What are the Japanese doing in Uzbekistan?
For natural resource investors, it's one of the most important questions in the world. The country is a major gold producer. It also produces large amounts of natural gas, cotton, and copper. But these days, Japan has little interest in the traditional commodities Uzbekistan has to offer.
The Japanese are in Uzbekistan because they need uranium...
That might surprise a few readers. Japan's Fukushima Daiichi nuclear disaster pushed the country to shut down its 50 nuclear reactors within weeks. The mainstream media reported Japan planned to swear off nuclear energy for good.
Several other countries followed suit, most notably Germany. Chancellor Angela Merkel shut down all of Germany's nuclear power plants, instantly removing 41% of Germany's electric power.
But that's not the end of the story. And if you dig through the hysteria and government misinformation and look at the facts, you'll find a big investment opportunity...
You see, once again, basic economics is overriding political speechmaking. Let me explain...
Coal is the world's most important fuel for power generation... accounting for 40% of the electricity generated in 2010 (the most recent full-year data available)... Natural gas comes in next at 21% (and rising). Hydropower generates 16%, barely ahead of nuclear at 13%.
Global demand for electric power totaled 22,018 terawatt hours (TwH) in 2010, according to the International Energy Agency (IEA) World Energy Outlook 2012. Depending on policy changes, economic development rates, and population growth over the next 25 years, the study predicts an increase in electrical consumption between 48% and 88%.
Government policies will drive development of the various fuels. But in any scenario you choose, nuclear power plays a prominent role.
In 2010, nuclear power produced 2,756 TwH of electricity. Depending on the scenario used, the IEA projects nuclear power growth between 42% and 117% over the next 25 years. That would put production between about 4,000 TwH and 6,000 TwH.
That is a significant underestimation.
This study accepts at face value governments' fanciful projection of renewable energy, which would reduce the role of nuclear power. In the most aggressive scenario, the study shows non-hydro renewable power accounting for 9,031 TwH in 2025. That's much more than nuclear and nearly 12 times the power production by renewables in 2010. That is a ridiculous assumption. And I believe, in real life, that nuclear power will be tapped to fill much more of that production than in this estimate.
The following table displays the costs of various sources of electric power in U.S. cents per kilowatt hour (KwH). Nuclear power is the cheapest source of electricity.
Further complicating Japan and Germany's anti-nuclear stance... both countries are aggressively trying to restrict the use of fossil fuels, like coal, to reduce carbon-dioxide production. (We'll leave the folly of that endeavor for another day.)
If you abandon nuclear fuel and coal... you're left with limited and expensive options...
"Renewable" energy sources are popular to discuss, but the only viable one is hydroelectric power. And as the table shows, it's more than four times as expensive to operate as a nuclear power plant. Wind and solar are unproven as mainstay sources of power for a national power grid... and are incredibly expensive to build and maintain.
Add to that... the demand for electricity is growing fastest in places that don't have the luxury of experimenting with fads and theories...
The IEA and oil major BP both put out highly-regarded annual energy forecasts. And according to both analyses, electricity demand represents the largest growth of any energy sector. World electricity demand is projected to grow between 2.2% and 2.6% per year through 2030, according to the two major forecasts. And as you would expect, the main sources of growth are the immense and modernizing economies of China (38%) and India (13%).
One of the cheapest, cleanest options for these countries is nuclear power. There's just no way the world can work without nuclear energy playing a prominent role... no matter what the politicians say.
That's why Japan is in Uzbekistan looking for uranium. Just a few months ago, Japan Oil, Gas, and Metals National Corporation – the government agency responsible for creating stable supplies of key resources – closed a deal to help fund the exploration and production of large uranium deposits in central Uzbekistan.
This is not the action of a country ready to give up on nuclear power. It's the action of a country that's saying one thing and doing another. And that's why there's a big opportunity here for investors.
In my next essay, I'll show you another major factor that will help kick off a bull market in uranium and uranium producers.