Uranium’s Explosive Month

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By Greg Peel

On the 16th of March 1979, Hollywood released The China Syndrome – a chilling warning of what might go wrong at a nuclear reactor. Twelve days later, the Three Mile Island reactor in Pennsylvania suffered partial core meltdown.

In 1985, my faculty was lectured by a musician and aspiring Minister for the Environment who was then leader of the Australian Nuclear Disarmament Party. In 1986, I was on the forex night desk when the reactor at Chernobyl suffered a catastrophic meltdown.

In 1970s the spot price of uranium leapt from under US$10/lb to US$40/lb as nuclear energy became the new Big Thing. After 1979 the price took a dive and as we entered the 21st century it was back at US$10/lb again. But then the oil price started moving and China started talking up a massive nuclear energy development plan. Speculators got on board, uranium hit US$138/lb in 2007 before crashing back to US$40/lb again by 2010.

So we might as well ignore everything between 1979 and 2010 and suggest that nuclear energy has picked up where it left off. Even the Australian Labor Party is now divided on whether Australia should pursue nuclear energy. Peter Garrett must be relieved he's out of the spotlight and not fielding questions about the NDP.

If Australia ever fires up nuclear power plant (as opposed to Lucas Heights) I'll bet money it won't be in my lifetime. Like everything else in this world in the 21st century, China has ensured the cost of building a nuclear reactor has skyrocketed. Forget the price of actual uranium required. Once a core is established you don't need very much to keep it running anyway.

But you do need a lot to get it going in the first place, and as we enter a new decade China's bold plans are beginning to look a lot closer on the time scale. Having originally sought only memoranda of understanding for long-term uranium supply, China is now beginning to convert those MOUs into actual long-term contracts. And in so doing it has awoken the uranium price from its slumber.

Industry consultant TradeTech has ruled off its November price indicator at US$60.25/lb. That represents a 16% gain in one month to the highest price since August 2008. And while China is leading the charge, and in so doing drawing speculators back into the mix, Chinese utilities are not the only ones back in the market for U3O8. The sellers know this, and have been backing off.

While the spot price has risen $8.25 in November, the uranium spot market is not very industry indicative. Spot trades are mostly reserved for supply shortfalls, which can mean either utility top-ups or producer top-ups to fill long-term contract obligations, but otherwise simply for hedge funds to jump all over each other.

When the spot uranium price was going berserk in 2006-07, the “real” market of producers and consumers left the speculators to it. Longer term contract prices also rose as the spot price rose, but only to around the US$60/lb level. This is about the price Paladin Energy ((PDN)) started selling its virgin yellow cake at, while poor old Energy Resources of Australia ((ERA)) was stuck fulfilling legacy contracts at US$15/lb even as the spot price flew into triple digits.

Longer term prices edged back with the spot price in the interim, but they, too, are now on the move again. China is the major driver.

TradeTech has shifted its mid-term price indicator up by US$6 to US$62/lb following November trade and its long-term price indicator up US$3 to US$65/lb. These prices do not move often.

While November saw 23 transactions totalling 3 million pounds U3O8 in the spot market, the buyers were mostly traders and “financial entities”. In the “real” market, six transactions of around 9 million pounds were reported, with supply being sought for periods out to 2019.

There is a window of potential demand-supply imbalance over the next several years as China and other nations seek start-up uranium at a time when legacy global mines are seeing falling grades and warhead dismantling is reaching its finale. Kazakhstan remains the swing factor, but just as OPEC does with oil and Qatar with natural gas, Kazahstan intends to control supply to its own price advantage.

The potential boom won't last forever, given planned mine expansions and as yet untapped mines (such as in Queensland where vapid politicians couldn't make a decision to save themselves) on the supply side, and the drop-off in required U3O8 once reactions are up and running on the demand side.

And this time, memories of 2007 will be very fresh.

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