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Uranium Week: Upside Price Potential And Downside Reality

Commodities | Apr 15 2014

This story features PALADIN ENERGY LIMITED. For more info SHARE ANALYSIS: PDN

By Greg Peel

The restart of the first Japanese nuclear reactor moved closer to reality last week with the approval of the government’s new 20-year energy policy which declares nuclear power to be one of the country’s key baseload electricity sources. The government will promote the reactivation of nuclear reactors, the policy states, assuming they satisfy the new safety guidelines.

Seventeen of Japan’s 48 idled reactors have filed for restart approval and it was hoped the first of these, Units 1 and 2 and Sendai in southern Japan, would be ready by June 30 to cope with the summer electricity demand surge. However even if operator Kyushu Electric has received government endorsement and regulatory safety approval, it still needs approval from both the provincial and local governments, hence several meetings are now to be held. Uranium industry consultant TradeTech thus believes the first restart is likely to occur later in the year.

The uranium industry has been waiting for news of the first Japanese restart ever since an Abe government was seen as inevitable late in 2012. Progress has been glacial and anti-nuclear protest has been powerful but in theory, here we are. The first reactor may not start till later this year but it is assumed restarts will then flow one after the other, and markets pre-empt such milestones rather than wait for them to actually happen. For two years industry analysts have been suggesting that once Japan’s nuclear future is restored, the uranium price must finally recover.

The other developing factor threatening to impact on uranium demand is that of the escalating Ukraine-Russia conflict. Were the West to step up its sanctions against Russia to a more meaningful level this could well include a ban on imported Russian enriched uranium, leaving a big hole in global supply of enriched reactor fuel. This threat is provoking US utilities to consider pre-purchasing supplies in case the sanctions come to be.

The scene is thus set for a realistic bounce in the spot uranium price from its eight-year lows. But what did the spot price do last week? It fell US50c to US$33.25/lb on TradeTech’s weekly spot price indicator.

There may be some supply anxiety among utilities, but there appears to be no sense of urgency just yet. Meanwhile with the price of uranium trading below the average global cost of production, sellers remain desperate to generate cash. At least one big seller was actively seeking buyers last week, TradeTech reports. Five transactions totalling 500,000lbs of U3O8 equivalent were conducted in the spot market last week,  and by week’s end the price had fallen as low as levels not seen since November 2005.

There were no transactions conducted in the term market. TradeTech’s term price indicators remain at US$37/lb (mid) and US$45/lb (long).

The industry gathered in San Francisco last week for the annual World Nuclear Fuel Cycle conference. While the mood was understandably solemn, TradeTech notes, given uranium price weakness, there was optimism that the nuclear power industry’s current situation will eventually improve in the long term.

CIMB believes the spot uranium market will begin to tighten over the next couple of years. CIMB analysts have modelled global mine supply and nuclear demand from the bottom up.

They forecast global nuclear power capacity to increase at a compound annual growth rate of 2.0% from 2012 to 2022. The analysts are sceptical that China can actually achieve its ambitious goal of 58GW of nuclear power generation by 2020, but believe Chinese nuclear capacity will triple by that time nonetheless. They also assume the restart of Japan’s west coast reactors over the next four years.

CIMB is forecasting a recovery in the spot uranium price to US$47.50/lb by end-2015. The recovery will be tempered by the extent of existing global inventories, the analysts admit, but price sentiment should improve on a recovery in the term contract market.

The recovery will not, however, be long lasting under CIMB’s modelling. Despite recent voluntary cuts to supply, including Paladin Energy’s ((PDN)) Kayelekeera mine in Malawi being placed into care & maintenance, and despite the end of the Russian HEU supply agreement, CIMB sees the global uranium market drifting back in to surplus by 2016. The analysts forecast a compound annual growth rate of supply of 2.5% in 2012-22, with increases driven by Kazakh mines reaching production capacity, Cameco’s Cigar Lake ramping up in Canada and the construction of new projects in Namibia.

In the meantime, UBS is the most recent of brokers to mark uranium prices to market for the purpose of producer valuations. The broker has cut its 2014 average price forecast to US$39/lb from US$43/lb previously.

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