Weekly Reports | Sep 04 2018
There are various reasons which can lead one to a conclusion uranium prices can only rise from here.
-Record August trading
-Producers dominate buy-side
-What can halt momentum?
By Greg Peel
August 2018 was the most active August in the uranium spot market since 1995. Industry consultant TradeTech reports 8.4mlbs U3O8 equivalent changing hands in the month, exceeding the previous high mark of 5.2mlbs set in 2010.
TradeTech’s spot price indicator closed the week and the month at US$26.40/lb, down -US10c from the week prior but up from US$25.85/lb at end-July – representing a 20% gain on the average price seen in 2017.
One might argue that it is a gain that had to happen.
Fukushima sent the uranium price spiralling. The immediate loss of demand from Japan and the slow pace of reactor restarts in that country in the interim seven years ensured there would be no swift bounce in price. Decisions by various countries across the globe to wind down their nuclear power industries over time in response to public fear added to a slow loss of demand.
There are plenty of countries going the other way and ramping up nuclear power – mostly emerging market countries and most notably China – but that slow increase in demand has done little to move the price dial.
The US has no such policy to wind down nuclear power – on the contrary – but the US nuclear power industry has been unable to compete with cheap gas-fired power provided by the shale gas revolution and hence older reactors have been forced to shut down and new reactor build plans shelved, pending intervention for the US government.
In response to a global demand/supply balance that saw uranium prices continue falling to historic lows, uranium producers have been either shutting up shop, or placing reactors into indefinite care & maintenance, indefinitely suspending production or simply reducing production.
But until this year, that hasn’t much made a difference to spot prices.
The Turning Tide
The bulk of uranium market transactions represent mid to long term delivery contracts between utilities and producers, perhaps over as long as a ten-year period. It’s been seven years since Fukushima, so there will still be the odd contract out there as yet incomplete, set at pre-Fukushima prices.
Over that time contracts have rolled off and new contract prices have fallen, in line with spot prices. Eventually the market must reach the point at which average term contract prices regress to current spot price levels. Those producers remaining active but suspending mining operations, given spot prices have fallen below the cost of production, have been able to meet ongoing contractual obligations by processing stockpiles.
Eventually those stockpiles must run out, but in the meantime producers have been able to satisfy obligations by simply buying uranium at spot.
It has long been assumed utilities would take the opportunity presented by historically low spot prices and build up stockpiles, but utilities were already carrying many years’ worth of inventory and were not in any rush, ensuring spot prices remained lower for longer.
But again, the day must come.
Perhaps record August trading suggests that day is not far off. Utility demand has slowly started to return in 2018 but August was notable for the level of spot market demand from producers, who one would normally expect to be sellers.
“Although a significant degree of upward price pressure can be attributed to announcements of reduced or suspended production at several uranium mines,” notes TradeTech, “it is purchases by those producers that will play a key role in expected material reductions to excess inventory in the coming months.”
Put all of the above together and one can only conclude uranium prices must rise, notwithstanding they are already 20% above the 2017 average. Utility demand has finally begun to grow out of necessity, producers are running out of stockpiles and are buying more and more material in the market, Japanese reactors are restarting, albeit at a slow pace, China is leading new reactor demand, and it may yet be that the US nuclear power industry and the US uranium production industry will be propped up by the US government, notwithstanding it’s hard to see how both can be achieved simultaneously.
The Barrier
Of course, exciting as it all sounds, there is an obvious price cap ahead. If spot prices were to meet and exceed the cost of production of the lowest cost producers, those producers will then start to think about reactivating suspended production. It may then take some time, assuming robust demand, for marginal producers to swing back into action and longer still for suspended production capacity development plans to be reignited.
As to where the equilibrium point may be is yet to be revealed.
For the record, TradeTech’s term price indicators remain unchanged at end-August from end-July at US$29.50/lb (mid) and US$31.00/lb (long).
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