This Beaten Down Energy Sector Looks Set to Rally
By Byron King | August 22, 2012 |

Imagine an entire continent blacked out. The power is gone. Light bulbs are dark. Machinery isn’t humming. There’s no air conditioning or refrigeration for food.

Is this unthinkable?

Then maybe you missed the news about the blackout that hit India at the end of July, unplugging nearly 10% of the world’s population…

India’s recent blackout was, by far, the biggest power outage in history.

- Avast system of trains was brought to a halt.
- Government offices were shut down.
- Hospitals and police departments were forced to run on backup generators.
- There were over 250 miners trapped in various coal mines across the eastern states.

All told, the power outage affected a population greater than the populations of the United States, Canada and Mexico…combined!

OK, so you don’t live in India. You live in North America, where things like that aren’t supposed to happen. Except something like that did happen in July 2003, when the entire Northeast went dark due to a cascading power failure that stretched from Ohio to Quebec.

And on a slightly smaller scale, don’t forget summer 2012, when severe storms plunged Washington, D.C., into darkness for days. (No jokes about that last one, please.)

As Forbes recently noted, since 1990, U.S. demand for power has risen 25%, whereas the infrastructure investment needed to support it grew by a mere 7%, With this kind of lagging infrastructure investment, you can bet on more power outages to come.

Things are about to get very bad in the electric power space. There’s almost nothing that anybody can do about it. Buy a household generator for emergencies, I suppose. Put some basic solar panels on your roof, perhaps.

But, we can look for ways to invest around the looming problem and make a little “emergency” money.

The Big Power Picture…

If you don’t want to worry about one-off events and singular power failures, then let’s consider the larger power picture just with the weather in North America.

The long summer drought of 2012 has wreaked havoc across the U.S. and Canadian economies. Crops have withered in the field, and food prices are rising. The heat has caused significant damage to infrastructure as well, such as buckled highways and bent rail lines.

Due to the continent-scale heat, air conditioning use is way up in every region. Thus is electric power use up strongly. Indeed, the need for electric power has helped pull natural gas prices upward, off of recent historical lows. That’s because more and more natgas is going to generate electricity.

Still, natgas isn’t the best long-term baseload fuel for generating electric power. Don’t confuse a temporary gas glut and historically low natgas prices with a long-term approach to running the electric economy.

Across the U.S., coal and nuclear power remain primary sources for day-to-day electric power. Ancient carbon, and even more ancient uranium, is what allows you to flip a switch and enjoy the experience of the lights coming on. And the coal biz is under attack, globally, due to concerns about pollution and carbon dioxide.

Which brings me to the investment idea for today…

An Undervalued Sector

The nuclear power sector took a huge hit last year, after the Fukushima disaster. I discussed these developments earlier this year.

Yet for all the troubles, the nuclear sector is coming back and is now clearly undervalued.

Things were so bad for nuclear power in Japan that every single plant was shut down — all of ’em. But in the past month, the Japanese have restarted one reactor, with more on the way.

Meanwhile, China has an aggressive ongoing nuclear building program. Those 20-plus plants under construction will reach the point of loading fuel in 2013-15, which is the wink of an eye in nuclear development terms. Where’s the uranium?

Other countries are pursuing nuclear power, such as Turkey, which wants 20 plants to provide power that now comes from oil and gas imports from Iran. And even Saudi Arabia is looking to build nuclear plants, to keep from burning oil for day-to-day power needs.

Looking out just another year, the agreement between the U.S. and Russia over decommissioned nuclear warheads will expire. It was good while it lasted, providing nearly 24 million pounds of uranium into the marketplace every year.

Looking ahead, I cannot imagine that Vladimir Putin will go along with dismantling more Russian warheads. Putin is not about to export highly enriched uranium to the U.S. to use in power plants. Indeed, Putin is talking about rebuilding Russia’s nuclear industry, starting with the Russian nuclear navy.

What About The Yellowcake?

An opportunity persists for uranium, or “yellowcake” as it’s called in the industry.

Last year, in 2011, total U.S. yellowcake output was 4 million pounds from all producers, great and small. Total yellowcake demand from U.S. utilities was over 55 million pounds — most of it imported, obviously (and much of that from Russia).

With the Russian supply set to dry up, the spot price for uranium could heat up.

Indeed, the uranium spot market is where things can get critical — no pun intended. That is, when utilities buy uranium for long-term needs, it’s usually via a major contract with a biggie like Cameco (CCJ: NYSE) or via Kazatomprom. These prices are set years ahead of time in the equivalent of private treaties.

But when a utility needs uranium supply in a hurry, for some unforeseen need, they reach out and touch the spot market.

With the supply and demand scenario we discussed in the forefront, the price for uranium looks set to rally. Look for that chart above to tick higher in the years to come.

As I see it, the spot market will give many uranium companies a little wind at their back.

Consider what I told you earlier this year: “The future of nuclear power is doable, and therefore, it’s investable. Better still, with share prices for uranium companies are at or near all-time lows, prices in the nuclear sector are still a bargain.”

From what I’m seeing in today’s uranium market, bargains still abound. Now’s your chance to take a look.

That’s all for now. Thanks for reading.

-- Byron KingSource: Daily Resource Hunter

 

Outbrain

 

Outbrain