State-owned National Atomic Co. Kazatomprom JSC's decision to slash uranium production by a further 20% over the next three years has sent ripples through the commodities sector, prompting speculation that it could move into a bull market.
Maxim Khudalov, director of corporate rating group ACRA, told S&P Global Market Intelligence that a surge in uranium prices was in the cards given that "the current market balance is already negative, as consumption in 2016 is estimated to be 174 million pounds while primary metal production is circa 163 million pounds."
"Kazakhstan accounts for 40% of global production, so the decrease of 10% production would reduce global output by 4%," Khudalov said Dec. 6, implying that a 20% cut would reduce global output by 8%.
Khudalov went on to equate the uranium market to the price surge that was observed on the aluminum market as a result of production cuts in 2014 and 2015, stressing that the effect was only really felt this year.
Lynkeus Capital LLC CEO Torsten Dennin said prices had simply not recovered following Kazatomprom's 10% production cut at the beginning of the year. He said pricing in the uranium sector was mirroring the oil sector and the effect of the cuts would take a while to kick in.
"Looking back, oil took a while to come to the US$55/lb to US$60/lb level, and this is probably a good estimate for the uranium market. It will probably remain at the US$25/lb mark for the next three to six months but then slowly take off to the US$30/lb, US$35/lb and US$40/lb mark," he said in a Dec. 7 interview.
Dennin added that the mine supply for uranium is likely to drop from 150 million pounds to 120 million pounds over the near term and an artificial deficit will continue for up to six to eight years. He said there was potential for uranium to move into a bull market on the pricing side, considering that prices have been so artificially low.
More production cuts are also very unlikely, particularly after Cameco Corp. outlined plans in early November to temporarily close its flagship operation in Saskatchewan from early 2018.
According to S&P Global Market Intelligence data, the spot price for uranium spiked following Kazatomprom's announcement, peaking at US$26.40/lb on Dec. 4. The price of uranium also spiked Jan. 10 when Kazatomprom announced the 10% cut.
The price of uranium has been in a steady decline since the 2011 meltdown at the Fukushima power plant in Japan. Following the disaster, Japan switched off 50 of its 54 nuclear power plants but was later forced to switch some of its facilities back on to pick up the energy shortfall.
In response to the disaster, Germany decommissioned eight reactors in 2011, pledging to completely phase out nuclear power over the next few decades. However, major capacity additions in Asia over the next decade look set to tip the market in uranium's favor once again.
According to the World Nuclear Association, China has 37 operational nuclear power plants, with another 20 under construction and more about to start construction. In a push to cut down on pollution from coal energy and improve air quality, the Chinese government plans to ramp up nuclear capacity by 70% to 58 GWe by 2021. India tells a similar story, expecting to have a nuclear capacity of 63 GWe by 2032 and aiming to supply 25% of electricity from nuclear power by 2050.
"There are currently 164 reactors planned to be built globally, [most of them still in project stage], so the demand growth at 2% to 3% rate annually over the next 10 years is highly probable," Khudalov said.