Uranium heads towards $100/lb but markets cautious of ‘ludicrous’ spikes

During 2023, uranium futures have shown an impressive run higher, and are now up by approximately 65% YTD.

Earlier this week, the yellow cake contracts continued their surge, topping the $80 (£63.7) per pound mark for the first time since January 2008.

In contrast, WTI crude, natural gas, and coal are lower by 5.6%, 26.1%, and 46.1%, respectively.

Over the previous decade, prices have been depressed in the international markets following the tragedy at Fukushima, resulting in considerable oversupply.

Rising demand

However, the new-found demand has been sustained by the global shift towards low-carbon growth, which has meant a bias towards reducing fossil fuel use, as well as robust utility contracting by energy grids.

Moreover, the intermittent supply issues from solar installations and wind energy; as well as the considerable disruption to traditional energy flows seen amid the Ukraine war, have led to higher demand for independent backups and security of supplies.

In particular, many European countries have struggled with regard to the difficulties around Russian gas supplies, especially since the onset of sanctions and the Nord Stream explosions.

The changing landscape has meant a resurgence of nuclear power in countries such as Germany, which reversed an earlier decision to shutter its facilities.

Today, in Japan, nuclear energy only accounts for 7% of the country’s energy supplies, but the government has rolled out a strategy to increase its share to 20%-22% by 2030.

One of the largest emerging sources of demand is China, which has a target of building 32 new nuclear reactors during this decade.

Supply challenges

As per data from the World Nuclear Association, global demand stands at 180 million pounds per year, significantly larger than output of under 145 million pounds.

In 2017, the world’s top producer, Kazakhstan announced plans to cut uranium output by 20% given the market’s excess supply situation.

However, with the turnaround in uranium prices, Kazatomprom has recently unveiled plans to increase volumes in 2025, which shall add up to 6,000 tons of elemental uranium (tU) to primary supplies.

Yet, for the moment, Kazakhstan’s squeezed supply will continue to support a bullish trend.

This was re-enforced by Justin Huhn, founder of Uranium Insider who noted,

…the Chinese are going to continue to increase the amount of uranium that they are buying out of Kazakhstan. That is not going to slow down. That trend has only just begun.

Moreover, Niger, which is the seventh-largest uranium producer, is recovering from a coup earlier in the year, adding to supply chain distortions.

Cameco Corp (TSX: CCO; NYSE: CCJ), the largest and most liquid stock in the sector, endured production challenges at the Cigar Lake mine, Key Lake, and the McArthur River mine, which forced a 9% downward revision in projected output to 30.3 million pounds of uranium concentrate.

The improvement in price to multi-year highs has also spurred on key industry equities including Cameco which is up by 98.5% YTD.

Other majors such as NexGen Energy (TSX: NXE; NYSE: NXE; ASX: NXG) and Uranium Energy (NYSE:UEC) are also up by 47.9% YTD and 69.6% YTD, respectively.

New incentives and long run trend

Steven Schoffstall, director of ETF product management at Sprott Asset Management, believes that the metal is now much closer to its incentive price, i.e., the rate at which producers are encouraged to expand operations and plants reap profits.

He expects that for the industry as a whole, the incentive price is presently around $75-$80, and showing an upward trend, will continue to support mine restarts which shall ultimately stabilize production.

Given the rising demands on uranium, whether from a low-carbon or energy security perspective, the World Nuclear Association expects buying to nearly double to 300 million pounds a year by 2040.

Speaking on Resource Talks, John Ciampaglia, CEO of Sprott Asset Management, added,

…what we can predict is that between now and 2040, there’s a billion and a half pounds of uncovered requirements based on the projected capacity additions for nuclear energy…

Outlook

Given the current imbalance in the physical market, Ciampaglia believes that the metal could rise to $100 or more per pound, marking a 25% upside within the next year and a half.

Uranium players are likely to breathe a sigh of relief once the metal shows staying power within the $80-$90 range, at which level the costs of developing new mines and replacement of reserves are likely to be adequately compensated.

Having said that, the price trajectory higher shall not be a smooth ride, with plenty of volatility in the offing.

The sector is vulnerable to considerable shocks and speculation given its still limited size, restrictive rules regarding exploration, the depletion of operational mines, and the sway held by ever-changing geopolitical factors.

Moreover, at present, uranium inventories are thin and receding, and so, even more vulnerable to shocks.

For instance, the EU’s inventories of natural and enriched uranium in 2021 were sufficient for three years, but have continued to dwindle and are reportedly 21% lower than the 2018 level, while demand continues to increase.

In the United States, domestic enrichment capacity meets only a third of the demand projected for 2035, while inventories stand at 1.2 years.

Energy policy analysts Rowen Price, Ryan Norman, and Alan Ahn argued that,

It’s likely that the continued operation of many US nuclear power plants may be immediately affected by global market disruptions in fuel supply.

This situation could mean that price spikes are here to stay.

Matthew Gordon, Partner and CIO at Ptolemy FO, cautioned,

…my other fear for investors is that price rushes through to a spike. I like these higher lows but I think we will a spike at something ludicrous…and may cause some damage

In conclusion, it appears that uranium fundamentals are in place to drive prices up. However, those holding a long-term view shall have to be attentive to the risks of an extremely volatile path to higher prices.

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