Investors in uranium producers and explorers could be in for a banner year of growth and opportunity, making the nuclear fuel an outlier compared to other mined commodities whose prices continue to stagnate.
Those with positions in companies like Cameco, Paladin Energy and Uranium Energy Corp could finally see their patience rewarded after many quarters of lost market capitalization due to weak uranium prices.
In the years following the Fukushima Daiichi nuclear reactor meltdown in 2011, uranium has had a rough ride, with prices slumping from about US$60 a pound before the disaster, to a nine-year low of $28 in 2014. Uranium has been hurt by a supply overhang prior to Fukushima, Germany and Sweden planning to phase out or scale back their reactor fleets, and Japan, a major uranium importer, shutting down all its nuclear reactors for safety checks, thus crimping demand.
Last year however saw an improvement, and though prices did not reach the expected $40 threshold, the $39 per pound average represented an increase of almost one percent, putting uranium as the best-performing mined commodity of 2015, according to Macquarie, the Australian investment bank. (It is a sign of the times that a barely-positive price increase registers as a top commodity performer) At $39, the price was up 18 percent in 2015 compared to $33 in 2014.
Reasons for the price uptick included supply disruptions at two of the world's largest uranium mines, Rossing in Namibia and Olympic Dam in Australia; the delay of Rio Tinto's Ranger 3 Deeps mine, also in Australia; and the lack of buying by U.S. utilities. In the United States, five reactors have closed since 2012. Related: Bearish Sentiment Takes Complete Hold Of Oil Markets
There is growing evidence that the uranium rebound is expected to continue, and accelerate, in 2016. The reasons have less to do with the much-hyped recent climate change conference that had world leaders embracing renewable energy sources and nuclear power, than a confluence of supply and demand factors that has the radioactive material on an upward price trajectory.
Nuclear power rising: the China factor
At the heart of the uranium resurgence is an increase in nuclear reactor capacity, led by China. India, as well, will be a key driver of uranium demand, with the country aiming to generate a quarter of its electricity from nuclear by 2050, compared to just four percent in 2013. The restart of four Japanese nuclear reactors, and 20 back online by 2020, is also crucial to the uranium market.
But by far, the biggest reason to be bullish about uranium on the demand side has to do with China. In its five-year plan covering 2016 to 2020, China plans to spend $1 trillion to expand its atomic capacity to 250 gigawatts, which would account for 25 percent of the world's nuclear power. To accomplish its goal, the country is investing $78 billion to construct seven new reactors a year for the next five years. By 2030 China plans to have 110 reactors in operation; it currently has 27.
The Chinese can't produce enough uranium to meet the demand. The Macquarie report highlights China's "staggering" stockpiling, noting that by 2016 the country will have nine years of consumption (at 2020 levels) in its inventory. China only produced 1,450 tonnes of uranium in 2015, but consumed 8,160 tonnes. To fill the yawning gap, China is stockpiling, producing more, and buying equity shares in foreign projects, notes Sydney Morning Herald. In a recent interview with The Energy Report, notable uranium analyst David Talbot said his firm, Dundee Capital Markets, is predicting uranium demand to grow by six percent annually until 2020, when demand will reach about 219 million pounds. In 2014 global uranium demand was 172 million pounds. Related: How Low Oil Prices Are Transforming Global Politics In Startling Ways
Another equity investment company, New York-based Cantor Fitzgerald, has uranium demand hitting 201 million pounds by 2018. The firm notes that current uranium stockpiles and material from mining operations will not be enough to match new demand for the nuclear fuel.
Supply overhang to lessen by 2017
Despite steep price declines resulting in production cuts and deferments of new uranium mines, the uranium market remains oversupplied. Analysts quoted by Reuters recently said estimates range from a global surplus of 20 to 27 million pounds in 2015, falling to between 7.5 and 10 million pounds by 2020. So how can this be good for the uranium price? It's not, but supply should tighten by 2017, analysts say.
The current supply problem boils down to utilities not contracting enough uranium to whittle down the surplus. Talbot, in his Energy Report interview, says that over the past three years, only 35 percent of the uranium consumed in nuclear reactors was replaced by utilities. However, "We expect this to put pressure on utilities to replace expiring long-term contracts, especially as 2017 approaches." Related: Oil Prices Tank Ahead Of Inventory Reports
Rob Chang, an analyst with Cantor Fitzgerald, noted in a year-end interview with The Energy Report that utilities' needs for uranium will become about 20 percent "uncovered" sometime between 2017 and 2018, meaning that "a significant amount material needs to be secured before then, otherwise their reactors will be forced to operate below capacity, which is not ideal since there still is strong demand for electricity globally."
So what does it all mean for the uranium price? Chang figures that uranium mines are not economic at the current price, and the only reason they are still producing is to meet long-term contracts which pay above $50 per pound. He thinks the breakeven costs for new uranium mines run around $70 to $80 a pound, so for an incentive, he predicts the supply-demand equilibrium to be $80 over the long term, likely rising to between $90 and $100 a pound. Dundee said in September that uranium spot prices are expected to reach $55 a pound in 2016, and while the firm has yet to come out with a new price forecast, Talbot says uranium investors should be ready for a quick uptick, even from one large contract, as happened in 2010 when China started buying uranium from Cameco and Areva SA.
"Lower uranium prices have moved investors away from the sector, but when the price turns, it often happens quickly. So investors come back in, and the stocks rebound quickly," he told The Energy Report.
By Andrew Topf of Oilprice.com
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Comments
The second important point is a bit more complex. New reactors require more uranium in the early years than reactors that have been operating for a while. This is to do with the core physics of the reactor and the build up of neutron poisons such as Samarium and Xenon in the fuel elements. What it essentially means is that instead of being able to reorganise core fuel strings and put back fuel that has already been irradiated much more new fuel is required. So initially a core requires alot more fresh Uranium than a steady state core does. That is the reason why China has been stockpiling Uranium. If you are building many brand new reactors you need much more Uranium in the early operating years of those plants than you do in later years. If you are planning to build 100 new plants you need a big stockpile of Uranium. This is of course what happened in the USA when it was building out its reactor fleet. China is going to build about 250 new plants a much bigger fleet than the USA so it needs a proportionally bigger stockpile of Uranium than the USA did.
A third factor also rarely mentioned is the upratings of existing US and other plants. Many operating plants in the USA are producing more than their initial nameplate ratings and similar applications have been made in Japan and elsewhere. More energy requires more fuel input and the fuel is Uranium.
On the negative side of the equation is that PWR's can burn Mixed Oxide fuels made of Uranium and Plutonium very effectively which makes very good use of used fuel. Only a few countries (UK, France, USA, Russia) have proven capability to do this. I expect China has this capability too. But it isn't cheap and it is not easy because the fuel is radioactive and needs shielded facilities to accomplish it. With Uranium at $40/LB there is not much of an economic incentive to do it...although there may be a political incentive if your nation has no indiginous supplies of Uranium.
So what is the overall picture. In my view most analysts are underestimating the demand from new reactors and overestimating what are termed "stockpiles"...above ground stores of Uranium....concluding that the market is oversupplied. It is a huge leap of faith to believe that these stockpiles will be made available to the commercial marketplace and I consider the exact opposite will be the case. Nations - especially Russia and the USA will want to ensure they have plenty of the material to run their military fleets of ships as well as ensure their commercial reactor fleets have an "insurance" in the event of supply disruptions. The market may well have been oversupplied in the past but that is rapidly changing. Japan is not going to dump Uranium back into the spot market as it restarts its reactors and Nations that have professed their desire to end nuclear power will need to rethink that policy as they become more and more dependent on irregular fuel supplies (solar and wind) and need to burn coal to pick up the slack.
My view...starting this year we will see the start of a ten year Uranium Bull market that will dwarf all others. Happy investing.