Uranium Week: Just a Blip?

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By Greg Peel

Try this quick quiz: Which was the best performing of all metals/minerals in price terms in August? No you’re wrong, it was uranium. Indeed, spot uranium is up over 13% since the end of June when the price bottomed out at US$28/lb. It was up again last week, by US25c to US$32.25/lb, according to industry consultant TradeTech’s weekly indicator. Five transactions totalling 500,000 of U3O8 equivalent were concluded.

But as Macquarie notes, uranium is not the only energy-related commodity to have enjoyed a price rally since end-June. European natural gas has also run up, and European thermal coal has not only run up but established a premium over other thermal coal benchmarks. This would tend to suggest uranium’s price rise is not about increasing demand or supply curtailments, but about sanctions imposed on Russia and the potential ramifications thereof.

Russia only accounted for only 5% of global uranium mine output in 2013 but it provided the US with 20% of its enriched uranium supply and the EU with 36%. Russian sanctions or retaliations had not yet impacted on uranium but last week the Australian government moved to curtail uranium exports to Russia until further notice. Australia is the world’s third biggest producer of uranium behind Kazakhstan and Canada and mostly exports to Japan (when required), the US and Europe, but does send smaller shipments to Russia.

Western leaders met in Wales on the weekend to discuss, among other geopolitical matters, possible sanction step-ups against Russia should the supposed ceasefire in Ukraine not hold. So far it’s not looking good. Hence it is possible the nuclear energy industry might be hit in the next round.

Initial sanction risk back in June coincided with a uranium market in which speculators were set to the short side, as producers desperately attempted to offload product to alleviate cash burn. A short-covering scramble thus ensued, which also forced a bit of a hurry-up call for utilities across the globe which had been holding off on re-establishing their stockpiles.

To compound matters, last week Canada’s Cameco closed down the world’s largest uranium mine due to a labour dispute. The battle with workers is ongoing, and given Cameco can cover up to a year’s worth of contractual supply obligations through inventories, Macquarie notes the dispute could be quite protracted.

This may just serve to keep the wolf from the door of the 50% of global uranium production which is theoretically running at a loss at current pricing. While last year saw a series of expansion plans being postponed and less economic mines being idled, such as Paladin Energy’s ((PDN)) Kayekeleera mine in Malawi, that supply constraint momentum has not continued into 2014.

Thus Macquarie does not believe a substantial uranium price recovery is being signalled by the recent price spike. That spike has been event-driven and not representative of anything structural. On the demand side, a recent rekindling of utility buying interest is mostly opportunistic at lower prices, Macquarie believes, and not suggestive of a major restocking phase. Global inventories remain “extremely” large, Macquarie warns.

Macquarie does see limited downside to uranium prices nevertheless, but expects the market will remain in surplus through the foreseeable future. What happens with regard Russia in the short term should not have much impact on the long.

TradeTech’s uranium term prices remain unchanged at US$34.50/lb (mid) and US$44.00/lb (long).
 

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