According to China’s Ministry of Land Resources, China plans to build up “sufficient reserves” of uranium and other minerals, in a new five-year government plan. The ministry said it would be stockpiling strategic reserves of uranium, copper, aluminum and other key minerals because of rising demand for those commodities. The Chinese also wish to avoid supply disruptions by hoarding uranium and other minerals, over the next few years.

Until now, you’ve probably taken for granted a steady, reliable source of electricity. A large part of your dependable energy came about because of the nuclear energy generated by the 103 nuclear reactors in 30 states. Without a steady supply of uranium to power those nuclear reactors, the U.S. electrical transmission network suffers a 20 percent loss. China’s new five-year plan to stockpile uranium had better be a Wake-Up Call to U.S. utilities. If they missed the import of China’s announcement, we are all going to be in a heck of lot of trouble before this decade ends.

Since June 2004, we have warned of supply disruptions for uranium. David Miller, who has since become President and Chief Operating Officer of Strathmore Minerals, argued at the time, “In my opinion, no one has any extra uranium to sell on the spot market. There’s just not excess inventory that people are unloading in the spot market.” We interviewed Miller again in November 2005, for an article entitled, “China Demand for Uranium, World Growth in Electricity Demand to Drive Uranium Price Higher.” Miller warned us, “China is the future wild card… what they are planning for nuclear is probably the most aggressive program in the world.” Miller added in his explanation, “All the new production is already factored into the future market for uranium. We’re underwater right now without building one more nuclear power plant.”

In mid April, during an interview with Sprott Asset Management Market Strategist Kevin Bambrough, we asked him about the Chinese. He answered, “Why shouldn’t they have strategic uranium reserves to supply their nuclear reactors? It makes sense to have a good stockpile of uranium considering the relative cost of nuclear power versus anything else.” And now, the Chinese plan to build up a strategic reserve of uranium for their aggressive nuclear program.

In another interview, also published in April, Gene Clark, CEO of TradeTech LLC warned us, “In reality, the U.S. utilities, which tend to wait longer to contract, may be the ones on the losing end because the Chinese and the Indians will contract early. The implication of current group-think is that the Chinese and Indians are not going to be able to find enough uranium for their new plants. But, they are committing for supplies way out into the future. When the U.S. utilities come to the market, they’re going to look around say, ‘Oh blankety- blank, what happened? Where’s the uranium?’ They’ll be the ones that sat around. I think that is what’s going to happen unless things really change in the way contracting is done in the United States.”

U.S. utilities have been cautioned, warned and advised that the Chinese demand for uranium could very well create a serious energy crisis for the U.S. grid. Nuclear reactors help supply the baseload generation for the U.S. electrical grid. Nuclear power plants provide stability to the electricity transmission network. About one-fifth of electrical generation is derived from nuclear power. Nuclear plants are running at more than 89 percent capacity. U.S. utilities are fiddling around like Nero, who watched Rome burn, hoping that promises of increased uranium production will stem the dramatic uranium price rise.

Severe strains in natural gas supplies, combined with the ongoing uranium supply squeeze, could very well put U.S. consumers on rations for their electricity. Can’t happen, you say? Ask the Brits about how business was conducted in their country, in late 1973 and early 1974, during the Arab oil embargo crisis. Or more recently, California’s rolling brownouts.

An electrical energy crisis is in the making, while U.S. utilities are patiently hoping or praying the price of uranium stop climbing. UxC President Jeff Combs wasn’t kidding when he urged U.S. utilities, during our interview, to “support the expansion of (uranium) production in the United States.” And if you don’t let your local utility know about the upcoming electrical energy crisis, then perhaps it will be your lights they may someday be turning out. The irony of ironies: All of those sweet anti-nuclear folks in Vermont, who depend upon nuclear energy for more than 70 percent of their electricity? They’ll be the first to suffer the most, if U.S. utilities don’t respond to China’s five-year plan.

COPYRIGHT © 2007 by StockInterview, Inc. ALL RIGHTS RESERVED.

Globalization has acquired a new definition in the last 10 odd years. This can be concluded easily, if one looks at the trends market has followed in as much time. One can now define Globalization as the supply of products and components from the Rapidly Developing Economies (RDE). The most popular among them is China. China sourcing is on the minds of most of the companies in the West for reasons that are by now, well known to all.

This trend has brought a drastic change in the sourcing strategies of many companies, if not all of them. Most companies are willing to go through the cultural differences, it will have to face while shifting their sourcing plans and also the hardships involved in shifting major portions of their sourcing thousands of miles away from their home. This trend has hit the international trade so hard that companies hesitant to this change are soon going to realize the mistake they are making. This is because global sourcing is evolving at a rapid pace and those who fail to catch up are at a loss which is quite unexpected.

-China Sourcing for low costs:

The first reason why Western companies being lured by the Chinese markets was low cost finished goods as well as components. The benefits were there for both their own markets as well as the Chinese markets. Many companies from around the Globe established their sourcing offices in China in order to implement their low cost strategies. The major reason that caused this change in trend was that rapidly developing economies like China demonstrated the world that they are capable of producing world class products and components at a price that is way low as compared to the market prices of the already developed economies. The only hurdle that companies coming in had to face was a shortage of qualified suppliers and also that of global sourcing people.

-China Sourcing for innovation:

The first reason was always the low costs of China manufacturers contributing to Chinese markets. And this was also the initial driving force for most companies. But, as China Sourcing matured, so did the China suppliers. Gradually, innovative designs were developed in China in almost all kinds of industries, be it consumer electronics goods, IT firms, automotive tools and various others. Innovations with the customers in component and product design are a success these days. Currently, many of the Chinese suppliers are designing new innovative products for the international markets as part of integrated supply chain.

Thus, we can conclude that the international trade has been rocked twice by the China sourcing wave. The first wave was the one which companies ran to Chinese markets to implement their low cost strategies. This first wave developed the base for Chinese products and components world wide. And then, just like another heavy blow came the second wave of China sourcing. This was that of innovation, which brought to the people’s attention a variety of innovative products at an unbelievable cost. And, so with its double blow the China sourcing has had a lasting impression on the international markets in the last decade of globalization.

It is amazing to think that there are, today, over three hundred million bicycles in China. A far cry to their popularity as late as the 1940’s when there were only around half a million bicycles in the whole of that country. 

What is peculiar is that the Chinese bicycle industry, according to Internet research, seems to have begun in the same way that the British bicycle industry finds itself today. In the late nineteenth and early twentieth centuries, the bicycles on sale in China were of high quality and imported from Britain, Germany and the U.S., with British bicycle producers exhibiting their machines in China. The early production lines set up by the largest Chinese importers were all from imported components and in very small quantities compared to the numbers of bicycles being ridden and sold in Europe and America. 

Today, we have gone full circle. Where Britain and Europe used to supply all of the Chinese market, China is now producing around a staggering 64 million bicycles a year. Surprisingly, though, their export rate is showing some signs of decline. The largest manufacturer of bicycles is Taiwan. Where Britain used to be the supplier of high-quality bicycles into China, it is the imports back into Europe that are high quality, with prices to match. In years gone by, anything imported was always considered of inferior quality and price premiums could be expected on British-made products. While cheap bicycles less than 100 GBP can be purchased online, or within high-street catalogue shops, most high street bicycle shop prices are far and away above this. A recent search of both independent and high street chain bicycle shops showed bicycles priced between 400 GBP and 1,000 GBP, nearly all of which originate from Taiwan, or America.

So what about the humble British bicycle manufacturer? Do they still exist?    British production rates have declined year on year from 325,000 units in 2003, to approximately 80,000 units in 2007. Compare this to the imports of around 3.5 million, and we get a stark contrast to true British production. Where they exist, they appear to be, typically, made-to-order and seem to cater for the specialist markets of, for example, Sports, Special Needs, industrial heavy-duty work bicycles – for deliveries, etc. – or the high-end, hand-built classic leisure market. 

What did surprise me when searching the prices was the apparent lack of knowledge as to which of their stocks were British. Most of the opinion was – probably quite rightly – that all the stock was imported or, if of some British origin, then only assembled in Britain from imported components – exactly as the China market started at the turn of the twentieth century.

Once again, in Britain we find fluctuating fuel prices; high unemployment; a Government that is trying to promote a bicycle-to-work ethos in order to help reduce carbon emissions; and we have some employers actively encouraging their employees with financial rewards for leaving their cars at home. So, why cannot we also encourage larger-scale bicycle production back into the country, before its too late?

California’s budget troubles are not going away.  Moody’s Investor Services warned the Golden State it faces a “multi-notch” downgrade to its credit rating if the legislature does not produce a budget that closes the $24.3 billion deficit.  The state’s current A2 rating is the lowest rating for any state’s general obligation bonds.

China is going all over the world to lock up supplies of key commodities.  This is just the latest example of the Chi-coms flexing their capitalist muscles.  It is not a level playing field, our laws require companies to only do business with certain countries, and cannot pay bribes.  China goes anywhere, ignoring human rights, and plays by no rules except “Do the deal”.

Durable goods orders were up in May for the second straight month.  Orders for non-defense capital goods jumped 4.8%.  This was the biggest jump since September 2004.  These two good economic indicators set an optimistic tone for the market this morning.  New home sales fell, but investors seemed to ignore it, until the FOMC announced they were going to leave rates at 0.00 to 0.25%.   The Fed announcement and accompanying notes caused a sour note, and the market sold off into close.  The Fed’s notes concerning inflation and a slow recovery raised concern.  20-year treasuries dropped like an anvil on thin ice. 

The biggest non-news was the EIA (Energy Information Agency) report on petroleum.  Crude oil continued its inventory depletion that has been the norm since the beginning of May.  We had one weekly increase in inventory (week of 5/29), but the next week we dropped more than the previous increase.  Crude oil closed down on low volume.   The market does not know how to handle the inventory news.  Gasoline inventories continue to build, suggesting that buyers are disappearing at the present pump prices.  It could also be refiners taking advantage of hedging opportunities.  Buy crude now and sell gasoline on the futures market for delivery in August.   Gasoline inventory went up 3.9 million barrels; crude oil inventory went down 3.8 million barrels. Refiners will cut the price of gasoline to move it (unless it is hedged). This puts additional pressure on the refiners, as they will have to squeeze their crack spread (markup in refined products). This would probably not be a good time to own refiners.

One year ago, crude inventory was 301.8 million barrels; present inventory is 353.9 million barrels. Keep in mind that this is down from over 370 million barrels of inventory just a couple of months ago. The inventory line is getting closer to last year’s levels. That is bullish, while there was demand destruction due to high prices last year; present prices are much lower and not to blame for lower use.   Most believe the economy is holding down use, which will increase as consumers gain confidence in their financial situation.  Present gasoline demand is about 200,000 barrels less per day than last year.  One other important fact, did you know we import over 10% of the gasoline that we use?  This acts as an anchor on our refiners prices.  Overseas refiners do not have the same environmental laws, work regulations, or safety requirements that our companies have.   One bearish fact out of the weekly report was that crude oil imports were up 247,000 barrels last week.  Imports had been moving down, in accordance with OPEC reduced production quotas.  If OPEC wants $80 oil it seems like a good bet to agree with them.  I do not like leaks in the dam of supply.

We discussed with the Ux Consulting president from which countries future uranium supplies may come, and who is going after those supplies more aggressively. He warns about the risks and rewards of Kazakhstan and Mongolia, looks to Africa for supplies, and talks about Russia’s expansion.

StockInterview: How do domestic uranium prospects rate in the eyes of U.S. and foreign utilities?

Jeff Combs:
I don’t think that utilities expect the U.S. to be a major supplier of uranium. What you’re seeing with China and other countries, where nuclear power is growing, is that they’re definitely looking to secure supplies. The Chinese are going to Kazakhstan and also Australia, where there are a lot of uranium reserves, a lot of potential for growth. I think there’s some potential for growth in the U.S. But if you had a fast growing nuclear power program, I don’t think the U.S. is the first place I’d look. I believe that you can look for some opportunities in the U.S. But in general, the U.S. utilities are basically in competition with some of these newer entrants into the market for available supplies. Those are primarily outside of the U.S., as U.S. utilities also depend on imports for most of their supplies.

StockInterview: It appears many countries are racing to secure uranium supplies outside their borders.

Jeff Combs:
Even Russia, which was a major exporter of uranium in the 1990s, is looking to secure additional supply sources, first to Kazakhstan, Kyrgyzstan, and Uzbekistan, former republics of the of Soviet Union, but also to Africa. Russia has an extremely ambitious reactor expansion program, as well as a desire to greatly increase its exports of reactors to countries like China and India. As it stands now, most of the growth in nuclear power is expected to take place in China, India, Russia, as well as Korea and Japan to a certain extent. All these countries are really looking outside their borders for uranium supplies that are going to sustain them for quite a long period in the future. None of them are blessed with very rich and extensive uranium deposits.

StockInterview: Is Russian President Vladimir Putin trying to create something on the order of a Wal-Mart Super Center for the nuclear fuel cycle?

Jeff Combs:
Well, you see them doing a joint venture in Kazakhstan. They’re trying to do something with Kyrgyzstan. They’re definitely looking at how they can shore up their supply through imports, in addition to investing a billion dollars in their own internal production. In this respect, they are trying to draw from their old supply chain arrangements. This is to meet their internal needs, as well as the needs of countries to which they have traditionally supplied reactors and the fuel to run these reactors. As Russia looks to expand its reactor sales to countries that don’t have established fuel cycles, they want to be able to supply them with fuel – possibly even lease them the fuel. This means that they have to be prepared to take back the spent fuel. This is due at least in some measure to nonproliferation concerns, in that you don’t want these new entrants building enrichment or reprocessing plants. While Russia has enrichment capacity and the ability to expand this capacity, they also need uranium to be able to supply these countries with enriched uranium. This is why they’re currently focusing on the uranium side of the equation.

StockInterview: Let’s talk about some of the target countries, where those with the more ambitious nuclear energy programs will want to secure uranium.

Jeff Combs:
We have recently done a series of reports, looking at countries where major production is taking place, or could take place. Of course we’ve done them on Canada, Australia, Namibia, South Africa, Kazakhstan, and Uzbekistan. I think the next country might be Mongolia because of the exploration and development activity that is taking place there. Mongolia’s mining laws are very favorable to foreign companies. Mongolia is also located in that part of the world where the bulk of nuclear power expansion is taking place. The problem in Mongolia now is the lack of infrastructure – the location of the exploration sites relative to roads and rail lines, and the ability to connect to the electricity grid and water lines.

StockInterview: There has been so much press and chatter about Kazakhstan. Is there substance in these commentaries, or is it mainly hype?

Jeff Combs:
They’ve got a lot of uranium resources and reserves. They’ve also got a commitment to expanding production there and a pretty big customer in China. The hype might be related more as to whether they can do it as quickly as they say, as opposed to whether they can eventually get to the levels they’re talking about. One of the things that will slow them down is the infrastructure, including the skilled work force, needed to expand at that rate. They have increased production. They definitely will continue to increase production, but perhaps not at the rates they are advertising. They’ve produced a lot in the past, in the old Soviet Union days. I think they can get back up to those production levels, but it’s going to take some time.

StockInterview: What will be required to get things going in Kazakhstan?

Jeff Combs:
It appears they’ve been able to attract capital. A large part of it is just the time is takes to build the infrastructure, including training workers. You can have all of the investment in the world, but it still takes time to get things done, especially if the infrastructure isn’t well developed in the first place. If you look at Kazakhstan on the map, it is very close or adjacent to Russia, China, and India, where the major part of nuclear growth is occurring. I don’t think there will be any shortage of demand for their output.

StockInterview: Where does Japan fit into the current uranium bull market?

Jeff Combs:
Japan is definitely a factor in the market. Their growth might not be as rapid as it once was, or once was expected to be. With Japan you have a country that does not really have any indigenous uranium resources to speak of. They really need to import uranium. To facilitate this and to secure future supplies, Japan has historically developed different supply relationships around the world, both by taking positions in uranium mines and by nurturing long-term relationships with producers. I think that it’s likely the case that this recent price rise caught them somewhat off guard, but recently Japanese utilities have put more effort into shoring up their supply options.

StockInterview: There are countries, which get little media coverage, such as Namibia. How does this country rate?

Jeff Combs:
I think Namibia will definitely have an important role in supplying uranium. I don’t think it’s going to have the expansion potential of Canada, Australia, or Kazakhstan, but I think South Africa, Niger and Namibia are going to be an important component for uranium supply in the future.

StockInterview: You mentioned Niger, which was the world’s third largest uranium producer, and has now fallen to number four, behind Kazakhstan.

Jeff Combs:
The funny thing about Niger is that in a way it’s sort of fallen off the radar screen. It produces, but it just doesn’t get the press as other places. If the price increases, it really changes how people look at all these different projects going forward and a lot of things, which might not have been looked at 20 years ago or so, are being reinvestigated. Obviously, there is uranium in Niger. It’s quite important to the economy there. As I said, they haven’t really been on the radar screen as much as a lot of other regions in the world. Perhaps this is because production there has been controlled by the French for a long time. There are some Canadian companies exploring in Niger now. Since this activity is fairly recent, it won’t likely bear any fruit for five to ten years down the road.

StockInterview: Do you foresee realistic nuclear energy expansion in other parts of the world, such as the Middle East?

Jeff Combs:
Frankly, I haven’t focused on that very much. I know that Turkey is looking to do something. At some point, I think you would see more nuclear power in the Middle East just because the oil supplies aren’t going to last indefinitely. We do a headline news service, and it’s packed full of stories on different countries that are looking at nuclear power. It seems like there is a new country added to the list every day. I know, for instance, that Vietnam is looking pretty seriously at nuclear power. It would not be surprising there would be interest in the Middle East. There is a lot of focus on the problems associated with Iran. Overall, I’m a believer that if you have more nuclear power, then you’re going to have fewer problems with energy and more economic development, higher standards of living, and that’s going to be a big positive that will outweigh the negatives in situations like Iran.

StockInterview: Speaking of Iran, what is Washington’s sentiment toward nuclear energy, aside from the Bush Administration’s endorsement?

Jeff Combs:
I think there is a growing recognition, even among Democrats, that you need nuclear power as part of the energy mix. You’re not going to get there just by renewable energy sources. With the environmental and overall energy challenges we’re facing now, with higher and higher natural gas and oil prices. From the U.S. standpoint the vulnerability with respect to secure energy supplies, I think there is a growing recognition that nuclear power is part of the solution, and this thinking extends outside of the Bush administration. I’ve talked to people, and they believe that even if a Democratic administration came in that you really wouldn’t necessarily put a damper on nuclear power.

StockInterview: What about the Hillary Clinton Factor, if she becomes the next U.S. President?

Jeff Combs:
I haven’t really asked her for her views on nuclear power recently. I think the story for nuclear power is not so much what happens in the United States, which certainly could add more reactors. The rest of the world probably looks to what the U.S. does to a certain extent. I think the real growth in nuclear power, and what’s likely to drive the market in the future, is on the part of the developing countries in the eastern part of the world. These would be China, India, Korea and Russia, where economies are growing a lot more quickly, not the really mature economies like in the U.S. and Europe. Although I would expect to see some growth there as well. In this respect, having a Democratic president would not derail what’s happening in nuclear power or the uranium market. As mentioned earlier, I think that you see a more general acceptance of nuclear power across party lines, in Europe as well as the U.S., although there are still some factions that are virulently anti-nuclear.

COPYRIGHT © 2007 by StockInterview, Inc. ALL RIGHTS RESERVED.

In the free market system, when demand exceeds supply, prices rise, and there’s excess profit. So, new supply is created, until excess profit disappears. This is a mechanism to keep supply and demand in equilibrium. “Speculation” helps keep future supply and demand in equilibrium, to prevent future shortages.

The price of oil has risen from $50 to $135 a barrel over the past 18 months. In the 2000s, the U.S. underproduced and overconsumed, while export-led economies overproduced and underconsumed. The price of oil is linked to the value of the dollar, i.e. a negative correlation. For example, when the U.S. Fed increases the money supply, economic growth is stimulated. So, demand for oil increases. China’s economy is linked to the U.S. economy. Consequently, when the U.S. economy is stimulated, China’s economy is also stimulated, i.e. when the U.S. raises actual output towards potential output, China overproduces even more. However, China is adding “fuel to the fire” by subsidizing oil, which adds to overproduction.

The U.S. has made the proper adjustments. On the production side, U.S. firms became substantially more energy efficient. However, on the consumption side, there was less energy efficiency, because U.S. houses, autos, etc. became even larger. However, China has not made the proper adjustments to slow its overproduction. Instead, it continued to subsidize oil, with dollars, including shifting the flow of dollars from U.S. Treasury bonds into barrels of oil. China continues to squander its gains of trade to maintain high output and employment, while the U.S. has captured its gains of trade. The free market system has allowed the U.S. to either gain the most or lose the least, in the global economy, while Chinese economic policies created a lose/lose situation in China.

The free market system contributed to least three major booms in the U.S. during the 2000s. U.S. households had a consumption boom, including the housing & related goods booms (through rising incomes, abundant & accessible capital, low interest rates, and low prices). U.S. firms had a profit boom, because they offshored low profitable goods for higher profits, imported those goods at lower prices, and shifted limited resources into higher quality/higher priced/higher wage/more profitable goods. The U.S. government basically was able to refinance its debt at lower interest rates. Consequently, U.S. living standards rose at a steeper rate, while the U.S. economy strengthened substantially.

Is Red China finally entering the first world? Is China really interested in solving its pollution problems up of the interests of its major financiers? It appears that China is now putting forth industrial regulations on its larger business community.

Is this the start of an industrial revolution? Is China trying to head off an industrial revolution? Is China trying to actually level the playing field so it can be respected by the rest of the world? Are we seeing a transformation of China and its industrial power?

One has to ask these questions and they lead to so many more. For instance is China or eat about its polluted water supply and it’s horrible air pollution? Is China worried about global warming? What do the business people think of all these new regulations because surely they will slow down the growth that China has been experiencing in the last 10 years? Or will this lead to new industries and environmental protection products and services?

It is great to see that China is finally addressing the issues of its water pollution and its air pollution and perhaps this might level the playing field so that other companies in other parts of the world can compete with China’s mighty industrial capacity and growth.

This is good news for American companies and also good news for the Chinese people and peasants who were once forgotten. Apparently someone in China figured out that if all the peasants died from the pollution caused there will be no one to work and the growth will stop. What are your thoughts on this, please consider all this in 2006.