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Uranium Market after Fukushima
Friday, 24 June 2011 04:36
Uranium Market after Fukushima
It has been a little over three months since the tragedy at Fukushima Daiichi nuclear power plant, but it is not too early to make some observations about the impact of the disaster on the uranium market. A lot has happened; unfortunately, most of it has been negative with respect to future market prospects. Below we will discuss the reaction of uranium prices, our projection of the reaction of fuel demand, and the relative moments of the spot and long-term prices.
Uranium Price Movements –First, it should be abundantly clear that the prediction that the accident would have no impact – we think one quote was “absolutely no impact,” was not only wrong, but spectacularly wrong. Reactors are being shut down or delayed around the world. In response to this, the spot uranium price has fallen by about 20 percent and could fall further. The current spot price as of late June is around $54/pound, while it was about $68/pound just before Fukushima. The long-term uranium price (currently at $68/pound) has also come down, but not as far. However, as an indicator of market prospects, the long-term price is far less important than the spot price.
Given the reaction of uranium prices, the market is working the way it should. Demand is falling and thus price needs to retreat in order for supply expansion to be cut back since less supply is needed in the future. This does not mean that the price pre- or post-Fukushima correctly reflects the relative scarcity of uranium or is sufficient to stimulate the requisite amount of uranium in the future, but it does show that the relative movement in price reflects the changing fundamentals in the market.
Even on a micro scale, price behavior after Fukushima made sense. As shown in the chart, price initially plummeted to just below $50 before recovering as market participants sought buying opportunities. Then price reverted to a much slower, but inexorable, decline as the news from Fukushima got worse and the ramifications of the tragedy began to sink in. Note that we would not have been able to make these more detailed observations about price without UxC’s daily price indicator – the Broker Average Price or BAP, which has been published since September 2009.
Changed Demand Outlook – UxC’s own forecasts of fuel demand have dropped notably in the aftermath of the accident. Our global base case requirements have dropped by a net total of about 500 million pounds through 2030, and our high case by roughly 600 million pounds, the result of our projection that demand growth will be delayed by 4-5 years over what was previously forecast.
We should note that our GWe and demand forecasts may have been more optimistic than some in the industry, and even after these reductions, they still may be quite optimistic. We currently see about 483 GWe in operation in 2020 and 625 GWe in 2030. The arguments for nuclear power continue to be compelling, and nuclear power is still projected to grow, but not as fast as it did before. However, for some countries, it likely was the case that everything would have had to go right for their nuclear power programs to move forward. Obviously, with Fukushima, everything has not gone right.
Like all projections, we will only know in hindsight how good they are. To be sure, they will change in the future as more information becomes available. For now, we can observe that changes in the uranium market price are in line with the altered demand projections. That is, the trend in the spot price before the accident was predicated on a vigorous growth in nuclear power, and now the growth prospects of nuclear power are not as positive as they were before and price has reacted accordingly.
Despite the expected drop in demand and reduced outlook for nuclear power, we have been besieged by calls from investors and media asking whether this is a good time to get back into the uranium market. While we do not offer up investment advice, one wonders why there is the rush to act considering the situation at Fukushima has not been fully resolved, and may not be for some time. Also, the more time that goes by, not only will we know more about what happened at Fukushima, but we will know more about how demand is reacting to Fukushima. This latter element is crucial when assessing the future prospects for the market.
Spot vs. Term Price Movements – The rush to invest in uranium may be a function of the growing gap between the spot and long-term prices or simply focus on the absolute level of the long-term price, and the misplaced importance that some investors attribute to the long-term price. We say “misplaced” because the long-term price is not nearly as effective an indicator of what goes on in the term market as the spot price is in the spot market.When things look worse in the spot market, the spot price falls, and that is pretty much the end of the story. When things look worse in the long-term market, not only does the long-term price fall, but buyers shy away from base-escalated contracts (to which the long-term price applies), opting for either not using this pricing mechanism or using it to price a smaller portion of contracted quantities in a hybrid contract. Thus, even if the long-term price does not fall very much (at least initially), its usage, and hence its relevance can fall considerably.
For a junior uranium producer, the situation is even worse.Junior producers are often not in a position to guarantee future deliveries and hence future prices, so long-term prices are less available to them in the first place. Moreover, as the market worsens, this type of pricing becomes even less available to them, both because production from new producers and especially price assurance become less important.
None of this means that uranium prices will not at some point in the future resume their upward trajectory. Even if it does not grow as much as previously projected, uranium demand is still expected to grow notably (especially due to reactor expansions in China, Russia, South Korea, and India), requiring a huge expansion of uranium mining production. In this regard, cumulative demand between now and 2030 in our base case still tops 5 billion pounds U3O8. Of course, the likelihood of price recovering (and this recovery occurring sooner rather than latter) increases the further price falls in the near term. It is also possible that price will fall too much or that the supply side could overreact to the price/demand decline, setting up a very tight supply situation in the future, which could produce another price spike scenario, as we saw in 2006/2007.
Conclusions – In summary, the market appears to be working pretty well, and having a daily price indicator has proven beneficial in understanding the market reaction over the short term especially during fast moving events like Fukushima. We are projecting a rather notable reduction in demand, but demand still grows to fairly substantial levels. Finally, it is the spot and not the long-term price that represents the opportunity cost in the uranium market, and thus is the major determinant of future supply behavior. Ultimately, we are confident there will be sufficient uranium supplies to satisfy the growing demand in China and elsewhere, but the proper price signals will be required to ensure that no severe shortfalls occur.
Resouce from: UXC company