We keep hearing – and being promised – that the uranium bull market’s “right around the corner” – only to be left deeper in the red.
But things actually have fundamentally changed in the uranium market recently. . .
And in terms of an asymmetric (low risk high reward) investment idea – there’s nothing quite as attractive as uranium today.
So let’s take closer look.
In mid-June, I wrote an article declaring that the uranium market was set to rally (you can read here if you missed it).
And since then, the price of uranium’s up over 18%.
Even more exciting is that this was during a monster U.S. dollar rally – which has crippled most other commodities.
This indicates that the underlying uranium fundamentals are changing – and finally for the better.
Here’s a little context.
All this started back in December 2016 when Kazakhstan – the world’s largest uranium producing country – slashed annual output by 10%. They did so because they didn’t want to waste mining their finite uranium reserves at a loss.
And although a 10% output cut wasn’t enough to end the brutal uranium bear market – it sent a powerful signal to the market. . .
That major uranium producers were at their limit and about to break. So they were going to kill the bear market themselves.
What I mean is – if the market wasn’t going to absorb the excess uranium supply, then the producers were going to force it.
And by next year – in January 2018 – Kazakhstan announced another 20% decline in annual uranium output.
Then Cameco Corp – the largest Canadian uranium producer and major player – followed their lead and shut down their McArthur-River mine (which remains on an indefinite shutdown). This mine alone produced 12% of the world’s annual uranium output (you can read the in-depth details here).
Now – this is a huge amount of uranium output that’s disappearing in less than 12 months. . .
But why is it all happening now when uranium prices have dragged lower for nearly a decade?
That’s because after the 2011 Fukushima Tsunami crisis – uranium producers thought they could weather the storm (aka survive temporarily weaker prices)
But seven years later and uranium prices are still at multi-decade lows. . .
Why? Because most producers of a commodity will try to ramp up production so that they make up for lower prices.
For example, if a pound of uranium (aka ‘yellow cake’) falls from $60 to $30, then producers must more than double output to make up for the lost revenue.
But when all producers do this – it floods the market with excess supply. Pushing prices even lower – and keeping them there.
So eventually as uranium prices fell to around $20 a pound, nearly 95% of global producers found themselves mining at a loss.
This forced producers to face the ‘tough-love’ stage and accept reality.
Which was: they needed to cut marginal uranium production – and a lot of it.
So finally – this year – there’s been a meaningful reduction of uranium production. Output’s expected to decline to 135 million from a global peak of 162 million – a 16% drop– from 2016.
These are really deep cuts – and this trend will continue for many years as producers slash output after facing the ‘tough-love’ of this brutal bear market.
But this is why there’s an opportunity now.
The kind of brutal bear market of which uranium recently suffered is the foundation for a multi-year bull market. Because the sectors had a significant drought of new investment. And diminishing supplies put a floor under prices.
That’s why speculators must be ready for the steady rebound in uranium prices as the market fundamentals re-balance.
Especially as uranium demand grows. . .
I know it’s hard to believe – but mining companies like Cameco are finding that it makes more sense at current prices to buy uranium instead of producing it.
What I mean is – they would rather keep their uranium in the ground instead of mining it at a loss. Thus they buy uranium cheaper on the open-market so that they meet their customer obligations.
And as long as top producers like Cameco continue holding back production and instead keep buying on the open-market – uranium prices will have support.
Also, we have emerging markets – such as China and India and Saudi Arabia – building more nuclear reactors than previously expected. These places will remain key for stimulating long-term uranium demand.
So – in summary – we’re finally seeing the deep uranium supply cuts happening. All while demand grows.
The Global X Uranium ETF (URA) was trading at $12.34 per share on Monday morning, up $0.18 (+1.48%). Year-to-date, URA has declined -18.01%, versus a 0.07% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Palisade Research.