By Tom Price, Head of Commodities Strategy at Liberum
The tiny global commodity market of uranium is having a moment. Since its dormant days of 2015-20, the trade’s flagship oxide price has reported a stunning 250% lift to just over US$100/lb in January.
What prompted the rally? It’s the outcome of a series of macro-scale events – beginning with the universal price driver of post-lockdown’s demand recovery, boosted then by 2022’s war-spike of global energy markets, buoyed more recently by the market realisation that nuclear power can help us decarbonise global power generation.
In recent weeks though, the price retreated to $90/lb. Has the rally ended, with all bull elements now ‘priced in’? Or is it a pause, before the signal pushes even higher? Die-hard bulls of the market – dominated by mining majors of Canada-Kazakhstan-Africa-Australia – insist that there’s more upside from here, on a winning combination of a structural shift in global demand versus weak mine supply growth.
Yes, we too see an enduring bullish twist in uranium’s demand growth outlook. But how uranium’s supply-side responds to it depends far more on the behaviour of its two biggest miners – Cameco and Kazatomprom – than many investors seem to realise. For at least in the short-term, their effective joint production rate will directly impact oxide’s price. So, do they maximise returns? Or do they secure their share of total mine supply?
Before we explain this price-driving supply-side dynamic, we need some perspective on key elements of the mutually dependent global markets of uranium oxide and nuclear power.
Global reactor demand snapshot
According to World Nuclear Association, there are 437 nuclear reactors operating worldwide, for a total of 393 GWe of net-capacity, delivering about 10% of the world’s total electricity supply, with another 61 reactors being constructed (+65 GWe).
Our estimate of the total uranium oxide required to fuel these reactors this year is 175 mlbs (+2.5%YoY). Of this, we expect 136 mlbs will come from mines. The 40 mlb supply shortfall will be met by the on-going flow from various stockpiles located worldwide. All this oxide is required to undergo preparation – conversion-enrichment-fuel assembly – before it can be used in a reactor (generally, the oxide itself represents <30% total cost of fuel assembly).
WNA’s reactor capacity growth forecasts suggests oxide demand growth over the next decade is robust. A net-65 GWe lift, or 15%, in the global reactor fleet. Over 40% of this growth will occur in China (+25 GWe; total net-lift to 77.5 GWe), followed by India (+10% of total; +6.1 GWe to 12.8 GWe).
The big miners
For 2024, we forecast that the world’s top-10 miners will deliver 75% of total mine supply (top three, 45%). Compared to the broadest range of global commodity markets – Metal, Energy, Bulks – uranium’s supply-side industry is regarded as moderately consolidated. That is, the top producers possess some price power, via their collective production rate. While it remains untested, the pricing power of the top uranium miners is akin to crude oil’s OPEC.
Of the miners, we review here 2024’s three big ones. The world’s top miner is 24 mbl/yr Kazatomprom, Kazakhstan’s government-backed entity, runs ISL operations in the country’s south; maintains local JVs with Cameco, Orano, Uranium One. 18 mlb/yr Cameco has its core mines in Canada’s Saskatchewan; partly vertically integrated (conversion; power gen/distribution); reactivation of its key McArthur River mine is a response to uranium’s price lift. 17 mlb/yr Orano is France’s vertically integrated nuclear power-gen utility (mining, conversion, enrichment); mines located in Niger.
The stockpiles
Over the past decade, about 80% of total global uranium supply has been delivered from mines, the rest from various inventories located worldwide. Uranium’s flow from stockpiles is a feature of this market. No other commodity trade’s total supply is so dependent on its inventories. Also, with known and accessible inventories totalling at least 850 mlbs (>4x annual demand), few markets have such a large overhang (includes reactor tailings, mixed radioactive fuels, weapons-grade material).
Re-activations & projects
Not since this market’s 2007 oxide price spike has uranium’s industry featured the current surge in industry reports on asset reactivations, expansions, project deployments – a general response, over the last 6-12 months, to this latest price rally.
Of these, we regard the key market-driving events include Cameco’s reactivation of its 18 mlb/yr McArthur River & possible expansion of its neighbouring 10 mlb/yr Cigar Lake (Canada); reactivation of Orano/Denison’s >3 mlb/yr McClean (Canada); Paladin’s 5 mlb/yr Langer Heinrich (Namibia); Lotus Resources’ 3 mlb/yr Kayelekera (formerly Paladin; Malawi); possible expansion/normalisation of Kazatomprom’s local ISL operations (>30 mlb/yr; assuming it can boost acid supply) and at Orano’s Niger operations (5 mlb/yr).
Key projects worldwide include Deep Yellow’s Tumas (Namibia) and NextGen’s Rook I (Canada). Elsewhere, exploration programmes are now being deployed in Namibia, Tanzania, Western Australia, Uzbekistan and Tajikistan.
A price rally, explained
Again, what sparked this price rally in uranium in 2021? We see three partly related events, emerging in succession, contributing to the signal’s sustained 2-3 year lift:
- 2021’s post-lockdown rally: as with many commodity markets, uranium’s price reported a sustained lift from mid-2021 on post-lockdown’s synchronised recovery in demand & stocking;
- 2022’s war inflation: further price lifts occurred in 1H22, a response to war-related hits to global energy (Russia cutting EU gas supply, a primary catalyst), and a rising risk of Russia terminating uranium exports;
- 2023’s ‘new demand’: nuclear power demand reported a step-change lift in capacity growth/investment worldwide; two motivations: need to decarbonise power systems; war-prompted demand for power sector independence (incl. Europe, Japan).
Physically-backed funds
A contributing factor to uranium’s price outperformance was the buying strategies of two physically-backed uranium funds – Yellow Cake and Sprott Physical Uranium Trust.
Their collective buying programme has been large: 2021-23, acquired & stored >50 mlbs of natural uranium, >25% global annual demand. The timing of their engagement of the market – Sprott buying from spot market vs. Yellow Cake, from Kazatomprom’s inventories – just as the global oxide trade was tightening – enhanced the scale and duration of spot’s rally.
Miners’ strategic responses
Most commodity markets feature a ‘perfect competition’ structure: many producers versus many consumers, none of whom are ‘price-makers’. Some markets, however, are ‘oligopolistic’: a few dominant producers versus many consumers. Examples include iron ore, top-grade metallurgical coal, potash and crude oil.
Given the supply-side dominance of uranium’s two largest miners – Cameco and Kazatomprom – we believe that this market also has traits of an oligopoly. That is, at various points in uranium’s price cycle, these two majors possess some pricing power – exercised via changes in their joint production rate.
Curiously, even after uranium’s price surge, output rates at Cameco and Kazatomprom have not lifted significantly. True, it takes time to reactivate assets. But players of a perfectly competitive market would have clearly boosted production within the 12-24 months of this rally.
The incentive certainly exists for these majors to delay reactivations, to allow the rally to extend. Their returns lift with the rally, on their unchanged production rates. So, what prompts the majors to finally lift output? Market-wide asset reactivations and project deployments would be a sufficient catalyst. But the majors can pre-empt most of them, with their own large-scale reactivations. As their joint output lifts, uranium’s price falls. Tracking supply-side responses, the majors can then assess what lower price-level deters most market entrants over the long-term.
2024 price outlook
We are uranium price bears, calling for a further 10% pullback in spot, towards US$80/lb this year. Yes, we are bulls on uranium demand, underpinned by a worldwide re-acceptance of nuclear power as a carbon-free base load option. But we’re even more bullish on supply: reactivations are underway; the project pipeline is expanding. Compounding this industry response to uranium’s price rally is the fact that Cameco and Kazatomprom will eventually and strategically claim back their market share. And they can do this at a lower price than their competition, using their abundance of low-cost, spare mining capability.