Uranium Still Trending Up

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By Greg Peel

Kazakhstan has now well cemented its position as the world's dominant supplier of uranium, notes BA-Merrill Lynch, and in the second half of last year the producer began to show signs of supply discipline in keeping a lid on production. It is a lesson well understood by OPEC in the oil market and more recently Qatar in the natural gas market – when you are the world's swing supplier you want to see solid prices but not so high as to scare off demand. Careful production management is in order to ensure the most beneficial demand/supply balance.

But while Kazakhstan is in the driver's seat, elsewhere in the world supply issues abound. French producer Areva is suffering from security issues in Niger and delays in Namibia, grades are down at BHP Billiton's ((BHP)) Olympic Dam and Rio Tinto's ((RIO)) Rossing, and Rio's two-thirds owned Energy Resources of Australia ((ERA)) is having all sorts of nightmares from both low grades and the weather. ERA's profile has gone from weak to “extremely fragile”, suggests Merrills, and there is a “high degree” of uncertainty beyond.

In the meantime, it is no secret that China is pushing ahead with ambitious nuclear power expansion plans and rapid progress to date sees Merrills lift its 2020 capacity assumption for China by 20%. Rising prices are not likely to stop China stockpiling U3O8, suggest the analysts, and Japan and Korea are unlikely to back off either.

All of which provide the underlying fundamentals for the recent steady rise in the uranium price, along with a subdued US dollar. Industry consultant TradeTech notes the buyers and sellers began last week staring each other down across a price gap but by later in the week they came together for five transactions in the spot market totalling 1.2mlbs of U3O8 equivalent. The indicative price ticked up from the previous mark by US75c to US$73.00/lb.

Merrills has upgraded its 2011 and 2012 spot price assumptions by 39% to US$79/lb and US$78/lb respectively, suggesting upward pressure remains before a peak in 2013-14. Stronger oil prices add to uranium's appeal. The biggest risk is a stronger US dollar, but the Merrills analysts have factored their dollar forecasts into their 2013-14 peak assumption.

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