Commodities | Nov 20 2012
By Andrew Nelson
One of the things that uranium market watchers assumed would halt the metal’s slide was news a few months back that China had shrugged off its post Fukushima ashes and decided to go ahead at full steam in expanding the nation’s nuclear energy program. The country is targeting 80 gigawatts of new, uranium-fuelled power by 2020. That’s a lot of yellowcake. Uranium’s response: weakness and further decline.
Aside from China, there are numerous countries ranging from oil rich UAE, Saudi Arabia all the way to Poland that have recently renewed their national commitment to nuclear power. Adding China’s plans to the global picture sees 436 reactors running worldwide, with a further 60 nuclear reactors under construction and approximately 150 new reactors in the planning stages. Uranium’s response: weakness and further decline.
There is a bit of new good news for sellers as well, with Kazakhstan, the world's biggest producer of uranium, saying last week it may delay planned mine expansions. The other two largest producers in the world, Canada's Cameco Corp and France's Areva SA, also reduced their annual production forecasts last month in a push to scale back growth plans.
So what we have is a sector that is producing a product that is absolutely essential in sustaining modern life that is being bailed up investors and left for dead. There is no short-term fix to account for a lack of nuclear generated electricity, nor to account for diminishing supplies of uranium to fuel this electricity demand. Uranium producers are starting to drop as selling prices remain uneconomical for most and despite the spectre of steep demand increases, the supply side continues to shrivel up.
Markets are easy enough to understand; despite the demand that will be there, despite the lower amount of stock that may be on offer down the track, right now there is too much stock for too few buyers. Without buying a round-the-world ticket and sitting down with countless producers, sellers, investors and utility companies, we’re never really going to know how much supply is really in the pipeline and stockpiles, therefore the only way we’ll know uranium is becoming supply constrained will be when buyers start to consistently bid up prices.
In the meantime, citing the assumption that the uranium price must go up but refuses to do so, an increasing number of uranium market watchers are starting to call uranium a contrarian play. The way to gauge upside in a contrarian play is to answer the following question: how out of favour is uranium in the eyes of investors? Unfortunately, this answer, intended to simplify matters, only leads to more confusion. Most contrary investors want the question answered with words like “very” or “hugely”, but with so many still hanging in there waiting for the bounce that must come; the answer for uranium is “not as many as likely should be”.
Here’s what we do know. Utilities are holding back purchases on hopes of even lower prices. Nuclear fuel inventories have built over the last few years as both Japan and Germany have moved to restrict fuel purchases. Natural gas prices are getting lower and lower, meaning the need for other power sources are less pressing. And despite rev-up plans, Chinese demand has actually been backtracking given the surfeit of hard facts about a revised nuclear build schedule and a surplus of hot air about the what’s, when’s, where’s etc.
So really, micro-market fundamentals remain unsupportive for uranium despite macro conditions looking quite favourable. This begs the question: is uranium really a contrarian play, or is this assumption the belief of increasingly desperate investors looking to make sense of a market that doesn’t appear (at least on the surface) to be following the fundamentals in a reliable manner?
Darcy Keith, from Canada’s Globe and Mail thinks uranium has finally reached capitulation, with the spot price dragging along the bottom before the big bounce back commences. As I noted, investors for the most part are yet to chuck in their towels despite uranium and uranium-related stocks sitting at multi-year lows. And if you’re a contrarian, here’s the good news, analysts are now starting to pare back their rebound predictions. If all the analysts are doing and saying one thing, the contrarian heads the other way.
Keith urges caution and sense, however, noting uranium isn’t likely to snap back overnight. It may take years, but the upside from current levels seems formidable.
In the meantime, spot uranium prices pushed a little higher last week on decent volumes, with signs of new demand from non-US utilities and market intermediaries emerging. Industry consultant TradeTech reports there were a total of six deals done on the spot market last week that saw some 2.5m pounds of U308 change hands.
Prices were all over the place, with one transaction concluded below the current weekly spot price, while the other five deals saw higher prices, pushing TradeTech’s Weekly Spot Price Indicator up US$0.75 to US$41.75 per pound.
There is also some new demand, with one non-US utility looking at offers for over 1 million pounds to be delivered in 2013. We should know what happens with this by December 10.
The term uranium market was quiet last week, with no new demand or transactions reported. That means TradeTech’s Mid-Term and Long-Term U3O8 Price Indicators remained unchanged at US$45.00 and US$59.00 per pound.
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