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Uranium Week: There Can Only Be Upside

Weekly Reports | Jan 24 2017

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It appears 2017 may prove a brighter year for uranium, but it’s a very long way back.

By Greg Peel

This week sees the global Nuclear Fuel Suppliers Forum held in Washington, which typically slows down market activity given participants are absent. Last week saw only modest volumes traded in the spot market. Industry consultant TradeTech reports only four transactions totalling 600,000lbs U3O8 equivalent.

The good news is that TradTech’s weekly spot price indicator has risen, again, this time by US25c to US$22.75/lb. Indeed, since hitting a 12-year low of US$17.75/lb in December, the spot uranium price has rallied a healthy 24%.

Out of context, that sounds inspiring. In context, that’s a US$5/lb rally following a -34.5% price drop in 2016, or about -US$17/lb. The price of uranium, note the commodities analysts at Macquarie, is currently trading at 50% of its price of 40 years ago in nominal terms, before one even accounts for inflation.

Meanwhile, the price of uranium’s energy rivals – LNG and coal – surged back in 2016 following earlier tumbles. Uranium was the worst performing commodity in 2016. No other commodity is trading at 50% its nominal value of 40 years ago.

A Picture Of Weak Demand

Uranium has now suffered the same fate as oil/gas and coal suffered in 2015. With spot prices falling below the cost of marginal production, supply has been wound back. But not enough to make a significant dent in the global surplus. On the other side of the equation, 2016 featured weak demand.

In the US, demand is falling as legacy reactors are being shut down, due to their inability to compete commercially with alternative energy sources (gas, renewables) and despite the low cost of fuel. With Japanese reactor restarts moving at a barely discernible pace, the global demand burden falls on China, where a major reactor construction phase is underway.

The problem is, as prices have fallen steadily since the Fukushima disaster, China has been opportunistically stockpiling the uranium needed to fire up new reactors. While Chinese stocking continues, the peak rate of China’s inventory build is now past, Macquarie notes.

In Japan, there are now ten reactors out of a pre-Fukushima 40-odd that have satisfied new safety standards and are therefore restart-able. But as the fifth anniversary of Fukushima approaches, only three are currently operating (and one of those is actually down for maintenance as we speak), two more were restarted and then closed down again due to court injunctions (safety concerns at the local level), and the fate of the other five is in the hands of local governments, or “the people”, as it were, and as such unknown.

Too Much Supply, Still

On the supply side, last week saw major global producer, Canada’s Cameco, issue a profit warning due the intended write-down of the value its production assets. The company will also lay off 10% of its workforce. Last year Cameco idled its Rabbit Lake operations. Similar care & maintenance curtailments have been the story for Australia’s Paladin Energy ((PDN)) over 2016.

Yet Cameco’s Cigar Lake mine continues to ramp up, and the Husab mine in Namibia continues to ramp up, where Rio Tinto’s ((RIO)) Rossing mine is also expected to recover production levels. While 2017 should see the lowest level of uranium production since 2010, Macquarie notes, the 2% growth rate in demand required to keep reactors operating is not enough to mean a surplus will be avoided. Macquarie does not see a balanced market until at least 2020.

That said, Macquarie sees more upside potential for uranium prices in 2017 than downside – a view the analysts are not alone in taking. Outside of Chinese construction and Japanese restarts, one positive may be provided on the demand side if shutdown plans for legacy US reactors are reversed due to favourable state legislation.

TradeTech’s term price indicators remain unchanged at US$22/lb (mid) and US$30/lb (long).

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