20 Mar 2014

Uranium players welcome Japan's new draft Energy Policy

by Brett Cohen, Hiroyuki Kano, Stuart MacGregor

A restart of Japanese nuclear reactors, signalled by a recently-published draft Energy Policy, may give a much-needed boost to the uranium industry

On 25 February 2014, the Japanese Economy, Trade and Industry Minister released Japan's first draft Energy Policy since Prime Minister Shinzo Abe was re-elected in December 2012.

The Policy, which is a draft that is currently with the Cabinet for approval, called for, among other things, nuclear power to remain an important source of electricity for the country. The share prices of ASX-listed uranium miners and explorers responded positively on the release of the Policy, with uranium miners no doubt hoping that the new Policy will signal improvement in a sector that has suffered a number of difficult years since the Fukushima tragedy in March 2011.

Since the Fukushima incident, uranium spot prices have gradually declined from nearly USD $60/lb to a low of USD $35/lb in late 2013, with current prices hovering just above USD $35/lb. The slump in uranium prices has coincided with uranium projects around the world being shut down or delayed, including the decision by BHP Billiton in August 2012 to postpone indefinitely the expansion of Olympic Dam in South Australia and Paladin Energy's suspension of its operations at the Kayelekera uranium mine in Malawi earlier this year. This decline in the use of uranium as an energy source has underpinned increased demand for natural gas, with Japan being the world's largest buyer of liquefied natural gas (LNG). A return to uranium may well be at LNG's expense however.

The Japanese nuclear power sector has been in somewhat of a state of limbo after the events in Fukushima, which saw all of Japan's 48 commercial nuclear reactors being turned offline. The Fukushima events also had a ripple effect on the nuclear industry around the world. Most notably, Germany, where nuclear power accounted for approximately a fifth of electricity supply at the time of the Fukushima events, has stated that it intends to phase out nuclear power entirely by 2022.

Mr Abe's Liberal Democratic Party Government has however been signalling a return to the use of nuclear power in Japan, and the new draft Energy Policy is seen as an important official step in that direction.

Japan's new draft Energy Policy

The draft Energy Policy observed that a mix of various energy sources, including nuclear power, is necessary for a reliable and stable source of electricity to meet Japan's energy needs. The Policy did not provide specific details on the targeted mix of energy sources, although prior to March 2011 nuclear power provided one-third of Japan's energy needs and the Japanese Government announced at the time that it would gradually increase the use of nuclear power by up to 40%.

The draft Policy refers to nuclear power as an “important base-load energy", promotes the recycling of nuclear fuel, and leaves open the prospect of building new plants and reactors. Mr Abe did however clearly state that the Japanese Government currently has no plan to build new plants and reactors (other than those which were already under construction prior to March 2011).

While the Policy did note that Japan's nuclear energy dependency will be reduced as much as possible, it states that the Japanese Government will restart those nuclear reactors that meet new safety standards set after the 2011 nuclear crisis. Japan’s Nuclear Regulation Authority, a nuclear industry watchdog that was established after Fukushima, is currently in the process of assessing 17 reactors for compliance with the new safety standards in order to determine whether those reactors can come back online. It is expected that a number of those 17 reactors will be approved and re-started in the second half of 2014.

Reaction to the Policy 

The release of the draft Policy has fuelled hopes among uranium miners and investors that Japan's nuclear program will be back online imminently. This was evidenced by strong increases in the share prices of ASX listed uranium companies including Toro Energy, Paladin Energy and Energy Resources of Australia.

Various analysts have suggested that the draft Energy Policy is consistent with the view that the long-term fundamentals of the commodity remain strong. In support of this view is the Chinese Government's decision in 2012 to significantly increase the country's use of nuclear power, which is expected to drive increased demand for uranium in coming years. Specifically, China has signalled its intention to increase the percentage of electricity produced from nuclear power from the current 2% to 6% by 2020.

Strong public and political opposition to restarting the country's nuclear sector within the Japanese public remains, with a number of former Japanese Prime Ministers criticising the draft Energy Policy as ignoring the lessons of the Fukushima crisis.

Fitch Ratings reported that it did not expect that the Policy (if implemented) would have an immediate impact on uranium prices, particularly as Japanese utilities have at least two to three years' worth of uranium inventory. Notwithstanding this, the potential re-start of Japan's nuclear energy program is a positive development for the sector. This could translate into increased demand for uranium, supporting a higher uranium price and ultimately sorely-needed investment funds for uranium projects.

Thanks to Armin Fazely and Hidemasa Nishisugi for their help in writing this article.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.