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Inventories may mute uranium price comeback

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Essential Metals & Mining Insights - September 2021


Inventories may mute uranium price comeback

Deep production cuts by major uranium miners have fueled expectations of a uranium price rebound, but some analysts cast a wary eye to the unpredictable impact of extensive uranium inventories that could mute the effects of miner discipline.

Cameco Corp. and National Atomic Co. Kazatomprom JSC recently slashed production, folding to years of low uranium prices given ample nonmine supply on the spot market and uncertainty over demand for nuclear energy following the Fukushima disaster in Japan.

"In a normal situation we would expect prices to jump up much higher," said Rob Chang, a Cantor Fitzgerald analyst, speaking to the mine production cuts. In uranium's case, the tie between production cuts and price support may not be so direct.

Chang, who is bullish on uranium in the longer term, and other analysts watching the market point to above-ground inventories of uranium as an overhang on prices. The inventories are largely held by utilities, and Chang estimates them to be between 800 million and 1.2 billion pounds of uranium, a range echoed by other analysts.

How much of that inventory is for sale is an open question. But the size of it in a market that uses a fraction of that amount per year stirs uncertainty over how miner production cuts may, at least in the near term, drive up prices. The World Nuclear Association estimates that 445 reactors around the world need about 63,000 tonnes of uranium, or about 139 million pounds.

One issue for the supply-wary is that, as spot prices inch up, inventory holders may decide that it is a good time to come to market and off-load, possibly dulling the bite of mine cuts. Exploration Insights' Joe Mazumdar is skeptical of a stout price rebound any time soon.

Much of the uranium market is covered by long-term contracts, but at the moment, with low spot prices, there is little incentive to tie up future needs in potentially more expensive deals at prices miners would like to see.

"It's just a game of chicken," Mazumdar said. "And when you're ... sitting on potentially over a billion pounds of global inventory and some guy's asking for US$40/lb, you're going, 'You've got to be kidding me. I don't care how much uranium is in terms of the proportion of your cost, I'm not paying double.'"

To Mazumdar, the production cuts are telling of a market in which miners are scrambling. "What's interesting is it's the low-cost guys that are curtailing," he said, pointing to Cameco and Kazatomprom. "Not the high-cost guys."

It is a sign to Mazumdar of a dysfunctional market for uranium miners that is not likely to resolve quickly. As an investor, he views it this way: "Until we see signing of long-term contracts then I don't get why you would buy a producer of uranium."

On the back of the production cut, Chang recently boosted his uranium price forecasts, with the 2017 spot forecast increasing by 2.5% to US$21.97/lb and the 2018 spot price increasing by 25% year over year to US$31.25/lb.

In the longer term, Chang is more bullish, believing that uranium miners will get better prices. But it is still a question of timing that is difficult to pin down, given inventories and how their owners may sell them into rising prices.

"My general concern is whether Japan will start releasing some of the material that it is holding," Chang said.