Yellowcake: Peril Or Power?

This week's decision by the Howard government to open uranium export negotiations with China, puts nuclear power back on the agenda. For ethical reasons, many investors have avoided this little understood source of power; on a more pragmatic level, investment options have been few even though Australia has about 40 per cent of known uranium reserves.

Today's debate has its origins in Montreal in 1987 and was kicked along at Kyoto 10 years later. Now, as the price of oil surges past $US63 a barrel, political leaders at all levels are urgently calling for a public energy debate.

Economists, like nagging parents in cash-strapped households, are forever telling people they cannot always have what they want. Resources are limited and choices have to be made. If too many people want the same thing at once, then its price will have to go up until there is just enough of it for those who can still afford it '” or until some probably inferior substitute is found. Someone will always have to wait or miss out altogether. Economics has been called the dismal science because this hard reality has never been popular in any household.

But politics is different. Even though it is presented as the art of the possible, most politicians are actually in the business of persuading people that those dismal laws of scarcity and choice can be overturned. All you need is faith '” and a supporting vote '” and things will turn out for the best. The politicians are the benevolent fairy godmothers in a snug, make-believe kingdom.

Although I write as an economist, my personal views on the energy future are far from dismal. If we give our existing markets, and our maturing power technologies, the freedom to work well together, then the problems of how to manage economic growth and its environmental costs will be overcome.

I'm certainly not advocating littering the planet (let alone the most defenceless parts of it, such as Africa or South America) with lethal material. What I am saying is that, even more surely, conventional energy sources will kill us via environmental contamination and global climate change. Also, conventional sources will deplete even faster than now as population growth and developing world economic-catch-up factors kick in.

Also, if we try to deny the Third World its equitable share of available energy '” either through price or physical rationing '” then there is likely to be a global riot resulting in war, famine, pestilence and death; and massive, probably unstoppable, migration to the rich OECD nations, including Australia.

All the problems the planet faces are not going to be solved by wind farms, farm-based methane generators or geothermal power, especially in the Third World, because they're far too expensive for the power they produce.

The only alternatives, unfortunately, seem to be economising on chemical-energy usage (the preferred Green strategy, which I think of as "back to the caves") or the careful expansion of new-generation nuclear power technology, which obviously must include the technology of waste management.

That's why we must have a grown-up debate, free of selfish, backward-looking axe-grinding. Our future does not lie in smoky, fire-lit caves. It lies in technology.

I've read many arguments that nuclear energy creates as much carbon dioxide as coal and oil because of the non-nuclear energy absorbed in construction and decommissioning. They are facetious. By that reasoning, we should not keep cattle or grow crops, because they release carbon dioxide and methane into the atmosphere. So I believe, we're stuck with nuclear as the lesser of all evils.

Waste-management technology has come a long way. High-level waste can be stabilised by vitrification (turning it into a kind of non-perishable glass or ceramic instead of a liquid or powder) and there are ways of immobilising those confined wastes in completely hermetic structures well away from earthquakes, lava flows or goundwater. Australia has several secure sites that have huge potential for the commercial management of customers' waste.

On top of that, the advance of reactor technology is beginning to permit the "reprocessing" (second combustion) of radioactive wastes as fuel. Not only can this reprocessing hugely extend the life of Australia's uranium fuels, it gives immense commercial advantage to those who control the "waste" that has now become fuel.

If the domestic debate breaks the right way, which I think it will, Australia can make a decisive contribution to the world's legitimate and massively escalating energy needs. In fact the International Energy Agency applauded the Howard government's recent decision to take control of the Northern Territory's uranium policy. But we can only move ahead by deliberately embracing the nuclear power option. This does not mean building nuclear power stations in Australia, but it does mean developing the uranium industry. Many people will feel uncomfortable with that choice, but there really is no other way.

Australia has a global role in the nuclear power industry. We may not need to choose between our grandchildren choking in an uncontrollably warming climate, or shivering hungrily in the dark, if we can overcome our old politically reinforced nuclear phobias.

Even more immediately, we are now being given the opportunity to support our neighbours' continued improvement in living standards by supplying them with the nuclear fuel they will need to achieve it. And, by selling them the means to help them grow, we also will grow and secure our own prosperity through trade.

URANIUM PRICES

Source - Ux Consulting Company.

But the opportunity goes a lot further than that if we also trust the technology of nuclear waste management. We could profitably profit from our uranium not once, but three times. We do this, first, by exporting greater quantities of uranium, second, by storing nuclear waste, and, third, through the longer term opportunity of selling reprocessed uranium to trading partners.

First, hard realities must be considered.

Population Growth

The most recent UN World Population Prospects paper predicts that 6465 million humans will share our planet in July 2005, an increase of 380 million in the past 5 years; and that another 755 million (nearly the present population of Europe) will join us by mid-2015.

So many new mouths to feed and new bodies to be clothed means productivity and profit must rise. That is very good for investment and commerce and for the creation of wealth.

A pessimist will ask where all those additional resources will come from, and will worry about their affordability. An economist will tell you that the market will make sure they are brought forth somehow, and at a new price, since supply always meets demand as long as politicians do not get in the way. And the politicians will again promise anything you want if you will only help them help you.

This conflict of expectations is only the surface of the problem. The UN analysis concludes that about 95 per cent of net population growth will be in the poorest countries and the population of OECD nations will hardly increase. The rich world's population, as it grows older and retires earlier from work, will jealously guard its prosperous lifestyle.

This means that the explosively growing less-developed countries, if their living standards are not to collapse under the weight of people, will need to develop their resources or buy them from richer economies. In trying to defend themselves against impoverishment, these countries, feeling compelled to seize vital resources, could easily launch economic sanctions against richer nations by banning exports or, worse '” with so little to lose '” resort to war.

Everyone needs to be reminded now and then that population growth has been limited in the past by the biblical Four Horsemen of the Apocalypse '” famine, pestilence, war and death. Any breakdown in our modern technologies of production and distribution might quickly unleash them again. Globalisation has knocked down the barriers that might once have confined the Apocalypse to only a few unlucky places, and the mythical agents of destruction are now free to gallop wherever they want if we let them loose.

Meeting Energy Demands

Now to another aspect of the problem of explosive and uneven global population growth. What sort of energy sources will be available and what will be their environmental impact?

If Australia does not facilitate economic growth in neighbouring regions, the flow of "economic refugees" from those regions could increase dramatically. Only by playing a pivotal role in solving global energy requirements can Australia become a fundamental part of the structural solution to the problem of neighbours trying to escape penury by migrating to Australasia.

The developing world's energy demands are going to be vastly bigger than its mere population growth suggests. That is because the industrialisation of those poorer economies will be accompanied by massive urbanisation, and new towns and factories are many times more energy intensive than dispersed agrarian villages. But economic development does not just shift the demand for power from one sector to another; it raises it from border to border.

In China, India and Mexico the rush of people to the cities is depriving the countryside of workers, forcing farmers to use more energy intensive machines and further raising fuel demand across the whole economy. China's energy demands are immense. The country aims to double its nuclear power capacity by 2020. This will involve building two nuclear plants worth more than $5 billion each every year from now until 2020. Even when this target is achieved only 4% of China's power will be nuclear. But there is no turning back: As development proceeds and the people get richer, so their energy demands rise as they graduate to bigger houses, and more lighting, airconditioning, electrical goods and motor vehicles.

Living standards and energy consumption go hand in hand, and Third World living standards have a long way to go before they catch up with ours. The combination of catch-up and population growth will hugely increase the global energy demand. Since we cannot accommodate that growth without industrialising, and we cannot industrialise without providing enormous increments of affordable and reliable power, where can all that new secure energy come from?

Fossil Fuels and the Atmosphere

Now we come to the final, most intractable, twist of the global problem. The combustion of conventional fossil fuel energy sources is already creating climatic changes that may be irreversible. The laws of chemistry are just as intractable as those of economics '” you cannot get energy through chemical combustion without getting oxidation products such as carbon dioxide. And locking up excess greenhouse gases before they do more atmospheric damage is technically difficult and expensive. Vegetation can certainly "fix" waste carbon, but we would need far more water than we have got to turn the world's deserts into carbon-absorbing forests. (Nuclear powered desalination plants might help us do that in time.)

The most recent emissions audit conducted by the UN Climate Study Group estimates that the US now produces 19,500 tonnes of carbon dioxide emissions per head of population every year. The other big greenhouse-gas emitters, Japan, the European Union and Russia, produce roughly half that figure per head and the 2.43 billion combined population of China and India (which will grow by another 10 per cent within 10 years) emit just over 10 per cent of the US per-head figure. Emissions in the developed world will not fall by much without a persistent and serious recession, which is the reason given by political leaders in the US and Australia for refusing to ratify the reduction conditions of the Kyoto protocol.

The big question is, at what average level will the per-head emission of the global population eventually stabilise?

Much of the world's thermal coal and crude oil is "sour", containing damaging concentrations of sulphur, which contributes to toxic smog and acid rain. Apart from the worsening quality of their reserves, many of the developed Asian thermal coal mines are already deep, dangerous and dear to exploit. And most of the world's recoverable oil and gas reserves are in such politically unstable places that their prices are easily shocked by supply threats, as we saw most recently with the election of a hard-line leader in Iran. Production, refining and distribution channels in these regions are also vulnerable to attack. Incidents every day in Iraq demonstrate that it is almost impossible to protect an oil well or a pipeline against a man with a small explosive charge. A nuclear power plant is a fortress by comparison.

Alternative hydrocarbon sources '” the Canadian tar sands, the bituminous crudes of Venezuela and the oil shales of Australia and the US '” are even harder and dirtier to process than coal before they even become fuels, and sub-sea methane hydrates, if they could be tapped at all, would also release abundant greenhouse gases.

Green Power

What about the many new "green" sustainable power technologies attracting public support? I doubt that they will make a fundamental impression on the problem of bulk energy demand, though many will be useful at the household level.

Their development should be encouraged. But technologies that rely on weather and water '” tidal barrages and sunk turbines, wave powered generators, wind farms, and even hydro-electric installations '” are either highly site dependent or too intermittent in their power generation to be consistently useful.

Hydro power is only feasible when a big enough river can be dammed '” and then, however clean and green it may be, it becomes dangerous in flood and ineffective in drought. Solar power collectors don't work at night, but they can charge batteries, heat water or even help to power an airconditioner when the sun is shining. Wind-driven generators are most effective in places where reliably strong winds make life difficult for people '” which means their output often must be transmitted a long way, with all the usual power losses, to where people do live and work. Even geothermal energy suffers from site remoteness because there are few cities or industries over geological hot-spots.

Apart from these peculiar disadvantages, the main objection to such non-chemical power technologies is the sheer capital cost of their meagre output. Their economic payback periods vary widely. At bulk power prices, they are usually unattractive even to a subsidised developed world consumer, and they look prohibitive to a Third World householder. But they might become marginally competitive with the dirtier chemical powered technologies if big enough carbon taxes are imposed. But that would be a strange way to contain inflation while promoting growth.

So, apart from the environmentalists' make-do-with-less strategy, what is left?

The Solution

The city of Kyoto is an icon of the international environmental movement because the Kyoto protocol (the UN Convention on Climate Change) was decided there in December 1997. The protocol stands for binding international agreements to contain, and ultimately reduce, national greenhouse-gas emissions.

That Japan's national electricity grid is already 35 per cent nuclear powered is a pretty powerful vote of confidence in the atom's peacetime technology by a people who were its first, and only, wartime victims. Despite all the perceived risks that still obsess the nuclear industry's critics '” terrorist threats, vulnerability to earthquakes, the perils of managing radioactive waste in a densely settled environment '” the Japanese continue to beat that figurative sword into ploughshares with unabated enthusiasm.

Japan's utilities operate 54 nuclear plants '” producing nearly 47,000 megawatts of electric power (MWe) '” of which 53 are the well-proven uranium fuelled light-water reactors, the other, at Monju, being a fast-breeder prototype reactor. Another two single-pass reactors are under construction, one about to be commissioned, and six more are at an advanced planning stage. As they are brought online, they will provide a further 13,000 MWe. So far, only two obsolete reactors have been decommissioned.

Let us put this into a local perspective. Victoria's Latrobe Valley, producing around 90 per cent of the state's electricity from low-energy wet brown coal, has a total installed power generating capacity of 6500 MWe '” including a peak contribution of 465 MWe from one gas-fired station '” and this is planned to rise to 6750 MWe in five years. The state's total generating capacity from all sources is now just below 8000 MWe, of which 1500 MWe is exported to other states. Only 475 MWe (6 per cent of the total) is not generated from burning fossil fuels such as lignite or natural gas.

The Japanese experience has been highly successful. Mostly because of the expansion of its nuclear power generation since the mid-1970s oil-price shock, carbon dioxide emissions per unit of electric power produced by its generating industry have fallen about 40 per cent. That is because an oil-fired power station will generate, over its life, about 0.75 kilograms of carbon dioxide per kilowatt-hour of the electricity it produces, while a nuclear power-station will emit only 0.02kg. The iron laws of chemistry once again. Coal-generated power is even more carbon-dioxide intensive, with a life-cycle rate of 0.98kg per kilowatt-hour, and even "clean" natural gas has a life-cycle emission rating of 0.61kg per kilowatt-hour.

So Japan's air and water quality has improved dramatically as well. And the nation's previous critical dependence on imported OPEC oil has fallen as it has switched to uranium fuel sourced from its reliable OECD suppliers '” Canada and Australia. The mantra of the Japanese power industry expresses bluntly the national policy objective: it is "to promote economic growth, energy security and environmental protection, while pursuing the stable supply of high-quality inexpensive electricity".

Balancing The Nuclear Record

Nuclear power is safer than most people think. In contrast to what most people believe, that satisfactory experience has in fact been replicated across the world. Worldwide, compared with the chemical industry, the coal industry and even the oil industry '” and, of course, ignoring the tobacco industry '” nuclear power generation has enjoyed a solid record of operational safety and performance. There are now more than 440 power-plants operating in 30 countries and generating about 267 gigawatts (GWe), 16 per cent of the world's total electricity supplies. These plants have 7200 reactor years of service over the past half century. Another 31 reactors are being built, of which 18 are in Asia, and a 60 more plants are likely over the next 15 years.

The industry has suffered two accidents: in 1979, the Three Mile Island plant in rural Pennsylvania experienced a coolant leak and was shut down, without damage or loss of life, and taken off-line; and in late April 1986, the Chernobyl No. 4 reactor, north of Kiev, the capital of Ukraine, became unstable during an unusual power-down test by inexperienced operators and blew up, instantly killing 31 people on site, a further 10 dying later from their injuries. More than 135,000 residents were permanently evacuated and there were later local reports of thyroid and other cancers among many exposed children.

However, the UN Scientific Commission on the Effects of Atomic Radiation (UNSCEAR) reported in 2000 that "there is no evidence of a major public health impact attributable to radiation exposure 14 years after the accident". The three undamaged Chernobyl reactors are still operating. But, despite the commission's report, the Chernobyl reactor spectacular has had a so far unshakeable impact on the international public perceptions of nuclear safety.

The Chernobly explosion prompted saturation media coverage and the story ran for more than a decade, whereas there was no equivalent environmental hysteria over the 1984 Union Carbide industrial disaster at Bhopal, India (which killed at least 3,800, possibly 15,000, and permanently incapacitated another 150,000), and nowhere near as much attention is paid to the annual death toll of between 6000 and 20,000 in China's deep coal mines. Perhaps those casualties seem more "natural" and unavoidable to us because of their familiarity.

Certainly there is something spooky about nuclear radiation, and this is probably why so many people recoil from the idea of hosting a monster that excretes radioactive waste. There may not be a lot of it, but you cannot just pile it up behind a school like a tailings dump. (The coal miners of Aberfan did that in Wales in 1966, and 116 children died when the dump collapsed on them.) You cannot tip it into the sea or dump it into a convenient river, as the chemical industry has been known to do with toxic wastes. Nor can you burn it as the oil industry does with its spills. Instead, you have to confine it in closely guarded cooling ponds for many years, and then put it into special drums, and eventually vitrify it (turn it into glass) before burying it, safely encased in bentonite clay, in galleries in stable, deep rock formations.

Milking The Monster

Storing nuclear waste is where Australia's next opportunity lies. Australia's Olympic Dam deposit alone contains roughly a third of the world's known reserves of high-grade accessible uranium. BHP Billiton spent more than $9 billion to acquire Western Mining, the deposit's owner, and is making plans for a probable $5 billion expansion if it can get the political approval to sell its output abroad. The mine's expected life is more than 70 years.

There are many other deposits in Australia, but parochial politics decided as far back as 1984 that only three uranium mines could operate. (Obviously, this may soon change with the Howard government's move earlier this month to wrest control of Northern Territory uranium mining from the Territory's local administration to Canberra.)

Canada, meanwhile, dominates the global market from an inferior resource base. The demand is there, the spot price of uranium '” specifically the spot price of oxide as yellowcake '” has tripled since early 2003 to $US29.50 a pound, and will certainly climb further as new reactors come on stream and as supplies from decommissioned military sources dry up. The utilities are buying for their future inventories and investors are starting to compete with them.

Not only can we sell high grade Australian uranium to energy hungry trading partners '” preferably as high-value fuel assemblies in future, rather than just as partially processed yellowcake '” we could also store the resulting waste, at least as profitably, in our own secure facilities. For that purpose, in the remote Pilbara Shield of Western Australia, Australia has some of the best pre-Cambrian rock formations in the world. Apart from the Archaic rocks in the Canadian Shield, which stretches between the Great Lakes and Hudson Bay, virtually all the other ancient and geologically stable suitable rock sites are in politically unstable areas.

And there's more. As fuel-reprocessing technology advances, nuclear waste will become extremely valuable, and Australia could sell it as fuel for breeder reactors of the future. No other industrial fuel '” coal, ethanol, methane, natural gas, oil, or even hydrogen '” can be traded three times.

But then, the laws of physics, which underlie nuclear technology, are different to those of chemistry, which underlie our present limited conventional energy sources.

The growing political debate must make sure that we all understand that crucial difference, and its potentially dazzling strategic, economic and environmental consequences. It is time we heard from the wizards, not the fairy godmothers.

ACTION PLAN

URANIUM STOCK PRICES

Source: Stockbroker Joseph Palmer & Sons

The solidly rising prices of energy stocks reinforce the belief that energy demand will be strong for a long time. The trend looks long lasting, rather than a cyclical blip, because what is driving all energy prices to record levels is not a momentary threat to oil supplies. If a lot of people want the same thing all at once, they will bid up its price until an acceptable substitute is found. That is exactly the process we are going through now, and a structural demand shock like this '” unlike a cyclical supply interruption '” takes a long time to play out.

Long-term investing is all about riding long-lasting trends and ignoring the distracting daily "noise" of price fluctuations. The trends of underlying population growth and lifestyle change in the developing world provide the biggest ever structural shift in resource demand. And the biggest beneficiary of this will be energy, which Australia has in abundance. So investors should have substantial exposure to Australian energy producers.

As the energy debate has begun to hit the headlines, and some Labor state leaders appear ready to follow the Federal Government's lead, uranium stocks have been especially powerful performers. The argument between uranium's critics and its supporters has a long way to go and the debate will be passionate. This will cause volatility in uranium share prices.

If your own portfolio can stand such jitters '” perhaps because your retirement is still a long way off '” this shouldn't worry you, and you should consider adding to your uranium exposure when prices are hit by a momentary win by the anti-nuclear side. But if you are about to retire don't gamble on short term profits in uranium, especially among uranium exploration stocks. A safer bet in our inevitable nuclear future is via BHP Billiton, whose activity in other resources will dampen market swings.