Weekly Reports | Jun 30 2020
Global uranium production is significantly curtailed while utilities have been running down inventories due to uncertainty. Something soon has to give.
-Utilities have been under-purchasing uranium
-Legacy delivery contracts running off
-Production remains shut down
By Greg Peel
Nuclear power utilities are traditionally guarded about what inventories of uranium are mobile for commercial use, notes Canaccord Genuity, and what is strategically held back for a supply disruption, such as a global pandemic. Whatever that amount may be, it is unlikely those strategic inventories will enter the spot market, Canaccord believes.
Utilities have been under-purchasing since 2014, the US Energy Information Agency has reported, and US inventories are down -30% over the last twelve months, leaving around 2.5 years of forward coverage. While different countries have varying sensitivities, a potential extension of the Russian Suspension Agreement should in Canaccord’s view see market activity pick up in the second half of 2020.
Major global uranium producer Cameco began shutting down its Canadian operations based on low prices, before shutting down further due to virus risks. Until there is more visibility on term contract pricing, Canaccord suggests the shut-down of Cameco’s flagship Cigar Lake mine is likely to be extended.
The conundrum is that were uranium prices to improve to levels that justify Cameco, and/or global swing producer Kazatomprom, restarting operations, the impact on supply must surely drive prices lower once more. Unless restarts can be justified by sufficient demand-side growth.
To that end, Canaccord notes no major contracting for term deliveries has occurred since Fukushima (2011). Utilities have relied on longer term delivery contracts still in play since before the tsunami, while allowing inventories to wind down. But the time is nigh. Deliveries to utilities from legacy contracts will “fall precipitously”, Canaccord points out, starting in 2021.
Canaccord anticipates rising concern over inventory levels. There has been minimal activity in term markets in 2020 to date, which also supports the expectation of activity picking up in the second half.