Commodities | Apr 17 2012
By Greg Peel
Last week a mere three transactions occurred in the global spot uranium market, totalling 500,000lbs, industry consultant TradeTech reports. TradeTech's spot price indicator remains unchanged at US$51.25/lb. Year to date trading has seen 8.2mlbs of U3O8 equivalent change hands compared to 18.4mlbs in the same period last year. We recall that the Japanese tsunami hit in March last year.
It must be noted that uranium is not particularly suited to spot trading. The price of a commodity enjoying globally high and wide everyday demand, like copper, is very much suited and thus the spot market is the dominant price-setter. Bulk materials such as iron ore and coal, which big steelmakers stockpile rather than order in at the last minute, have long been traded on yearly price settlement but they are now moving closer to spot pricing given the China impact and competitive supply. Alumina is one commodity now looking to spot trading after a history of fixed price linkages. LNG, however, is still traded very much on 20-year offtake and equity sharing deals, for example.
Uranium is not a widely consumed commodity globally, and not widely mined. Supply is dominated by a handful of big players. Nuclear reactors take a very long time to build, and use a large amount of uranium to fire up. Once fired up, a much smaller amount of uranium is needed to keep them going. Supply contracts between suppliers and consumers are thus also of the term variety, for anything from one to twenty years. Deals are tendered and negotiated for weeks and months can go by without any transactions. The spot uranium market is mostly used to cover miners' supply contract shortfalls or sudden small-order demand from consumers, but is not the definitive price-setter – more of a general indicator.
The spot market is also the plaything of speculators, be they intermediary uranium traders or commodity-punting hedge funds. A once somnolent uranium spot market was whipped into a frenzy in 2005-07 when speculators poured into the market to exploit one commodity in demand from China which had not yet joined the “super cycle” surge. The result was a major price bubble, and when a spot uranium futures contract was listed in the US it pretty much heralded the peak before the inevitable crash.
Fast forward to early 2011, and speculative interest in uranium had just begun to re-awake when along came Fukushima to blow a few speculators out of the water once more. Those left playing have this year had to deal with global gaps in delivery location and form, while the “real” players have bided their time to a great extent, no doubt continuing to assess just what fallout Fukushima will ultimately bring about. There's no rush to buy or sell. (On that front, assumptions are growing that Japan will soon switch on some reactors again ahead of the summer peak in electricity demand.)
So the spot uranium market has been pretty “dead” for the past several months. This has not prevented interest beginning to return from real players in the term markets, medium and long. Last week for example, four utilities entered the market seeking supply contracts for a total of 6.8mlbs covering periods of one to twenty years into the future, Trade Tech reports. TradeTech's term price indicators remain at US$53.50/lb (medium) and US$60.00/lb (long). On the spot front, the feeling now is that US$50/lb is a proven price floor which alleviates the need for sellers to dump in panic while buyers are in no rush either.
Australian-listed Paladin Energy ((PDN)) has been following a bumpy road to becoming one of the world's more significant uranium producers as it deals with the usual pitfalls of project development and expansion and deals with them in Namibia. Aside from production issues, Paladin is suffering from cashflow tightness as development costs rise in the face of weak post-Fukushima uranium pricing.
As a relative new kid on the global producer block Paladin does not suffer from having to service old long-dated legacy contracts from years ago at low prices and can sell its product at closer to a spot market price-setting. JP Morgan notes that while Paladin's production fell short of expectation in the March quarter and sales were lumpy, the achieved average sale price of US$59.17/lb well exceeded the analysts' forecast of US$51.33/lb (which is basically current spot).
All is thus not lost, it would seem.
Moreover, JP Morgan calculates that in today's world of rising costs the incentive price for new uranium supply projects is US$80/lb – a long way above current spot. Not only will this ensure new project considerations will be held back, it will likely ensure delays and cancellations among existing new projects. This, suggests JP Morgan, points to a tightening supply market and, eventually, higher uranium prices.
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