EXCLUSIVE TO SIGHTLINE U3O8 – Since 2007, Kazakhstan has raced to become the world’s largest producer of uranium. With the second highest amount of known recoverable uranium resources and one of the lowest production costs in the industry, Kazakhstan has positioned itself perfectly to dominate the uranium market. So, what have they done with those advantages? They did what any reasonable country with a powerful competitive advantage would do – they priced out the competition.
Since 2007, Kazakh production has grown at an average 18.8% per year, amounting to over 40% of the world’s uranium production in 2016, all from a 16% market share in 2007.
In their race to become market leader, Kazakhstan has flooded the market pushing long-term U3O8 prices down 68%, to a critical low of US$31/lb. and a spot price hovering at under US$20.00/lb.
This trend is about to change, however, as Kazakh state owned KazAtomProm, the biggest supplier of uranium in the world, establishes a Swiss marketing arm to trade uranium in preparation for their 3rd quarter, 2018 IPO.
KasAtomProm’s Influence on Uranium Prices
KazAtomProm reports that 100% of uranium mined is exported. Hidden in the details is that Kazakh transfer pricing laws force uranium to be sold at publicly verifiable prices to restrict tax avoidance through transfer to subsidiaries in another country at below market rates. As a result, KazAtomProm has been forced to sell all its product exclusively on the spot market, which has contributed to utility spot purchases rising to an all-time high (over 22%).
By establishing a separate distribution center that is able to trade uranium for the company, KazAtomProm is about to take back serious control of U3O8 prices. Given Saudi Arabia’s effect on oil prices through the manipulation of their 13% share of the market, it will be interesting to see what Kazakhstan can do with their 40%.
While there is still some downward pricing pressure due to secondary supply sources, primary supply dominates secondary at a ratio of 4:1 and Khazakstan represents a lion’s share of that supply. It is the changes to the primary uranium supply that investors should be paying attention to.
The Swiss marketing arm will change the way KazAtomProm drives their top line financial results, acting as a buffer between producer and purchaser. It allows the company to regain control of their asset value and production without the consequences of plummeting spot prices and further damage to the company’s margins.
Why Reduce Production Now
KazAtomProm and a host of other big-name producers (Areva and Cameco included) have been implementing production cuts throughout the year. With KazAtomProm establishing a distribution center, you may be wondering why they would cut production now?
As world nuclear fuel demand has just recently (2017) surpassed pre-Fukushima levels, supply has grown 23,000,000 lb U3O8 since the demand drop in 2011. The current degree of market supply is unsustainable in the short term, even for one of the lowest cost producers in the world. Which is why Chairman Askar Zhumagaliyev has stated that KazAtomProm will not be increasing production in the next few years.
As some of the 66 reactors under construction begin their initial fuel loadings, uranium production can and should increase. Seeing as current mining is insufficient to meet demand in the long term (2020+), a financial incentive to do so will soon materialize.
In the short term however, with uranium prices being depressed so significantly, producers are finding it better to limit their supply in order to recover the margins they have lost.
Why Low U3O8 Prices Make Sense Thus Far
Kazakhstan’s transfer pricing laws are not changing anytime soon. Although KazAtomProm is setting up a Swiss marketing arm that allows them to sell into the contract market, they will still need to sell to Switzerland at publicly verifiable prices.
By selling into KazAtomProm’s marketing arm at low prices they can maximize the financial benefit of Switzerland’s low 7.83% federal tax rate on EBIT.
With uranium, the timing of price changes is always difficult to pinpoint due to the industry’s low transaction volume and the myriad of variables that affect the outcome. Until now, there have been big players (China, Kazakhstan) with an incentive to keep prices low. When one of those players starts singing a different tune, it’s time to start paying attention.
The Pressure For Price to Rise
Incentivizing a big price reversal for an entire commodity is tricky business but with a 2018 IPO and a team of big-name consultants, KazAtomProm is getting ready to take charge of uranium pricing. These actions come in addition to independent producers (Cameco, Areva) cutting supply and an increasing number of countries developing and expanding their nuclear capabilities (UAE, China).
We’re witnessing the world’s largest uranium producer, whose valuation greatly depends on uranium pricing, take very definitive steps to create a favorable outcome for their IPO. And when the world’s largest producer of uranium starts making moves that deviate from the pattern established in the last seven years, we should all re-examine where this commodity is heading.