Uranium has been in a deep bear market since the 2011 Fukushima nuclear accident. Japan shut down its power plants, and the world shifted to significant overproduction, exacerbated by Kazakhstan (now the world’s largest uranium producer) only increasing its production and selling raw material to the spot markets.
Overproduction in homogeneous (e.g., raw material) markets = price collapse.
In November 2016, the price of uranium reached its bottom, $18/lbs (pound).
But uranium is a complex raw material, for which years of inventories are purchased. China began massive purchases, and much of the overproduction has ended up in China’s strategic inventories. Consequently, in the uranium market, Consumption is not the same as Demand. Demand is influenced by Consumption, but also by inventory re-/destocking cycles.
Since 2016, Western power plants have under-purchased and burned through their inventories. Or more accurately, uranium is generally bought with long-term supply contracts (LTC). When Western power plants’ LTCs have run out, they have been reluctant to renegotiate them, as producers have demanded a significantly higher price for LTC pounds than the spot price.
Power plants have preferred burning their own inventories, buying from spot markets, and using carry traders*.
Carry traders are not producers. They enter into 1-3 year contracts with power plants and buy their needs from the spot markets (and sell at significantly lower prices than producers).*
A large wave of LTC expirations will occur in 2020-2023.
At the same time, several uranium companies have had to close their mines. They too have supplied the promised material to power plants by buying directly from the spot markets.
All of this in recent years has meant that 1. markets have shifted to underproduction 2. spot markets have withered 3. power plant inventories have shrunk 4. no new investments in production have occurred (while mines have been depleted and the production side has collapsed) and 5. we are facing a new contract cycle, entering which almost all negotiating power has shifted to producers.
Add COVID19 to the mix, which has forced mine closures (removing 20-25Mlbs from 2020 production (vs 2020E 135-140Mlbs production)), but which has had no impact on nuclear power plants. The depletion of mobile inventories is at an incredibly high level in 2020.
The deficit has grown so severe that even if all closed mines and a number of new ones were brought online, there might not be enough 10-year LTCs for all nuclear power plants.
The economic production cost across the board for uranium mines is >$50/lbs. Today’s $32.5/lbs is still far from what producers need to open closed mines, let alone bring new production online.
Such situations greatly benefit companies with low production costs and the ability to enter into long-term contracts at fixed prices in the next cycle.
The last uranium bull market raised the stock prices of companies in the sector by an average of 2000%. Such sectors are highly susceptible to “hype”. But even excluding hype, the sector has some genuine value that will perform excellently whether similar hype occurs or not.
This is a hyper-cyclical and small niche sector, not followed by many. But this year, uranium has started to gain attention.
The writing is on the wall, and it’s only a matter of time before the price of uranium rises above $50/lbs. The uranium case is 1-4 years. Hyper-cyclical sectors do not work for those who wait on the sidelines and get excited when mainstream media writes about the topic. They work for those who position themselves to benefit from something that is going to happen.
Either the price of uranium will rise within a few years, or lights will have to start shutting down.
- 1. The price of uranium for reactors is ultimately very small. While 75-85% of the electricity price produced by a coal or natural gas power plant is fuel, for a nuclear power plant, uranium accounts for about 5-8 percent of costs. If reactor fuel costs $10/lb more, the electricity price increases by $0.00053/KWh. If a reactor cannot get fuel, you have a multi-billion dollar investment that produces nothing.
