Commodities | Apr 22 2014
By Greg Peel
Industry consultant TradeTech puts the drop in uranium market liquidity and price in 2014 down to the withdrawal of investment banks Goldman Sachs and Deutsche Bank from the market as trading intermediaries, following a change to US Federal Reserve regulations. Otherwise, external influences on the market in the year to date have arguably underscored a case for more positive activity and prices.
On the supply side, the Russian HEU agreement ended last year, existing producers have been limiting or mothballing production, new production plans have been shelved, and there remains a risk sanctions will be imposed on exports of Russian enriched uranium. On the demand side, Japan is close to restarting its nuclear reactors and China is ramping up its reactor construction a-pace. After three years in the post Fukushima doldrums, everything has been pointing to a long awaited rebound in price and liquidity.
But the opposite has been true. Nothing is more telling than last week’s spot market activity, which saw only three transactions and a drop in price of US75c, on TradeTech’s spot price indicator, to a new eight-year low of US$32.50/lb.
It makes sense that producers are keen to sell product expediently at spot, given current prices are rendering many cash negative on production. It makes sense that traders and speculators may have been caught long on expectations of price rebound and are now trying to bail. What doesn’t make a lot of sense is why utilities are not in there buying at these bargain basement prices. The answer may lie in the fact utilities maintain sufficient stockpiles in case of future supply shocks and hence are not about to run out of fuel, and had already picked up excess Japanese supply, but at some point a restocking phase must begin.
That liquidity in the spot market should wane is of no great surprise. Typically the “real” players – producers and utilities – only enter the spot market on occasion to top up short falls or let go some excess supply. The term contract market is where the vast bulk of deals are transacted. Spot market activity only expanded during the Chinese super-cycle years pre-GFC, when suddenly every hedge fund and intermediary wanted to play. The spot uranium bubble actually burst before the GFC, and Fukushima went a long way to killing off speculative interest altogether. Goldman and Deutsche may have had other incentives to leave, but a lack of market interest would probably have provided impetus.
Yet there’s been little activity in the term market of late as well. Term prices have also drifted lower, and this week are unchanged at US$37.00/lb (mid) and US$45.00/lb (long) on TradeTech’s indicators. There has been plenty of apparent interest in term supply contracts shown by utilities more recently, indeed one is awaiting offers for a 7mlb contract over multiple delivery periods in 2016-25, but few transactions concluded.
Maybe one utility will soon blink, and a scramble will ensue.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.