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Japan’s Underwhelming Nuclear Revival

Commodities | Mar 04 2014

By Greg Peel

The state of the global uranium market at present is one of unhurried buyers and frustrated sellers. Last week represented the end of a month which featured discretionary buying from utilities and as yet no action from the speculative buyer who is supposedly looking for 1mlbs of U3O8.

Eventually operating utilities will need to be more urgent in their demand, given they have largely stood back for some time as the spot price has wallowed given no pressing need to refresh stockpiles. But eventually inventories will run low. As industry consultant TradeTech reports, the past month was again one of utilities picking at offers but not chasing sellers who backed off in the hope prices were about to start rising again. The big speculative buyer entered the market last year, then withdrew, and came back again this year, but appears as yet unmoved.

Spot market activity thus slowed in February with only 2.0mlbs of U3O8 equivalent changing hands compared to 3.7mlbs in January. Only when frustrated sellers capitulated did trades occur. The market continues also to be disrupted by tyranny of distance, with North American product being offered at prices less than European buyers are prepared to pay. The difference is not enough to warrant seaborne trade.

Given sellers became more willing to lower their prices as the month came to a close, TradeTech’s weekly spot price indicator fell another US25c last week to US$35.25/lb, down US15c from end-January.

The term market saw three transactions in February, all in the “mid” range. The departure earlier in the year of two of the most active term market intermediaries – Goldman Sachs and Deutsche Bank – was expected to place upward pressure on prices but this has not proven the case, TradeTech reports, as other traders and producers have shown to be competitive enough to keep the market stable.

TradeTech has dropped its term price indicator by US75c to US$37.75/lb, while its long term indicator remains unchanged at US$50.00/lb.

It is little wonder uranium traders are frustrated, given general market news over the course of 2014 to date has suggested uranium prices really should have started to rebound. Aside from various supply constraints and abandoned projects, developments in Japan – the hinge in the global uranium outlook – have been positive from a price expectation point of view.

The Japanese government released a draft proposal on February 25 which strengthened its commitment to nuclear power, suggesting the country will continue to rely on nuclear power as a central part of its energy policy. There may nevertheless have been a modicum of industry disappointment stemming from the proposal, given that Prime Minister Abe’s focus had previously centred around the short term while the proposal is clearly more focused on the long term.

The 20-year plan implies that while Japan may now be at the beginning of a nuclear power revival, demand is unlikely to pick up in the immediate future.

Aside from this observation, the analysts at Macquarie have also been looking into the Chinese demand picture.

China’s January trade data showed uranium concentrate imports totalling 1930tU, which is 22% higher than the average monthly import level of 2013. In 2013, China’s total imports reached a record level of 18,968tU. This rate of purchase ran significantly ahead of actual current reactor requirements, Macquarie notes, and if January is any indication, Chinese inventories will increase even further in 2014.

What might be China’s motivation?

Firstly, Macquarie points out, China is looking to rapidly expand its nuclear capacity (no great surprise for anyone who has seen pictures of the smog in China’s cities this past week), to 50GW in 2017 from 14.6GW currently. Secondly, China’s own domestic production has proven to be unreliable within such an expansion plan, given inefficiencies, low grades and slow expansion.

While these suggestions make sense, we also know, as Macquarie acknowledges, that China has a well-established history of taking advantage of periods of low prices for any commodity and building stockpiles upon stockpiles to hold for future use. State-owned enterprises make such a policy possible, and also lead to lengthy and often market-disturbing cycles of stocking and destocking. Since 2006, Macquarie calculates, China has amassed enough uranium to meet current consumption rates eight times.

So while there is presently no end in sight to China’s voracious uranium demand, as January imports would attest, at some point China is going to decide it has enough. If this occurs before demand from other major consumers starts picking up, Macquarie warns (and presumably this is a nod to Japan), look out.

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