What China Needs More than Oil, Coal, or Natural Gas

China needs electricity… badly.

When the Chinese government began loosening business regulations in 1978, the its economy exploded. And the entire country’s work force changed in just 20 years. Before 1978, nearly 80% of the Chinese workforce was in agriculture… by 1994, it was only 50%.

China managed to meet most of its increased energy demand until the late ‘90s. In fact, following the Asian financial crisis in 1998, China actually had an oversupply of electricity. So, the Chinese government issued a moratorium on the construction of coal-fueled power plants from 1999-2002.

The results have been disastrous.

China’s economy kept growing, but energy production started decreasing. By 2004, public and private companies in Hangzhou (large business district in China) were forced to shut down for 4 days a week. Foreign-owned companies were closing 3 days a week. And even now, in Shanghai, students read by candlelight and elevators freeze between floors.

Currently 70% of the country’s electricity comes from coal. And while the country has 11% of global reserves, most of this is of low quality, highly sulphuric, and heavily pollutant. In other words, it’s difficult to mine, and filthy to produce.

This last aspect is becoming particularly significant. Since, for the first time in history, China will host the Olympic Games. And the last thing the Chinese government wants is an international showcase on how filthy and dirty its buildings and skies are from coal usage. China has already ordered the shutdown of coal-fueled power plants by 2007.

So, the cleanliness of any potential fuel source is key.

Because of this, China recently turned to alternate fuel sources, like hydroelectric dams. In 1994, the country began construction of the Three Gorges Dam: the largest hydroelectric dam in the world. It’s taken over 10 years to build. And its completion is scheduled for later this year.

Once completed, the dam will be capable of producing 18 million kilowatts of electricity. By 2009, it’s expected to produce 84.7 billion kilowatts of electricity annually.

And it will barely make a dent in China’s energy demand.

In fact, according to Wired Magazine, China could build a Three Gorges Dam every year from now on and STILL not meet its growing demand for electricity.

Simply put, hydroelectric dams take too long to build, and aren’t powerful enough to slake China’s energy thirst. Coal is too filthy. And then there’s uranium…

Longtime investors see uranium as untouchable. They remember the 1979 nuclear reactor meltdown at Pennsylvania’s Three Mile Island. And then there was the Chernobyl catastrophe in 1986.

However, before these disasters, uranium was a hot commodity, and a reallyhot investment. For much of the ‘70s, uranium traded at $45 ($137 today) a pound. It’s extremely efficient: o ne pound of uranium supplies the same energy as 3 million pounds of coal. And it’s much cleaner than coal.

So, it’s not surprising that China’s President Hu Jintao recently set aside $54 billion to acquire as much uranium as possible. He also ordered the construction of 27 nuclear power plants over the next decade.

Over the last two years, Chinese officials have paid several visits to Australia and Canada: two of the biggest uranium producing countries in the world. Last year, CITIC Pacific, a Chinese financial conglomerate, tried to buy WMC Resources Ltd., which owned Australia’s largest uranium mine at the time.

Make no mistake; uranium prices will rise as China bites into the commodity. In fact, they already are: In 2001, uranium prices bottomed out around $6 a pound. Today, five years later, it has passed the $30 mark and is closing in on $40.

And there’s still plenty of room to run. Remember, in the 1970s uranium traded for as high as $45 a pound: that’s $137 in today’s dollars.

There are a few ways to profit from this trend:

• Buy uranium outright
• Buy a manufacturer of nuclear technology
• Buy companies with uranium reserves

Unless you’ve got a lead bunker, I wouldn’t recommend option one. Option #2 is risky, because China has already pirated much of this technology. Option #3 – purchasing shares of a company with uranium reserves is the way to go.

The top three reserves of uranium can be found in Australia, Canada and Kazakhstan. The latter country is inherently unstable. I would recommend you stay away from it and focus your attention on a company that’s relatively cheap in either Australia or Canada. That’s hands down the best way to position yourself as China spends billions of dollars to solve its electricity crisis.

Good investing,

Graham Summers