Commodities Uranium Market Glowing Green William Pentland 05.20.08, 6:00 AM ET From copper to gold, from oil to natural gas, prices for the earth's riches have skyrocketed in the past few years as emerging markets added vast demand and speculators revved up markets in ways never seen before. But one commodity trumped them all: uranium. For decades, the trade belonged to a handful of insiders who kept prices level and deals quiet. All the key players could fit in a single Starbucks. Not anymore. The world's insatiable thirst for new energy supplies has fueled a quiet resurgence of interest in nuclear energy, and the market is changing fast. New entrants are now knocking elbows with entrenched insiders for influence over the future of nuclear fuel and the market where it is bought and sold. The predictable result: The price of uranium exploded, peaking at a price of somewhere between $136 and $138 a pound, a stunning 1,365% rise from the early '90s, when uranium prices fell below $10. That outpaced even gold, which rose 400% during that time. But since prices dipped to more modest levels this year, investors are calling for change in the uranium game. The fact that there isn't even agreement on pricing shows how immature the market remains. "Observing the uranium market today, one can see a growing discussion about exactly what trading tools the market participants want and need," says David Stollfox, senior editor of Platts Nuclear Fuels report. "We see a lot of discussions going on about creating standardized contracts, about the need for greater price transparency and more liquid spot and futures markets." Until 1968, only the federal government could own uranium in the U.S. Although investors still cannot physically possess uranium and there is no formal exchange for the metal, as there is for gold, oil and copper, they can legally own it, if only on paper. The actual uranium never leaves producer facilities. Since the early '70s, anyone could buy or sell uranium. For 30 years, only a handful of utilities companies bought uranium, and they bought it from a uranium trader like Atlanta-based American Fuels Resources or New York Nuclear Corp. As a result, a few dozen individual traders became the key wheelers and dealers in the uranium market. Traditionally, utilities and nuclear reactors would buy uranium supplies far in advance of the actual delivery to ensure they had sufficient future supplies. The price they paid was either tied to the spot price at the time of delivery or agreed to at the time they formed the contract. After the New York Mercantile Exchange added uranium futures in May 2007, index funds were set up on U.S. and European stock exchanges that tracked uranium prices and the nuclear energy sector generally. New financial players, like South Africa's Nufcor Group and Evolution Markets, a New York-based over the counter brokerage firm, have become active in uranium contracts in the last couple of years, while deep-pocketed investors have financed new uranium exploration operations. Similarly, mutual funds like the Junior Energy Fund and venture capital firms like Solios Asset Management have made big bets that growth in nuclear power is inevitable. The relentless rise in demand for electricity has resulted in nuclear reactors ramping up production almost to capacity. In 2007, U.S. nuclear reactors operated at record capacity of 91.8% and generated a record 806.5 billion kilowatt-hours of electricity. Meanwhile, a new generation of nuclear reactors is already under construction or in advanced stages of planning. In less than a decade, the world has plans to add nearly 40 more nuclear reactors besides the 438 reactors currently operational. By 2013, nuclear power will generate 414 gigawatts of electricity, or 13% more than the 367 GW it generated last year, according to Lehman Brothers. The corresponding rise in uranium demand would be 18%--roughly 3% growth annually--or 33 million pounds more than the 173 million pounds used in 2007, according to Lehman. The spot price peaked at $138 last summer, says Lehman, and has since settled around $70, still up 600% from a decade earlier. Says Jeff Combs, president of UX Consulting, "The spot price rose so dramatically in 2007 due to speculation following a series of floods and water problems starting in the latter part of 2006 that led to cutbacks in mine output and a reduction in anticipated increases in production. The spot market was, and is, relatively thin, and with spot material in relatively short supply, buyers had to bid up price to quite high levels to establish positions." Many investors seem considerably more bullish on the industry's long-term prospects, which have fueled a growing number of uranium exploration deals. Part of the enthusiasm reflects the anticipated expiration of the Highly Enriched Uranium agreement between Russia and the U.S., in 2013. A critical piece of post-Cold War anti-proliferation policy, the HEU agreement has kept uranium supplies abundant since it began in 1993. Add to this the widely predicted growth in demand for electricity likely to materialize in the same time period, and the stage seems set for supply shortages and a rise in uranium prices.