What's behind the red-hot uranium boom

NEW YORK (CNNMoney.com) -- Uranium is hot, and it's not just because of its protons and neutrons.

Two years ago the metal, used mostly to power nuclear reactors, traded around $20 a pound, according to the research firm Ux Consulting Co., which tracks uranium prices in the market by surveying buyers and sellers each week.

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Last week prices hit $113 a pound and the pace of increase isn't slowing but rather accelerating. Last week's prices were up 19 percent jump from the prior week - the biggest weekly gain since Ux began tracking prices back in 1968.

"You haven't had a down week since 2003," said Christopher Ruppel, a senior geopolitical analyst with the energy consulting firm John S. Herold.

The runup is due partly to basic economics.

While demand for the metal has been steady, it's expected to surge as a host of new nuclear plants come online in coming years. And supplies are running short, thanks to severe flooding at two of the world's biggest mines and a dwindling amount of element number 92 that can be salvaged from old nuclear warheads.

And, oh yeah, speculators, did we mention them? There's been a fair amount of interest from hedge funds, according to Ruppel, who said the funds have exploited legal channels, once used only by utilities and suppliers, to win ownership rights to uranium stored in repositories in North America and Europe.

Until now, investors interested in the uranium boom were limited to buying a handful of funds in Canada and England that purchase the metal, or buying stock in outfits that mine uranium such as Australia's Rio Tinto (Charts) or Canada's Cameco (Charts).

But on Monday the New York Mercantile Exchange said it would begin offering a uranium futures contract. The contract, for 250 pounds of the metal, begins trading May 7, and will be available via the electronic trading platforms in most brokerages.

A NYMEX spokeswoman said there are no current plans to offer a half-sized contract similar to the half-sized crude oil contract targeted to retail investors.

For users of uranium, like utilities, trading on the NYMEX is probably good news.

"Trying to figure out uranium supply and demand is a black box," said Peter Tertzakian, chief energy economist at ARC Financial, a private equity firm based in Calgary, Alberta.

Tertzakian said public trading of the metal should result in more public interest, which should spark more research into the market and a greater degree of clarity in how prices are set.

"There's only one (group tracking) prices in what has become a multi-billion dollar market," he said.

A renewed interest in nuclear power, sparked by global warming fears and surging electricity use in the developing world, is the main driver behind the expected boost in demand.

Worldwide, there are 28 new nuclear reactors being built, 64 on the drawing boards and another 158 proposed, according to John S. Herold's Ruppel. If all those reactors get built, it would mean 57 percent more reactors from the 435 in operation.

Factor in supplies that aren't growing, but actually declining, partly due to flooding at two of the world's largest mines. Last October workers at Canada's Cigar Lake mine, half owned by Cameco, mistakenly hit water, flooding the mine. Ruppel said production at the unfinished mine will now be delayed another two years and won't come online until 2010.

And heavy rains this spring flooded a big mine owned by Energy Resources of Australia that could result in a production loss of 35 percent at the mine, Ruppel said.

But that's only half the production problem. The other half is that the world has been relying on old nuclear warheads for enriched uranium, and that supply is running out.

Ruppel said in 2006 the world consumed 180 million pounds of uranium, but it only produced 100 million pounds. The rest came from old weapons, mostly Russian. At current supply and demand levels those old stockpiles will be eroded by 2015.

"Without significant new production coming online, you're going to have a shortfall," said Ruppel.

Mining activity is growing rapidly, especially from smaller companies, but developing a uranium mine takes a long time, 10 years or more.

For all the gains, the runup in uranium prices is unlikely to have a big impact on the price of electricity. That's because unlike coal or natural gas, most of the costs associated with nuclear power come from building the plant, not the fuel used.

Ruppel said fuels costs account for only about 28 percent of a nuclear plant's operating expenses. Still, "if prices don't moderate, nuclear plants will be somewhat less profitable," he said.