Weekly Reports | Oct 10 2017
If the price of uranium is ever going to recover, more painful supply cuts by miners are required.
By Greg Peel
2017 began well for the uranium market, Macquarie recalls, when the world’s largest and lowest-cost producer, Kazakhstan, announced a -10% production cut. The removal of some -4% of global primary supply suggested an improvement in uranium prices was on the cards.
Further positive news has come in the form the restart of five of Japan’s 42 operable reactors over recent months. Meanwhile, China is forecast to add an average four reactors per year through to 2020 and nuclear power generation has been growing at a compound rate of 20% per annum in China over the past three years.
While there are other reactor builds either underway or planned across the globe, particularly in emerging markets, China is the clear drive of growth for the global nuclear fleet. The problem is that when the Fukushima disaster sent uranium prices tumbling six years ago, China took the opportunity to increase its uranium stockpile.
That stockpile is now equivalent to 11 years’ worth of projected 2020 consumption. Currently China has no need to acquire any more, except perhaps opportunistically were prices to fall even further. Indeed, Chinese imports of uranium are now on a downward trend, suggesting the peak has past.
Surplus Falling
The good news is that thanks to the tough decisions made by various producers in recent times to cut supply, this year’s production surplus looks like being the smallest since 2008, Macquarie notes. But it still represents an inventory build in a commodity already carrying three years’ worth of global requirement. And of all the commodities Macquarie analyses, uranium is the one that trades “deepest into the cost curve”.
In other words, the gap from the current spot price up to the average cost of production of uranium is the widest of any commodity. Yet strategic mines in Africa, Russia and North America continue to operate regardless of economics. And uranium behaves somewhat differently to other commodities, Macquarie notes, given today’s purchases are not for today’s consumption, but for stockpiling for consumption in the future. Hence there is no consistent marginal buyer in the spot market, leading spot transactions to be lumpy and typically driven by sentiment and expectations of future demand.
Given aforementioned stockpiles, spot trading is largely opportunistic. The past few months of trading have suggested utilities are interested in picking up some extra product below US$20/lb, but lose interest at any higher a price. The spot price has not exceeded US$21/lb since May, but nor has it traded much below.
Last week did see a gain in price, according to industry consultant TradeTech’s weekly spot price indicator, of US30c to US$20.70/lb. It was not a utility or utilities forcing the price rise, but a buyer from the financial sector. The result was several transactions were concluded “off market”, totalling some 400,000lbs U3O8 equivalent.
There were no transactions in the uranium term markets last week. Trade tech’s term price indicators remain at US$24.50/lb (mid) and US$30.00/lb (long).
So what is the answer to uranium’s oversupply malaise?
Clearly the response has to come from the supply side, Macquarie declares, given there are no apparent catalyst on the demand side. The pace of Japanese reactor restarts remains glacial, the US nuclear power industry is in a state of flux given the inability to compete with gas-fired power and subsidised renewables, and China has enough inventory to keep its ever-growing nuclear fleet going for more than a decade.
Eventually the spot price will have to recover, but given the extent of the gap between current price and cost of production such a recovery will take a long, long time. “It is difficult to see any sustained recovery in spot prices in the near term,” Macquarie suggests “unless further painful decisions are made by the miners”.
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