Weekly Reports | Sep 14 2021
Speculative activity has now pushed the uranium spot price to its highest level since 2014.
By Greg Peel
The Sprott Physical Uranium Trust (SPUT) has lit a fire under the spot uranium market, sending industry consultant TradeTech’s spot price indicator up 39% in the last four weeks – a record in percentage terms. That’s a US$12/lb gain since mid-August.
Having turned over 3.7mlbs U3O8 equivalent the week before last, the spot market last week saw a further 3.8mlbs change hands in four trading days. TradeTech’s weekly spot price indicator rose to US$42.50/lb from US$39.00/lb the week before.
The last time the spot uranium price was above US$40/lb was in November 2014.
SPUT is purely a speculative vehicle which raises money to buy physical uranium, betting on increased demand as the world steps up its efforts to reduce carbon emissions. Last week SPUT filed an amendment to its original prospectus to increase its funds by a further US$1bn.
SPUTs thesis received a boost last week when the state government of Illinois approved a financial support package to head off Exelon Energy’s proposed early closure of its two-unit Byron nuclear plant, and to prop up the company’s financially challenged Braidwood and Dresden plants.
Where are the utilities?
The recent spot price surge has been driven primarily by traders, financials (such as SPUT, which is not the only investment vehicle) and intermediaries, TradeTech reports. Traders and producers are the primary sellers.
While supply remains plentiful to meet spot demand, sellers have been backing off their offers in order to retain supply ahead of any further increase in prices.
Utilities – the actual end-users of uranium – have simply been watching spot market developments. But they haven’t been sitting on their hands.
Utilities have been active in off-market transactions. On the Friday of last week, 940,000lbs changed hands in the off-market following the Illinois news. TradeTech reports one reason driving utilities to stay out of the spot market is the willingness of sellers to show more competitive offers to utility buyers, especially if there is a possibility for securing a new client or increasing their market share.
Sellers are not exhibiting the same willingness to extend such terms to speculators.
Utilities also prefer to secure material on term contracts so as to lock in a price and avoid spot market volatility, and producers also prefer to sell that material on term contracts for the same reason.
Still not high enough
But the problem producers face is the speculative spot market bubble has pushed the uranium market into backwardation. TradeTech’s current spot price indicator is US$42.50/lb while its term price indicators are US$35.75/lb (mid) and US$35.00/lb (long).
While the time value of money suggests backwardation (lower prices further out in time) is a natural state for commodity markets, it’s only been since the speculative surge that term prices have fallen behind spot prices. Current term prices remain below the cost of production for many.
So, does a producer wait and hope to be able to secure higher term prices ahead, or continue to sell at below cost to ensure it doesn’t lose customers?
Little has been heard recently from Cameco, which in the prior couple of years has supported spot market prices by buying in the market to cover legacy contract obligations rather than producing to sell at a loss. Most recently, Cameco’s hand has been forced by covid-related production shutdowns.
A restart of full production at Cameco might just be the pin that could burst the current bubble.
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