Uranium has been considered the black sheep of the alternative energy market, really since the meltdown of the Japanese nuclear reactor at Fukushima in 2011. With many developed world countries seeking to exit nuclear power, demand for uranium globally dropped. That now seems to be about to change.
Nuclear energy is increasingly being considered as a major contributor to a low carbon future, especially for the developing world that is seeking its own alternatives to fossil fuels. There are currently 441 operating nuclear reactors globally, according to the World Nuclear Association, with the US leading the way with 96, and France with a further 58. The UK’s own reactors represent around 3% of global demand for uranium.
Global demand for uranium is picking up
However global demand for uranium is already increasing as more reactors come online. There are another 54 reactors under construction and a further 104 planned as countries like China and regions like the Middle East look for non-fossil fuel power sources.
The uranium market is about to experience a supply squeeze: we are already seeing the price moving off a floor that has seen it rangebound in the $20-24/lb bracket. Remember, uranium hit an historical high at $140/lb, right before the financial crisis. This followed a succession of disasters that shut down many of the major mines in quick succession, among them the flooding of the Cigar Lake mine in Canada in 2005, and the flooding of the Ranger mine in Australia in 2007.
Chinese buying subsequently provided a boost to uranium in 2011, a spike which saw the price break $60/lb just before the Great Financial Crisis struck.
We are now seeing some reduction in the global uranium supply taking place at a time when it seems as if demand is about to start picking it up. Cameco, the world’s biggest uranium miner, has shut down its mine at Rabbit Lake and suspended operations at MacArthur River. Kazatomprom, another of the largest miners in the world, has cut production by 20% while Paladin suspended operations at its Langer Heinrich mine in May 2018.
None of this seemed to have shifted prices that much, but now Cigar Lake has also been suspended and Kazatomprom has also confirmed it is curtailing production. This does seem to have put a different spin on things.
Uranium prices has plenty of scope for growth
This is starting to make an immediate impact on the uranium price, which stood at $24.10 on 16 March. In the last month it has crept up steadily to stand at $32 at the time of writing, with plenty of scope to continue its growth. On top of this there is now disruption to the uranium supply chain being causes by the COVID-19 virus.
“COVID-19 impacted production, but it will eventually come back to normal,” observes Andre Liebenberg, CEO of Yellow Cake, a specialist uranium investment company. “We could, however, still see impact from disruption to various elements of the fuel chain.”
Yellow Cake provides investors with access to the uranium price by buying and storing physical uranium. It also enjoys a strategic relationship with Kazatomprom, one of the lowest cost producers of uranium globally.
A low uranium price has inevitably contributed to underinvestment in exploration and development and this could also be a contributor to a future supply gap. More than half of the global production of uranium was not making money at a $24/lb spot price. This has led to what Liebenberg calls “significant supply side discipline” on the part of major producers – i.e. pulling uranium off the market.
And the US Energy Information Administration is forecasting a 29% increase in nuclear power by 2030.
Here at The Armchair Trader we remain bullish on the price of uranium. The shut downs occurring in the uranium mining sector are taking some of the cheapest uranium off the market at a time when the developing world is turning increasingly to nuclear power, and major economies like France are still leaning heavily on nuclear power for their electricity (70% approx.)
Last time we saw Cigar Lake shut down (2005) it led to an appreciable impact on uranium prices. We are seeing this again now. We think the price has some way to go.