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Uranium on the nose

More than 26 months after the nuclear accident at Fukushima, Japan, the nuclear industry is still feeling the effects with depressed uranium prices and cost pressures that are squeezing margins.

It took many years for the political fallout after the Chernobyl and Three Mile Island nuclear disasters to dissipate and for the nuclear industry to rebuild again. It looks fairly likely to follow the same path this time, which could mean several years before the uranium price recovers.

The price for uranium has fallen 40% since Fukushima to US$40 a pound, as Japan suspended its fleet of nuclear plants, while Germany cancelled licence extensions, shut down some if tis oldest nuclear reactors, with others to close by 20122. And it’s not just the Fukushima incident that has affect uranium prices. Concerns over global growth and China’s demand for raw materials have seen most commodity prices dragged down.

Falling prices have forced many companies to put new projects on hold, but with huge demand for electricity and energy, there’s a growing gap between supply and demand. Simple economics dictates that that should force the price of uranium to rise. India, South Korea, Russia and China continue to expand their nuclear programs, and Japan is expected to restart some of its reactors later this year. According to Tim Gitzel, CEO of Canadian uranium miner Cameco, 65 reactors are under construction around the world. Mr Gitzel predicts that annual consumption of uranium will rise from 170 million pounds to 220 million pounds by 2022.

Australia’s Paladin Energy (ASX: PDN) is expected to produce 8 -8.5 million pounds this financial year, and expects a supply shortage post 2013-2014. However, the company suggests that the price would need to double or triple from here to between US$80/lb to US$120/lb to incentivise new production. That would certainly help Paladin, which has average costs of US$45/lb. No wonder the company has flagged a potential sale of 15-20% of one of its two African mines, as it tries to cut its debts from US$673 million.

Foolish takeaway

While the outlook for uranium may appear bright, the uranium price could stagnate at current levels for many years, much like it did after previous nuclear incidents. Japan may not restart its reactors, preferring instead to seek other energy alternatives, and reactors currently under construction could still be cancelled or postponed. That is not good news for ASX listed uranium miners Paladin, Energy Resources of Australia (ASX: ERA), Toro Energy (ASX: TOE) or Deep Yellow Limited (ASX: DYL).

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