Longer Term Weakness For Uranium?

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By Greg Peel

The short burst of enthusiasm witnessed on the spot uranium market two weeks ago ran out of legs last week once the handful of prospective buyers were filled on their orders and left, industry consultant TradeTech reports. While further interested parties, including utilities and traders, entered the market last week, sellers, including producers and traders, were quick to respond.

The result was six transactions totalling 700,000lbs of U3O8 equivalent but a drop in TradeTech’s spot price indicator of US25c to US$35.00/lb. Tradetech’s term price indicators remain steady at US$38.00/lb (mid) and US$53.00/lb (long).

The week ended on a slightly brighter note, nevertheless, when the Tokyo Power Company requested safety inspections ahead of the restart of units 6 and 7 at its Kashiwazaki-Kariwa plant 200k up the coast from the capital. The seven-unit K-K nuclear plant is the world’s largest, and units 6 and 7 the world’s newest reactors.

The restart of Japan’s reactors is pivotal to rebooting the global uranium market, most believe, and thus to stronger spot pricing. The K-K units bring to fourteen the number in Japan on the pending restart list. The market had been hoping for swifter action when the new, pro-nuclear Abe government was elected late last year, but has been disappointed to date with the ongoing delay.

BA-Merrill Lynch is one broker forced to reduce its 2013-15 forecast uranium prices based on this delay. Merrills has downgraded its 2014 spot forecast by 24% to US$47.50/lb, expecting 7 million pound surplus of U3O8 at the end of 2014 rather than the 14mlb deficit earlier forecast.

Yet while the Merrills analysts are responding only to the Japanese delay, peers at Macquarie now believe the uranium market will remain in surplus throughout their five-year forecast period, Japanese restarts or no Japanese restarts. Macquarie has also swiftly dismissed the end of the US-Russian HEU supply agreement as offering little impact as well.

One issue for Macquarie is the difference between the growing demand for nuclear capacity, which is assumed will drive growing demand for uranium, and actual demand for uranium. Various global regulatory hurdles, including post-Fukushima regulation tightening, have delayed reactor projects, the analysts note. Hence while pending start-ups might add to incremental global nuclear capacity, the start-up uranium required was actually purchased some time ago.

Note that reactors require a significant level of uranium to start them up but comparatively little to keep them going.

Beyond that disappointing truth, uranium inventories across all major consumers sit at record highs, Macquarie notes. In Japan alone, the 7500 tonnes of material accumulated since the Fukushima accident is enough to cover the needs of the twelve reactors having applied for a restart (which has now grown to fourteen). In the US, inventories sit near levels representing two years of consumption, the highest level in decades.

At least the market can be relieved that China, which has the most number of reactors planned or in development, just keeps on buying uranium. Indeed, year to date 2013 imports exceed the equivalent 2014 period by four times, Macquarie exclaims.

But as has long been the case, China does not operate under a system of buying materials when they are needed and not when they are not. The many state-owned enterprises ensure China the luxury of stockpiling material when prices are low and then de-stocking when prices rise. Hence China is no longer likely to be a price supporter (as was the case in the noughties commodity boom), rather a price taker. And on the upside, China is an effective price capper once stocking turns to de-stocking.

Macquarie nevertheless admits there hardly is an explosion occurring on the uranium supply side either. Kazakhstan is providing the only meaningful growth among major producing regions, while Areva’s operations in Niger are being disrupted, Energy Resources of Australia’s ((ERA)) Ranger mine is currently only running down stockpiles and Cameco’s huge Cigar Lake development in Canada has yet again been delayed.

But Cigar Lake will eventually ramp up one way or the other, Macquarie warns. And while the end of the HEU agreement means the end of years of dismantled warhead supply, the hole left will only prove incremental, say the analysts, given supply of alternative Russian secondary material and growing supplies from global reprocessing.

The good news is that Macquarie suggests the global uranium surplus will indeed narrow over the next couple of years given an entry cost level of some US$40-45/lb for new mined supply. But any price rebound will be slow and gradual and then capped at around US$60/lb (2013 dollars), as this price is enough for postponed mining projects, mostly in Africa, to fire up once more.

Macquarie’s dour predictions contradict the greater level of medium to long term enthusiasm suggested by industry consultant UxC’s survey of attendees at the World Nuclear Association Annual Symposium, held last month, which suggested belief in prices down the track well in excess of US$60/lb.

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