The price of uranium continues to climb, thanks to production cuts by major providers like Cameco (TSX:CCO) and Kazatomprom (LSE:KAP). It is becoming a more interesting market for sophisticated investors, as projected demand for uranium around the world is expected to increase just as production starts to drop, contributing to a potential supply squeeze.
Uranium is not traded under the same transparent conditions as oil, and getting a clear picture of who owns what can be hard. But what we can be certain of is that buying by traditional purchasers has been in decline since 2014. Data from the Energy Information Administration in the US shows that US utilities have seen their inventories decline by 30% over the last 12 months, equating to about 2.5 years of coverage.
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But on top of this, as the world seeks a means of reducing carbon emissions, including from its power plants, more countries are turning to nuclear energy for at least a medium term solution to their growing power needs. According to the World Nuclear Association, there are 441 nuclear reactors globally, with the US leading the way with 96. But more are projected to come online soon: 54 are under construction globally, with over 100 more on at tthe planning stage.
This has all translated into a sharp pick up in the uranium price, which had been trading in the range of $20-27/lb since the start of 2017. Since the end of February this year we have seen the price climb from $24 to hit $33. Historically the market has done much better than this – in 2007 the uranium spot price hit $136, and in 2011 it had another spike to $72.
Shut down of Cameco’s Cigar Lake mine
One of the critical recent uranium price drivers has been the shut down at Cameco’s Canadian Cigar Lake facility. It is expected that this is going to remain closed until further price rises are seen.
“The incentive price for restarts and development projects is dependent on a truly representative cost curve which would highlight that higher cost producers are uneconomic without legacy contracts which are increasingly rolling off,” said Canaccord Genuity Capital Markets in a note last month. “This indicates that producers would be unwilling to contract at current pricing levels.”
The market for uranium looks a little stagnant from the outside, in that there has been no major contracting since the Fukishima disaster (2011). This has meant that in terms of contracts and deliveries, there could be a precipitous drop off in 2021.
We could be facing a situation where there are more uncovered demand requirements, a drawdown in inventories (remember, we don’t know just how substantial utilities’ inventories are, nor those held as strategic reserves in Russia and China), and a drop in both primary and secondary supply of uranium. Canaccord Genuity points to the sudden pick up in near term market activity, with 186 sales for 25m lbs of uranium in May 2020.
US utilities are back in the buying market
US utilities are now understood to be back in the market, as of last month. This demand expected to pick up as American power plants will need to secure their raw material needs for the period 2023-25.
Investors should not be distracted by headline announcements of nuclear power plant closures in major economies like France and Germany, as this is being replaced by increased demand from China, India and Russia. The Middle East is also exploring nuclear power as a medium term replacement for fossil fuels. Canaccord Genuity believes that re-starting the big mines in this space will not be sufficient to meet this demand.
Secondary supplies of uranium are less likely to impact the price either. All secondary supply has to come off somebody else’s existing inventory, and every pound of uranium put to use reduces that inventory.
“Secondary supply is a temporary means to bridge the gap between primary production and primary demand,” says Wayne Heile, CEO of uranium miner Peninsula Energy (ASX:PEN). “My estimate of current departures of inventory into the secondary supply category is 20m lbs/annum. That is obviously unsustainable because secondary supply is not new supply and demand consumes material.”
Heile says global utilities as a whole have moved closer and closer to what he calls “just in time inventory management.” Between two to three years of demand needs to be in their fuel supply chain to take production from yellowcake to fuel rods. That means that globally, utilities have to hold between 400 and 600 million pounds.
Recent reporting has suggested US utility inventory was near flat year over year. It had grown slightly, but some two thirds of US reactors were due to reload in 2020, so power plants had to draw on extra inventory in 2020.
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