Commodities | Jan 13 2009
By Andrew Nelson
There’s no arguing that 2008 was a tumultuous year for the spot uranium market, but the first few weeks of 2009 have been pretty calm. This calm entry into the new year sets the stage for what most are expecting will be a pretty uninteresting year for uranium, with most spot price forecasts sitting in the same neighbourhood as or just above the current spot price.
Industry consultant TradeTech notes that both buyers and sellers have been slow to re-engage in the market after the holidays, with absolutely no new demand or any type of transaction being recorded in the uranium spot market last week. As a result, the consultant’s Spot Price Indicator remains unchanged at US$52.00 per pound U3O8.
However, TradeTech reports that at least one seller is looking to place 100,000 pounds U3O8 before month-end. The problem is: most sellers are content to wait for demand to pick up.
So, just two weeks into the new year and the spot market is already in a position of oversupply, with at least one vendor likely to be pushed into discounting prices to get the stock cleared, which bodes poorly for the short-term spot price outlook. Hopefully, this minor oversupply will be sorted out quickly, with TradeTech pointing out that several utilities, while not in a hurry, are making preparations to enter the spot market in coming weeks.
TradeTech’s longer term price benchmark stands at US$70/lb.
And that brings us to JP Morgan, who have just completed a comprehensive supply/demand review of the uranium market. The broker sees the short-term situation as being one of higher production levels and near to medium term weakness in the spot price relative to the last two years. The good news is that the broker then sees a period of stronger prices longer term as the industry shifts towards supply deficit.
The broker’s 2009 forecast is still relatively in-line with the current spot price at US$57/lb U3O8, but while the broker sees demand increasing in the next few years, it has lowered its CY10 to CY13 forecasts as a result of a build up in uranium surplus as buyers look to secure future stock opportunisticly at lower price levels. In fact, the broker is also expecting that financial speculators will look for prices to remain depressed in order to encourage buying.
This view is pretty much consistent with the broker’s view at the end of November, with the only difference being the extent of stockpiling that it expects.
All up, JP Morgan has reduced its uranium price forecasts by 16.2% in CY10, 14.3% in CY11 and 18.2% in CY12 to US$54/lb, US$53/lb and US$53/lb respectively. The broker’s long term price forecast remains at US$65/lb. The reduction in the forecast price also brings the broker back down to be closer to peers in its outlook.
Back in the end of November, Macquarie was forecasting CY09 prices at US$52.50/lb and the CY10 price at US65/lb, as the longer-term picture develops. At the same time, GSJB Were was forecasting a CY09 average price t US$57/lb and the CY10 price of US55/lb. The broker said that this view was consistent with its forecasts for lower annual average prices in other energy commodities such as coal, oil and gas.
Deutsche Bank is still sitting at the optimistic end of the spectrum, at least in comparison to the others mentioned. Judging from a start of the year update on energy and commodities in general, the broker has still pencilled in US$70/lb for 2009, while 2010-2012 predictions are sitting at US$80/lb, US$70/lb and US$65/lb respectively. What all mentioned agree upon is that over the medium-term, prices will get little support as stockpiles grow and the sector remains in slight oversupply.
However, JP Morgan sees the long-term contract market trading at a significant premium to the spot price for the foreseeable future. The broker gives two key reasons: 1) Nuclear utilities tend to focus on longer time frames and will generally offer a premium for security of supply. 2) Utilities, while always looking for a lower price, are still aware that if there isn’t sufficient incentive for supply, there will be no new supply to meet future demand. The broker points for the need of incentives to ensure current and future producers are able to commission new mines and expend existing ones.
These sentiments should offer at least some support to the spot price moving forward.
There is currently a big gap between long-term and spot prices and this will also put constraints on shorter-term supply, as producers are likely to look at increasing the proportion of sales sold into the long term contract market. However, notes the broker, this will eventually result in a reduction of the gap between the long-term premium, and the short-term spot price. Right now, advises the broker, the gap represents about a 32% premium in favour of the long-term price. JP Morgan expects this gap will close to about 15% in time.
One of the main things for uranium investors to keep their eyes on in the shorter-term is the progress of Cameco’s Cigar Lake project. Right now the company is adamant supply will begin in 2011, but the broker is of the opinion that 2012 is more realistic. Either way, any further delays to development are likely to be a catalyst towards elevated uranium prices.
Ux Consulting, the other industry consultant who publishes its own weekly spot price indicator for the industry, has thus far kept its benchmark at US$53/lb.