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Is Uranium At An Inflection Point?

Commodities | Aug 28 2012

By Andrew Nelson

You can call it a support, or you can call it resistance, but either way uranium has stayed within a few dollars of US$50/lb for a long time now. There have been signs of firmness and signs of weakness over the past 12 months and with speculative talk now trickling through the market of theoretical emerging supply tightness and the possibility of increasing demand, the spot price has held steady for a few weeks now.

Looking at and trying to draw conclusions from a market that doesn’t do much week in and week out gets a little bit harder to do every time you try. One pines for novel information in order to say something new. When you finally get something new, it’s hard not to go over the top with either optimism or gloom.

Over the past few weeks we have written about the possibility a looming supply shortfall, the prospects of increasing Asian, European and North American demand, to name just a few. There seem to be a growing number of analysts talking about building exposure now, as prices in this sector could climb quickly once they're set in motion.

But as of yet, there is no motion, only talk, and the U308 spot price is rooted firmly to its year-long support/resistance level. Last week saw no change in this. There was, however, a little more talk, a little more news.

China is planning to build as many as 100 reactors over the next two decades. While there is nothing new in this statement, there is at list a little more motion. China’s National Nuclear Power Co said it has now received final approval from the Ministry of Environmental Protection to move forward with its planned initial public offering.

The state-owned nuclear power operator said in June that it had received preliminary approval from the ministry to move ahead with an IPO to finance five power projects valued at 173.5 billion renminbi (US$27.3 billion). The ministry's approval is the first tangible step, but the impact of this decision is likely months or more likely years away.

None the less, it is good news, as China had suspended the construction of new reactors following the Fukushima nuclear disaster in Japan last year. Thus while positive statements about China’s plans have been flowing though the market for the past few months, these latest claims at least have a little more substance.

There was another instance of old news turned new, good news last week. The market has known for months that BHP Billiton ((BHP)) was going to push back plans for the expansion of Olympic Dam. BHP has been dropping hints for months. But until the release of the company’s full-year earnings report, it wasn’t official. Well, now it is official.

Post the company’s result, analysts at JP Morgan ventured to guess that at best, it is unlikely there will be a material increase in uranium production from the Olympic Dam before the end of the decade. Such an outcome would significantly tighten the longer-term outlook for uranium, in the broker’s view.

Unsurprisingly, the broker remains fairly positive on the uranium market given that the current spot price around US$50/lb is well below its estimate for the price required for expansion projects to book a decent return. JP Morgan estimates that the average incentive price for new projects is around US$83/lb.

Thus with demand expected to grow, driven largely by China’s nuclear growth program, the broker thinks  uranium prices must push higher at some point to simply encourage production growth.

Until then, we’re still stuck where we are.

 Last week industry consultant TradeTech noted a continuation of slightly higher activity levels that were seen the prior week. While volumes were down, 600,000/lbs changing hands last week, there were five transactions, which was more than the week before.  Buyers included utilities, traders, and financial entities, notes TradeTech.

The good news to take from this is that utilities are back on the list and are actually showing some interest in purchases at current price levels.

However, TradeTech notes the majority of demand remains discretionary in nature, with buyers continuing to resist paying higher prices. In response, sellers have been willing to sell at the current price, but have been wary retreat higher for fear buyers could be spooked and pull out of the market once more.

Thus, TradeTech’s Weekly U3O8 Spot Price Indicator stayed put at US$49.00 per pound, unchanged from the week prior.

There were again no new transactions on the term market, but TradeTech notes there was some new demand here as well. A US utility entered the market last week looking for over 1 million pounds, while a non-US utility is also expected to formally enter the market soon for “significant” quantities of material, notes TradeTech.

Yet despite the good news, once again it has only added up to talk at this point. TradeTech’s Mid-Term U3O8 Price Indicator has stayed put at US$53.50 per pound, while the Long-Term U3O8 Price Indicator remained at US$61.00 per pound.

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