China, it’s profile already well established by its meteoric economic rise, has been the focus of even more headlines lately because of the recent disastrous earthquake in the Sichuan province as well as the upcoming summer Olympics in Beijing. As we’ve pointed out, China has been a major driver of global demand for vital resources and perhaps the biggest reason that commodity prices have remained in a bull market despite the weak US economy.

When US economic strength started to fade last year, commodity bears predicted it would have the same impact as it did in past cycles. That is, slowing demand in the US would drive down vital resource prices across the board. As it’s turned out, demand for a wide range of resources has dropped domestically, particularly for raw materials used in home building.

However, resource demand globally has remained very strong. In fact, it’s accelerated in some countries. That should come as no surprise to anyone who’s looked at the numbers. China now consumes more than twice as much copper than the US, an exact reversal from five years ago. Growth in copper demand in Asia, consequently, is now twice as important as its decline in the US. That’s the main reason copper-heavy VRI Portfolio recommendation Freeport-McMoRan Copper & Gold (NYSE: FCX) recently hit new highs.

The failure of the US slowdown argument to take down resource prices has caused the bears to shift their arguments. Now the consensus forecast suggests the weak US economy will take down the Chinese economy, knocking down commodity prices as US slumps have in the past.

That may indeed happen. But, despite the jittery market, there’s no evidence of such movement at this time.

As we’ve pointed out, vital resources are inherently a volatile business. That’s why we’ve recommended taking money off the table from time to time in some of our biggest winners.

Year-to-date, the VRI Portfolio is up roughly 34 percent. That’s far outpaced virtually everything else except the energy market, which is also responding increasingly to similar global demand factors rather than just US market conditions.

We’re committed to playing the long-term bull trend in vital resources. But the experience of these markets is that the higher these plays run, the more likely they can pull back. And the action can be quite dramatic, no matter how bullish the long-term picture.

Readers should note that many of our stocks can fluctuate 5 percent or more on a given day, often with no real news depending on the broader market’s mood, only to go even stronger in the opposite direction the following day. Taking some money out of the game on upward spikes and redeploying it when prices back off is a sound strategy that will maximize bull-market profits.

The most important issue to remember is that the underlying bullish trends remain intact. Mainly, the natural disaster in China–although certainly a human tragedy on a grand scale–doesn’t diminish that nation’s growth story. Nor does it threaten the extremely powerful, demand-driven underpinnings of this bull market, which still has many years to run.

Uranium’s spot price has fallen more than 30 percent this year to USD60 per pound. That’s after the frenetic rally that took prices from USD40 per pound to USD140 per pound in 2006 and early 2007.

Not surprisingly, uranium mining stocks have also been hit hard. The bull case for the fuel is still very much intact. As a result, the sector is a strong value.

Source: Bloomberg

Nuclear power plants provide roughly 20 percent of US electricity, totaling about the same percentage over the last quarter century. Several of the early reactors have been retired. But because of increased concentration of ownership, efficiency has dramatically increased over the past decade.

The US average nuke now runs at a capacity rate of more than 90 percent, versus 65 percent in the early 1990s. Meanwhile, outage times have been cut by two-thirds because lessons learned at one plant can now be applied to every reactor in a company’s fleet.

Nuclear’s operating costs are quite stable compared to plants run on more volatile-priced fuels such as natural gas, making them increasingly competitive and profitable to run. And that advantage is certain to widen in coming years as greenhouse gas regulation comes into play. Nuclear generation emits no carbon dioxide (CO₂), which is a major plus as the effort to reduce carbon footprints becomes more widespread.

According to the Nuclear Energy Institute, in 2006 US nuclear power plants supplied the second-highest amount of electricity in the industry’s history, while achieving record-low average production costs. In fact, efficiency improvements to operations over the past decade have yielded the equivalent of some 20 new nuclear plants.

Thanks in part to federal government incentives, 12 new nuclear plants are in various stages of development in the US, virtually all at existing sites where local support is strong. But the lion’s share of nuclear power’s current growth is happening overseas.

There are currently 433 reactors operating in 30 countries, generating 16 percent of the world’s electricity. Thirty-three more are under construction, 90 are being planned and another 220 are reportedly in early planning stages.

The latter number is a testament to the popularity that uranium is starting to get around the world as energy prices continue to rise. As you can see in the map below, 65 percent of the world’s operating nuclear power reactors are in Europe and the US, while Japan has 13 percent of the total.

The demand certainly is there. China currently uses relatively little nuclear power, with 11 reactors producing 2 percent of its electricity. But it has 35 reactors scheduled for construction within the next 10 years, and another 86 plants are proposed. Once constructed, they’ll dramatically increase the country’s electricity production.

Europe is still the biggest user of nuclear power in the world, with nuclear power delivering approximately 37 percent of its electricity. France is the poster child with roughly 70 percent of power coming from nukes. And although Germany is still slated to shut down its operating reactors in coming years, several other countries are building nukes to reduce their growing dependence on natural gas from Russia.

Given the high costs of energy production these days, the cost reductions and other production efficiencies the nuclear industry has been able to achieve only increase its appeal as an energy provider.

Source: International Nuclear Safety Center

Consequently, increased use of nuclear power is basically locked in globally. That means there will be rising demand for uranium for years–if not decades–to come. The result: Uranium supply is still tight as demand increases. And the market should remain in a supply deficit for at least another couple years. 

Much of the uranium supply today is locked up in long-term contracts. But as uranium stockpiles quickly diminish, miners become an increasingly more important supply source. That, in turn, means the uranium industry will normalize. The latter is a reference to the extra uranium supply that’s been has been drawn from the highly enriched uranium (HEU) inventories of the military arsenals of the US and Russia for the last few decades.

Enriched uranium produced during the cold war–to be used with nuclear exports–has been stockpiled and for more than 10 years now. Today, it’s being sold to the US from Russia because the former has consumed a small portion of its ex-weapons stocks. Russia has been shipping uranium to the US based on an agreement signed in 1994, which called for the delivery of 500 tons of Russia’s HEU to the US by 2013.

However, it’s uncertain whether Russia will decide to renew the deal beyond 2013. The country now has its own energy needs to worry about as its economy continues to expand. If a deal doesn’t take place, the rest of the uranium market will need to procure another source to account for the difference.

The US government sold some of its stockpile last August. That was a major factor in deflating uranium’s price because a lot of funds that were aggressively involved in the long side also had to sell. Industry experts believe that the US won’t sell in a non-orderly fashion, and any new releases will affect the prices only in the short term.

The bottom line: The stage is set for uranium prices to start climbing again. We don’t expect the craze of 2006 to repeat anytime soon. But more important, we do see a viable mining industry that will become more important to the worlds’ increasing energy needs and quest for a cleaner environment.

Because most of the major producers have locked into long-term contracts, the best bets on uranium’s resurgence are going to be small companies that sell mainly on spot. There are several of these on which we’ll be reporting in the coming weeks. But there’s one major play that we already have in the VRI Portfolio: Rio Tinto (NYSE: RTP).

As we’ve pointed out in previous issues, Australia-based Rio is a major producer of many vital resources, notably iron ore and aluminum. And despite its size, it remains a major takeover target. Rival BHP Billiton (NYSE: BHP) is still the most likely suitor. But the company also owns a few big uranium mines and is locked into the uranium story as well. We continue to rate Rio Tinto as a buy up to USD500. We’ll have a more leveraged play in a future issue.

Source: World Nuclear Association