Inside investment: Uranium – Metal of the mind and Tohoku
Investment is easy when you can immanentize the eschaton. But even radioactive assets such as uranium can be worth running a Geiger counter over.
News triggers thought in a tricky way. Take, for example, the Fukushima disaster in Japan. It occurred in March 2011 after the Fukushima nuclear plant was hit by a tsunami produced by the Tohoku earthquake, the largest ever recorded in Japan (9.0) and the fifth largest ever in the world. Over 15,000 people were killed by the tsunami, which, while not breaching the nuclear plant’s containment, caused three of the six reactors to melt down.
Fortunately, the containment held, and no one has so far died from the meltdown. A 2013 World Health Organization report says that the worst case effects would be a possible rise of thyroid cancer among female infants living in and remaining in the Fukushima Prefecture from a natural rate of 0.75 to 1.25 per 100 over the course of their lives. The WHO estimated that, even among the emergency workers inside the plant following the incident, cancer risks were the same as the general population in two-thirds of the cases and slightly higher in one-third.
Considering these facts alone, one might well conclude that the nuclear plant performed very well in the face of an incident far more severe than it was designed to handle. In the not-too-distant future, the Fukushima plant might well be cited as a testament to the safety of nuclear power. The 2013 WHO report is a step in that direction.
That is not, however, how people view the matter today. Forgotten are the earthquake and tsunami that caused so much death and destruction; remembered is the ‘Fukushima nuclear disaster.’ I imagine that when many Japanese people think about the tsunami, what comes to mind is not a tidal wave, but Hiroshima.
235 Gnostic speculations
Uranium is as much an idea as it is a metal. I remember a time around 1970 when I was a college undergraduate and ran into a friend sporting a lapel button that read, ‘Don’t immanentize the eschaton.’
William F Buckley Jr had visited the campus to address the Conservative Society where he distributed these buttons. At that time, the Vietnam War controversy was raging on campuses because the draft still existed, which made the already scary prospect of graduation even more horrifying. Anti-war sentiment was high and the proponents of unilateral nuclear disarmament were active. Buckley took the position that although the effects of a nuclear war would be horrible, unilateral disarmament would increase rather than reduce the risk of one occurring. He might have been right – so far.
But the point is that ideas are often more powerful than reality, even over substantial periods of time. This applies more strongly to investments than to many other areas, such as lawn care or automotive repair. The feedback mechanism for bad lawn care ideas is the appearance of brown spots on the grass in a few days or weeks, and for bad automotive repair ideas mechanical failure.
Investment ideas, however, do not exist in that real world. Investment ideas are not of this earth. They float in outer space in an ether of capital markets theory, buoyed up by forecasts – fallacious and otherwise. The world of investment ideas is, in short, a world of opinion.
This frustrates fundamentalists who perforce believe there will be an end time, an eschaton, when reality is revealed. Fundamentalists are betting reality will trump theory within their investment horizon, which might be a month, a quarter, or a year.
I wondered about this when I listened recently to a presentation by a uranium mining company. I was particularly struck by a slide that showed that while only 58 nuclear reactors were under construction before Fukushima, the number is now 72; 152 reactors were planned before Fukushima, 174 are planned now. This is on top of the 435 reactors now operating in the world.
Although demand dropped when Japan shut down its nuclear industry, the supply of uranium is already getting tight again. In fact, mine supply has been below consumption for 25 years. The 20-year programme under which Russia, in co-operation with the US, downgraded its weapons-grade uranium to fuel grade had been adding to supply until it ended last year.
Mine production increased in the previous decade as uranium prices spiked to almost $150/lb, and the increase was mainly in Kazakhstan, which now accounts for about 40% of world production. We are now at $35/lb, which is said to be less than half the price needed to justify investing in new mining capacity. Meanwhile, the Global X Uranium ETF (URA) has dropped 21% this year and 80% from its high in 2011.
According to the World Nuclear Association, the uranium fuel cost needed to produce one-kilowatt hour of electricity with uranium costing $35/lb is half a cent. Electricity prices in the US average between 10 cents and 15 cents per kilowatt-hour, so the uranium fuel is not a big factor. The price effect of uranium falls, therefore, wholly on supply and not at all on demand. Right now, supply is flagging while rising demand is built into the existing plant construction schedule.
Some fundamentalist investors are now betting on uranium. Their reward still floats gently between the real world of facts and the dream world of investment ideas. They are betting that the realization of uranium’s value will soon come to earth and that the eschaton will be immanentized to their profit.