One Seller Spooks Uranium Market

This story features ENERGY RESOURCES OF AUSTRALIA LIMITED. For more info SHARE ANALYSIS: ERA

By Greg Peel

It is the nature of commodity price movements that a sharp run-up, particularly one tracing out a parabolic curve, can be quickly followed by a sharp sell-off. These “blow-off tops” occur when the herd is running too wild to the upside and someone finally decides enough is enough. Panic profit-taking transpires.

Spot uranium had run from the low forties to US$73/lb a couple of weeks ago over the space of mere months. While the price run mirrors inflation-driven price rises in other commodities, specifically uranium has been suffering from supply issues. Are they temporary or structural? Either way we mustn't forget that Kazakhstan can simply increase production.

Two weeks ago, after having not previously looked back, industry consultant TradeTech's indicative spot uranium price ticked down US25c to US72.75/lb. Last week it quickly dropped US$4.25 to US$68.00/lb.

Suddenly the sellers were not looking so smug. They had been backing off and backing off as if luring a horse into a pen with an apple, supposedly safe in the knowledge that major suppliers such as Energy Resources of Australia ((ERA)) had been suffering from low production grades and weather-related shutdowns. ERA has been forced to buy in spot uranium to fill long term contract obligations. But if the horse suddenly bolts, well, you might just have to chase after it.

A “non-traditional seller”, as TradeTech puts it, came into the market last week with an offer of over 800,000lbs. (The implication is a hedge fund or some other speculative trader.) What did they know? Why were they selling? The sellers were not going to wait to find out. And nor were the buyers prepared to get mown down in the rush.

The sudden, sharp drop in price soon sparked some buying support at lower levels and in the end 700,000lbs changed hands in a total of seven transactions, TradeTech reports. And later fresh utility interest came in, with offers sought for parcels of 600,000lbs and 300,000lbs.

So it's not all over, but rather a healthy blip. TradeTech also reports that after a couple of weeks of quiet, demand returned to the term market. Various utilities have begun shopping around, including one seeking 2.2mlbs for 2012-19 delivery.

The medium and long term indicative prices nevertheless remain at US$75/lb and US$70/lb respectively.

Click to view our Glossary of Financial Terms