Japan’s nuclear policy shift marks a turning point for uranium

More than a decade after the 2011 nuclear accident at the Fukushima Daiichi nuclear power plant in Japan roiled the uranium industry, the country has announced a major policy shift towards restarting idled reactors.

On Aug. 24, Prime Minister Fumio Kishida announced that Japan would restart more suspended nuclear power plants and look at developing next-generation reactors. This represents a significant policy shift amid soaring energy costs, a global fuel shortage, and extreme weather.

According to Kishida, Japan aims to restart seven more reactors from next summer. This would increase the total number of reactors online to 17 out of 33 operable reactors in the country (pre-Fukushima).

Kishida also said that officials would look at extending the lifespan of existing reactors beyond the current maximum of 60 years. Officials have been instructed to come up with concrete measures by year-end.

Nicolas Piquard, VP, portfolio manager and options strategist at Horizons ETFs Management, tells The Northern Miner the reason Japan’s announcement is such a big event is that it highlights how difficult the situation has become for energy grids globally, especially the ones that rely on imported energy sources like liquid natural gas.

“In the year to date, Japan’s capital Tokyo has buckled under two power crunches, with one occurring during a significant heat wave. By restarting its reactors, Japan also hopes to curb its reliance on energy imports,” he said.

Japan’s announcement was more significant than the series of other announcements recently by major economies, including France, the U.S., China and India.

“Japan is a real turnaround case because of what they went through,” Piquard said in an interview.

The read-through for Piquard means that if Japan feels like they have to embrace nuclear power once more, by extension, it means other countries such as South Korea, China and India – the world’s economic growth engine of atomic energy and uranium consumption over the next 20 to 30 years – will follow. It highlights that policy and public attitudes toward nuclear are changing, and consumption growth is coming.

“This is, of course, a very bullish event for uranium prices and producers,” he said.

The analyst noted the market is already tight today even without the balance of Japanese reactors working and does not include any of the plants under planning or construction in China alone.

Wall of demand

China has said it plans to build 150 new reactors between 2020 and 2035, and Japan also aims to boost nuclear capacity, as does South Korea. In Europe, the U.K. plans to build one new nuclear plant yearly to cover about 25% of electricity demand with nuclear power sources.

France, which already relies on nuclear reactors for about 70% of its electricity, has committed to install 14 new plants, while the European Union has proposed counting nuclear plants as a green investment.

In contrast, the Japanese announcement follows disappointing news from Germany in the past two weeks, with the country finally deciding to close out their last three nuclear plants after much back-and-forth and plenty of flip-flopping.

The market is in a slight deficit, and the reality is it is difficult to get new mines operating. Despite the price lift in the past three quarters, most operations today are merely breaking even, according to Piquard, while the incentive price has risen to a range of about US$65 to US$75 per lb. of yellowcake from US$55 to US$65 per lb. in the past.

BMO Global Commodities Research analyst Colin Hamilton said in a note to clients the Japanese government had been telegraphing a pro-nuclear stance for some time now. Still, the more poignant change has been the shift in perspective from the wider population back toward nuclear following the Russian invasion of Ukraine, Hamilton said.

“Pre-Fukushima, Japan’s uranium demand was about 18 million lb. per annum, with current demand nearer to 4 million pounds. On the back of this announcement, demand is naturally likely to increase, however, given the high level of inventory in the country, we see a limited need for utilities to enter the international market over the next couple of years,” according to the analyst.

“However, this is another positive for future uranium needs.”

Canaccord Genuity Capital Markets analyst Katie Lachapelle concurred in a memo to clients that while still subject to final approvals, the Japanese nuclear restart represents a dramatic shift in government policy and public perception.

“It is clear to us that many countries are revisiting nuclear power as a response to rising energy prices driven by the Ukraine war and as a tool for decarbonization. Some recent examples include Belgium approving a ten-year lifespan extension for two of the country’s existing reactors that were planned to shut down, and Germany reconsidering its plan to exit nuclear power,” she wrote.

Meanwhile, the uranium majors are upbeat about market conditions.

Majors ramping up

As noted by Canada’s largest uranium producer Cameco (TSX: CCO; NYSE: CCJ) in its second-quarter results release, Piquard also points out that the Japanese development could very well be the catalyst for power utilities to once more lock in future uranium supplies under contract.

Cameco had seen a return to long-term contracting activity by power utilities as they pivot toward procurement strategies that more carefully weigh the origin risk.

The world’s largest uranium producer, Kazatomprom (LSE: KAP), said earlier in August it had increased its 2024 production target by about 10%  due to growing demand for nuclear energy amid global energy concerns. That move marked a reversal of some of the more aggressive curbs seen in recent years as the industry seeks to run down inventory.

The Kazakhstan-based company now expects to generate between 25,000 and 25,500 tonnes in 2024 (65 to 66 million lb. of uranium oxide), representing an increase of 2,000 to 3,000 tonnes from levels targeted for 2023.

According to BMO analyst Alexander Pearce, the increase represents the first real easing of supply curtailments since their implementation in 2017. It can also be viewed as a mark of confidence in further improvement in underlying uranium fundamentals.

BMO also points out uranium producers have been encouraged by a surge in uranium spot and contract prices over the past year, with Russia’s invasion of Ukraine boosting demand in recent months.

Bank of America forecasts uranium spot prices to rise to US$70 per lb. by 2023. “Increased uranium purchases from financial market participants often correlates to higher prices,” the bank said in an early-August report.

“Loss of Russian supplies and Diablo Canyon nuclear plant extension could be bullish catalysts. We think uranium prices should continue a measured increase, peaking around US$70 per lb. in 2023, versus spot at US$49.5 per lb. However, any loss of Russian supplies would make us more bullish,” the bank’s analysts said.

Uranium ETF

Piquard manages the Horizons Global Uranium Index ETF (TSX: HURA) – the first exchange-traded fund in Canada to provide direct exposure to the global uranium sector via equity positions and up to 25% exposure to the uranium price.

He says uranium is in the beginning stages of a prolonged bull run. “The ETF is up 150% since inception on May 15, 2019,” Piquard said.

The analyst pointed out that over the past decades, the market has seen cycles’ ups and downs become longer. “That seems to be one of the characteristics of the uranium market because of its long-term contracting nature. We’re still at the beginning stage of the uranium bull market, and given that the price is marginally above what breakeven is for a lot of projects, compared with all other commodities, I think it’s fair to say that there’s no reason why there’s not plenty of upside here,” he said.

The HURA ETF last traded at $23.47, up almost 32%, despite a highly volatile year that saw the price touch a high of $30.35 and a low of $17.19. The fund has net assets valued at $58.1 million.