The economics of the uranium sector are not as strong as the industry association would have us believe, writes Simon O'Connor.

PRIME Minister Kevin Rudd's ambition to rid the world of nuclear weapons has prompted a re-examination of Australia's role as a major global supplier of uranium - the fuel for nuclear weapons.

The push to promote uranium exports has gone up a notch in recent weeks with Resources Minister Martin Ferguson launching an Australian Uranium Association report that predicts uranium exports will add tens of billions of dollars to the nation's gross domestic product by 2030.

This rosy outlook comes as many listed uranium explorers are slipping in value. Last year, the global uranium spot price hit $US130 a pound. Now it has slipped back to about $US75.

So what are the prospects for the industry and which direction are share prices for Australian uranium players heading?

Global uranium is tightly controlled by a small number of low-cost suppliers. The World Nuclear Association estimates global demand is about 67kilotonnes a year (ktpa). Of this, only 54 ktpa is supplied by newly extracted ore from active mines. The remaining 13 ktpa is from secondary sources, industry inventories and Russian military stockpiles.

Australia supplies about 20% of global uranium from three mines at a reasonably constant output of 10 ktpa. Despite optimism from the industry, in reality there will need to be a dramatic global investment in new reactors to see significant increase in demand. Even the International Atomic Energy Agency prediction of 60 new reactors in the next 15 years would make only a slight impact on global demand when decommissioning of old reactors is also considered.

A nuclear reactor consumes roughly 150 tonnes of uranium oxide a year. In 15 years, this could mean nine ktpa additional demand from new reactors - an increase of 13%, before you start to factor in the closure of old reactors.

The industry association's report extended this growth in reactors out to 2030, projecting a total nuclear energy capacity of 960 gigawatt-equivalent, up from 370 gigawatt-equivalent. This forecast is a full 80% above the projections of the world's leading global energy agencies - the IAEA and the International Energy Agency.

In defending its figures, the AUA has described its modelling as "conservative". It says it has relied on work that factors in a global price on carbon and the potential flow-on effects for nuclear electricity generation. But it has missed the point of what this level of growth in demand within a relatively short time frame would mean.

The AUA projection comes from a highly theoretical position and is packed with assumptions. It assumes a global carbon price will not result in any improvement in energy efficiency or reduction in energy demand.

It assumes it is physically possible to build more than 590 nuclear reactors globally despite the existing regulatory constraints and the reality that lead times for nuclear reactors often break the 10-year mark. And it assumes that despite the ever increasing costs for reactor construction, return on investment will remain competitive with other energy sources.

These desperately optimistic assumptions are in no way "conservative". In fact they massively overstate the real potential for nuclear growth to 2030.

Add to this the expansion of BHP Billiton's Olympic Dam mine and the future becomes even gloomier for the Australian small cap uranium companies.

Recent peaks in share prices for small uranium explorers reflect irrational exuberance based on poorly researched analysis of industry potential for growth, rather than any fundamental growth opportunities. Clearly, the economics of the uranium sector are not as strong as the industry association would have us believe.

Simon O'Connor is the Australian Conservation Foundation's economic adviser.