear power is one of the few options available. Governments have announced plans to expand capacity: Sweden has committed two more reactors by 2035 and the equivalent of ten more by 2045; last year Japan restarted three that had been mothballed; America recently connected its first new reactor in eight years. All this is small compared to China, which plans to build another 150 reactors over the next decade. No wonder investors are flocking in.
Yet there are reasons for caution, starting with the supply crisis. Although the coup in Niger was dramatic, the country is only the seventh largest supplier of uranium and it is not clear that there will be a permanent reduction in production. In addition, many governments have stockpiles, often purchased for defense purposes, that can be released for civilian use. Investors can only guess how much policymakers will be willing to spend. And energy companies have their own supplies, which are often enough to keep them going for a few years.
Then think about the question. The history of nuclear energy is one of false starts: it never delivered the cheap energy it once promised. During the oil shocks of the 1970s, uranium prices rose more than sixfold, peaking at $44 in 1979, equivalent to $198 today. Due to subsequent declines in oil prices, uranium prices had halved by 1981. Later, in the 2000s, a bubble grew. Prices rose from $10 in 2003 to $136 in 2007, as investors predicted a nuclear renaissance thanks to “peak oil,” a supply shortage and dwindling Russian supplies. Things went wrong during the 2007-2009 global financial crisis; The Japanese accident in Fukushima in 2011 seemed to be the final nail in the coffin.
For a happy ending, nuclear energy must finally work out this time. Demand—from energy companies, not just speculators—must rise, forcing someone to pay the colossal upfront costs of nuclear power or make the energy source cheaper. Both are plausible: net zero targets could mean governments are willing to spend heavily; a number of startups are working on small modular reactors, which if successful would reduce construction costs. China, which has the most ambitious plans to build capacity, has so far managed to keep costs in check.
But return to the example of other metals. When prices rise, more supply is almost always found and customers discover cheaper alternatives. That’s what happened with cobalt, lithium and nickel. High prices are the solution to high prices, the saying goes in the commodity markets. How sure can investors really be that uranium is different? ■
Read more from Buttonwood, our financial markets columnist:
Should you put all your savings into stocks? (February 19)
Investing in commodities has become terribly difficult (February 16)
The dividend is back. Is it right that investors are satisfied? (February 8th)
Also: how the Buttonwood column got its name