The YTD rally took another leg higher this week after Canadian uranium producer Cameco announced that it would extend a production halt at its McArthur River Mine – the world’s largest – for an “indefinite period,” according to Barron’s. The cutbacks have helped prices for the weekly front-month contract rise more than 11.6% this year so far to $26.50 per pound. But production cuts haven’t been limited to the Canada: Kazatomprom, Kazakhstan’s state-controlled uranium producer, announced late last year that it would reduce uranium production by 20% over three years. Kazakhstan is a crucial player in the uranium market, controlling nearly 40% of global production, almost all of which flows through Kazatomprom.
For years, uranium producers held out for a turnaround even as prices sunk to $20 a pound – leaving many of them underwater. But these companies are finally abandoning what one analyst calls their “reluctance to accept reality.”
The industry had gone through what Joseph Reagor, managing director and senior research analyst at Roth Capital Partners, refers to as a “reluctance to accept reality.” Since 2011, uranium producers “have been reluctant to make the necessary production cuts to balance the supply and demand,” he says.
And according to some analysts, this “accelerated rebalancing” in supply dynamics is just getting started.
“We are now seeing an accelerated rebalancing of the uranium market fundamentals that will provide the basis for a sustained and substantial uranium market recovery,” says Scott Melbye, executive vice president of U.S. producer Uranium Energy.
But supply isn’t the only factor working in the favor of contrarian commodity bulls: Demand for uranium is finally expected to make a comeback as Japan continues to unwind its post-Fukushima nuclear power shutdown.
A massive earthquake on March 11, 2011, in Japan led to a nuclear disaster, the world’s worst in a quarter-century, at the Fukushima Daiichi power plant. That reduced demand. All of Japan’s nuclear facilities were eventually shut down, and none of the country’s nuclear units came back on-line until 2015.
“While nuclear growth slowed following Fukushima, global production expanded at an accelerated rate, incentivized by a previous period of higher uranium prices,” Melbye says. As prices fell to about $20 a pound, around “95% of global production found itself ‘under water,'” with production costs exceeding spot and long-term prices. The result has been substantial reduction in global uranium production, he says, with output expected to decline to 135 million pounds this year, from a global peak at 161 million in 2016, he says.
“The events of Fukushima, close to eight years ago, certainly were a setback for the industry, as the impacts on supply and demand put into motion the bear market that we are only now recovering from,” Melbye says.
The expiration of long-term “uranium procurement” contracts could also drive prices higher as utilities are forced to lock in their hedges at higher prices.
“Utility companies in the U.S. and elsewhere typically hedge their uranium needs many years out to not only lock in price but also assure supply from reliable producers,” says Jeff Wright, chief investment officer at Wolfpack Capital. “The reason the timing is right for uranium to go higher is a supply deficit after the current production hedges expire in 2020-21 at a number of uranium producers.”
Recently, the Trump administration has highlighted “national security concerns” involving domestic uranium producers that could lead to a significant premium for uranium produced in the US.
Meanwhile, the Trump administration has called attention to the market in the past few weeks. U.S. Secretary of Commerce Wilbur Ross on July 18 said he had launched an investigation into whether the amount and circumstances of uranium ore and product imports into the U.S. “impair national security.”
The inquiry was launched at the request of two U.S. uranium producers, Ur-Energy and Energy Fuels, whose petition requested limits to imports and a quota requiring U.S. utilities to purchase 25% of their uranium from domestic producers.
The proposal would also require that federal government procurement would be 100% of U.S. origin, says Melbye. All told, this would require “around 15 million pounds of domestically mined uranium to be ramped up in the next few years, and likely a substantial premium would evolve for U.S.-origin uranium.”
For U.S. utility companies, however, “any increase to their costs in terms of higher uranium prices for domestic consumption would not be favorable,” says Hinze.
To be sure, as one analyst points out, prices have broken out several times in recent years, only to retrace these moves after encountering resistance.
Some analysts remain wary of uranium’s price gains. They’ve tested current levels “three times in the past three years only to continue basing,” says Jeb Handwerger, editor of natural-resources newsletter publisher Gold Stock Trades. Still, this “could be the start of a new uptrend, as demand is increasing yet oversupply may be ending.”
Still, given the sheer number of mines, supply dynamics can be difficult to predict over a lengthy time horizon. But as prices for fossil fuels like oil and LNG rise, and the green energy movement continues to gain traction, more utilities could start looking toward uranium as a serious option – that is, until the next nuclear disaster sends prices sailing back down.
The Global X Uranium ETF (URA) was unchanged in premarket trading Tuesday. Year-to-date, URA has declined -18.67%, versus a 8.39% rise in the benchmark S&P 500 index during the same period.
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