The Uranium Price Rebound Ahead

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By Greg Peel

It has not been a happy new year for uranium producer Rio Tinto ((RIO)) which having first suffered a leach tank failure at its Ranger mine in Australia, owned by Energy Resources of Australia ((ERA)) of which Rio is the majority shareholder, has also suffered a leach tank failure at its Rossing mine in Namibia. Meanwhile, AREVA has decided to close its two mines in Niger for maintenance for a month as it awaits approval for a licence renewal from the Niger government.

These events simply add to the growing list of uranium supply disruptions and curtailments that began to build towards end-2013. Add a low uranium price to the mix and analysts are assuming further curtailments may yet await and new production plans will remain in the drawer. This then leads to the typical commodity market chicken-egg principle that production cuts due to lower prices will lead to higher prices on a subsequent supply squeeze. Many an analyst began to predict higher uranium spot prices from the last quarter of 2013 but was left disappointed by sellers sitting on excess inventory keen to square their positions ahead of year-end. Watching on were the genuine consumers, who seemed in no rush to start stocking up at supposedly low prices.

Participants began to drift back to the market after New Year breaks last week, resulting in four transactions being concluded in the spot market. Prices improved for sellers as the week progressed, industry consultant TradeTech reports, leading to a rise in the consultant’s weekly spot price indicator of US50c to US$35.00/lb.

TradeTech’s term prices remain unchanged at US$37.50/lb (mid) and US$50.00/lb (long).

Despite retrenchment in the supply-side of the industry, Japan remains the swing factor in the ongoing supply-side story. In simple terms, Japan is carrying substantial stockpiles of uranium earmarked for consumption by the country’s nuclear plants which are currently all shut down pending clarity from the government on a future nuclear policy. Were the government to elect to walk away from a nuclear future, not only would those stockpiles need to be sold given their redundancy, they would desperately need to be sold to help finance the heavy cost of the country’s fossil fuel consumption alternative.

Japan boasts 61.3GW of electricity production capacity from its reactors, existing and planned, TradeTech notes. Of that capacity, 6.3GW has now been lost at Fukushima and another 5.9GW is unlikely to restart. A total of 15.4GW is either planned or under construction and currently suspended. That leaves 33.8GW that could restart if policy allows and safety checks pass new, very strict requirements. Of that capacity, 15.6GW, representing 16 reactors, is currently awaiting approval.

It was assumed the new Japanese government, now one year old, would move swiftly to reinstate Japan’s nuclear capacity given a pro-nuclear policy. But the spectre of Fukushima still looms large, providing staunch opposition from the electorate and many politicians. Lifting existing reactors to new levels of safety has taken time, but the Abe government has also vacillated. Clearly the policy manoeuvres need to be delicate.

The bottom line is one of Abe trying to drag the Japanese economy out of twenty years of stagnation while not only having to pay out trillions of yen in Fukushima-based compensation, clean-up and decommissioning costs, but further trillions to import the oil and natural gas needed to fuel the 30% of Japan’s electricity generation previously supplied by nuclear plants. Add to this the knock-on effect of a substantial industry of any nature now idle, costing jobs and curtailing economic activity in the cities and towns at which nuclear plants are located. Japan’s is a manufacturing economy currently being offered unprecedented export support through orchestrated devaluation of the yen under Abe’s controversial policy actions. Yet the country is currently running up trade deficits every month given the offsetting cost of fossil fuel imports.

Something, one presumes, has to give.

Utilities across the globe have held off on committing to fresh supply contracts, despite historically low uranium prices, given it remains unclear whether Japanese stockpiles will yet be dumped onto the market. Producers operating newer mines, such as Australia’s Paladin Energy ((PDN)) for example, have been producing uranium at a cash cost above spot. If there is no respite from weak spot prices, the inevitable is on the cards for the likes of Paladin. But if Japan were to restart just one reactor, suggesting a nuclear Japan is back on the agenda, the response from buyers would be swift.

US investment firm Raymond James believes six reactors will be back online in Japan by end-2014. While acknowledging the shrinking ex-Japan supply-side for uranium, the analysts further highlight the extent to which utilities across the globe have allowed their inventories to dwindle without securing necessary ongoing supply contracts while the Japan uncertainty has played out. Such “uncovered uranium requirements” have now grown to 38mlbs in 2016, 53mlbs in 2017 and 71mlbs in 2018 according to industry data which in aggregate represent a 25mlb increase on only one year ago.

“The takeaway,” says Raymond James, “is that due to a major slowdown in buying we have seen a pronounced rise in the amount of uranium utilities will have to buy going-forward”.

Suffice to say that Raymond James is forecasting a rebound in the spot uranium price in 2014 following the 21% fall suffered in 2013.
 

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