Commodities | Jun 02 2011
– Germany has declared it will phase out nuclear power by 2022
– The short term impact will not be substantial
– The medium term impact will not be substantial either
By Greg Peel
Germany is a world leader in the pursuit of renewable and other forms of “green” energy and as such has spent a good deal of effort trying to avoid burning coal and importing gas for its power needs. Germany is, for example, the world's largest developer of geothermal energy. The Frankfurt Exchange is considered the place to list companies involved in any form of alternative energy. And until early this week, Germany produced 22% of its base load power from nuclear reactors.
German nuclear power has always a bone of political contention in Europe's largest economy. While nuclear power does not involve the burning of fossil fuels and thus the emission of carbon, there are strong arguments that uranium mining does and therefore nuclear cannot be rendered truly “green”. And that's before you get to the small matter of what to do with the spent fuel rods (Britain still has every rod ever spent over decades of nuclear power generation in storage waiting for an answer to that question) and as to whether nuclear reactors are safe.
France and Sweden live happily with their substantial nuclear power generation but in Germany, the Green Party has always been anti. The coalition government in place in Germany a decade ago of which the Green Party was a member voted to phase out nuclear energy, but it was then usurped by a coalition of which Angela Merkel is now leader. Her government not only supports existing nuclear energy, but recently voted to extend the end-of-life shut-down schedules of the country's existing reactors by many years.
Then along came the Japanese earthquake, tsunami, and Fukushima nuclear disaster. In late March, a German provincial election delivered the country its first Green coalition state government. The vote was seen as a referendum on nuclear power, irrespective of all that's being going on otherwise including opposition to Germany's financial support of recalcitrant eurozone members. Merkel was forced to act.
Merkel called for two reports – an objectively pragmatic report from the country's Nuclear Safety Commission (RSK in German) and a less objective, broad social inquiry into nuclear power by a specially formed Ethics Commission.
The RSK delivered its report in mid May and while noting that a number of older reactors would be hard-pressed to withstand even a light plane crash, the overriding view was that Germany's reactors were sufficiently safe on the whole to withstand imaginable shocks. But then the EC reported and showed little equivocation in recommending Germany permanently shut down all of its nuclear reactors by 2022.
Fighting for her political life, Merkel went with the EC.
Although having previously extended German reactor life, Merkel's plan was always to phase out nuclear power over time anyway on the assumption it could gradually be replaced by renewable energy sources such as solar and wind, among others. So realistically, this decision, albeit purely political, does not represent a major policy backflip. Indeed, the EC's report added the caveat that it would be “unacceptable” if a nuclear phase-out simply led to nuclear power imports (from France for example) or higher electricity prices or – and this is the big “or” – increased CO2 emissions.
Whether or not the caveat seems somewhat ingenuously utopian, Merkel has vaguely made that pledge. No analyst across the globe has come forward to suggest a one-for-one replacement of lost base load power with renewables in the time frame is realistic, which implies Germany will have to simply increase its coal consumption, one assumes.
Germany had already shut down reactors in April pending safety checks but Macquarie notes a concerted push to increase solar and wind energy production worked, such that Germany's coal consumption actually fell in the month rather than rising as was expected. The problem, however, is that Macquarie suggests the unusually high level of sunny and windy weather experienced in Germany in April will not be the case every month.
(Note that the Swedes like to poke fun at the Danes for boasting the highest level of wind power generation per capita on the planet given often Denmark has to import nuclear-produced power from Sweden when not even a zephyr can be detected.)
Yet whether or not Germany's lost nuclear capacity can be replaced by renewables or will have to be replaced by fossil fuels is not the concern hanging over the uranium market. What uranium producers need to know, and investors in uranium producing stocks would like to know, is just what impact the German decision will have on the uranium industry.
In the short term, suggests Macquarie, not a lot. Indeed, the analysts are surprised that the drop in the uranium spot price post-Fukushima has been no greater than from US$73/lb to US$56/lb given a marginal production cost of US$40-50/lb at present. That the spot price is still trading above the cost curve suggests short-term supply remains tight, which can largely be attributed to stockpiling by China. China's current apparent demand for uranium is above its level of current consumption, but then China is not planning to alter its grand nuclear plans like Germany and right now can pick up stock at a good price.
Germany, on the other hand, already has stockpiles which it will now run down gradually in the phase-out period. At this point Germany will not be buying any more uranium on term contracts, so the global risk for uranium demand is a medium-term consideration. And even then, it is not exactly material. Says Macquarie:
“The direct impact on global uranium consumption relative to our post-Fukushima base case is to reduce it by about 1% through 2016, and to reduce demand by up to 2% by 2020.”
On those numbers, it's not what you might call a global nuclear disaster, assuming Germany is not suddenly joined by a rush of other countries with phase-out plans (Switzerland made the same decision previously). We can also, of course, note that a decade is a long time in global nuclear policy and development terms and a very long time in politics. Understandably, there are already rumblings of law suits and compensation claims from Germany's nuclear power companies.
Meanwhile, the German announcement right at the end of May did have an impact on uranium industry consultant TradeTech's monthly spot price indicator. Having risen last week to US$57.00/lb from US$56.00 the week before, the indicator was marked at US$56.50/lb on May 31. But that's still US$1.50 above the April price.
Activity soared in May compared to April, TradeTech notes, with 33 transactions completed in the spot market totalling 3.8mlbs of U3O8 equivalent.
The highlight of the month was first the denial and then the confirmation of the sale of all of the US Department of Energy's 5.2mlb stockpile reduction quota, which was intended to be sold gradually out to 2013, via Fluor-B&W to a single party. The problem is that while this might suggest the removal of a large overhang from the uranium spot market, the buyer – Traxys – is a trader and not an end-user. So in theory the stuff is still out there, one way or another.
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