Hopes Fade For Short Term Uranium Recovery

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By Greg Peel

While the Japanese prime minister has recently reaffirmed the country’s commitment to nuclear energy after two years of market anticipation (and the third anniversary of the Fukushima disaster now passed), the reaffirmation has come across as more “motherhood” than suggesting any renewed urgency to speed up reactor restarts. The market’s mood may brighten when the first Japanese reactor does actually restart at some point this year, but until then there are no signs near term demand for uranium is about to pick up.

The Ukraine situation also impacted on market sentiment last week, more as an uncertainty factor than any specific risk to demand. Half of the country’s electricity supply is provided by its 15 nuclear reactors which state-owned operator Energaotom has ensured are “vigorously protected” and well stocked with supplies. The Ukrainian nuclear authority did initially ban exports of nuclear fuel from Russia to foreign customers further afield across Ukrainian rail lines, but this was more of a safety measure when Kiev was beset with protests rather than any act of sanction. The ban has since been lifted.

The upshot is that sellers of uranium became a little more skittish earlier in the week and subsequent rushed sales affected a sharp drop in the uranium spot price, but after six transactions totalling 1mlbs U3O8 equivalent the week ended with industry consultant TradeTech’s spot price indicator down only US25c to US$35.00/lb. The buyers are there, including utilities and the enigmatic speculative buyer of 1mlbs, but they are in no rush.

Meanwhile, news from the US suggests issues on both the demand and the supply side of that country’s uranium industry. Uranium enricher USEC has filed for bankruptcy, although the company’s plan is to restructure its debt under Chapter 11. It is understandable that an enricher should be impacted by low uranium prices, but one might not expect a utility to be struggling when fuel is so cheap. Yet that is the case for Exelon, operator of the largest fleet of US nuclear power plants.

Exelon has claimed the current market conditions do not reward its facilities for the environmental and reliability benefits they provide, and that without new legislation the company would be forced to shut down up to half its plants.

Uncertainty still holds sway over the uranium market, as all of the above might attest. JP Morgan is one broker who has long forecast an imminent tightening in the market and a resultant price increase but now JP Morgan, too, has backed off. The broker still believes the market will improve in the medium term but concedes a global inventory overhang means this is not going to happen any time soon.

The argument for a price recovery continues to build, as JP Morgan notes. On the supply side, not only are new uranium projects being curtailed at current price levels but existing projects are being shut down for the time being as well, including Paladin Energy’s ((PDN)) Kayelekera mine in Malawi and Uranium One’s Honeymoon mine in Australia, and the Russian HEU contract has ended. On the demand side, China is still buying uranium in substantial quantity and Japan has at the very least committed to a nuclear future.

Yet the broker is now forced to wind back its price recovery expectations and lower its near term price forecasts. The year-end forecast drops 10% to US$45/lb to render a 2014 average price of US$40.30/lb, down 11 % from the previous forecast, while the 2015 average forecast price is lowered 17% to US$50/lb.

TradeTech’s term price indicators remained unchanged last week at US$37.75/lb (mid) and US$50.00/lb (long).
 

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