Exclusive to SightlineU3O8: This fall, we spent some time revisiting and updating the SL|U3O8Price Outlook. After reporting it for just over a year, we wanted to see just how well we had done and determine what learnings could be incorporated into the model going forward.
Last April we shared the underlying logic and methodology behind our price predictive model (“Dissecting the SLU3O8 Uranium Price Outlook”). The inputs to the model included detailed reactor-by-reactor fuel usage numbers from 2002 up to 2016 as well as detailed global production numbers for the same period. Out starting point here was to add the recently reported detailed actual numbers for 2017.
In looking back on our forecasts we made two primary observations:
- First, our Spot price predictions appeared to be reasonably accurate; however
- Our Long Term price expectations were consistently overstated.
Our historic inputs covered a period during which U3O8 prices fluctuated in excess of US$40.00 per lb. What we saw was that once the Long Term price of uranium fell below US$40.00 per lb. (the approximate marginal cost of production), all bets were off. The Long Term price of uranium ceased to react in concert with changes in global inventory.
We were reminded that uranium does not trade on an exchange. Each transaction is negotiated between a buyer and a seller. Once sellers were offered pricing below their cost they simply refused to sell. Let’s face it, utilities would sign 5-10 year contracts for $30.00, $35.00 or $40 uranium in a heartbeat but there are very few producers who can break even, let alone make money at those prices.
As a result, we are left with a game of “chicken”. Rather than reactionary price movement as we would see in an efficient exchange – Long Term prices look more like a chess game with long thoughtful periods of time between moves.
Our updated model has produced the following expectations:
- Below $40.00 per lb., Long Term price movement is uncoupled from ongoing inventory changes;
- Long Term prices will not move in any significant manner until Spot prices approach or exceed their current $31-32.00 range;
- Based on current corrections in the Spot price, we expect to see it cross the Long Term price as we move into Q2 2019;
- Closer to the end of 2019 we expect to see the Spot price approach the marginal cost of production (US$40.00);
- We expect to see small Long Term price moves throughout 2019, however, a significant shift should be seen any time between Q4 2019 and Q1 2020.
Readers must keep in mind that the SLU3O8 Outlook is a forecast model optimized to anticipate the timing and extent of pending changes in the uranium prices and these projections are provided for informational purposes only.
Users of these Outlook estimates are cautioned that ours is but one opinion, based on one predictive approach.
SL|U3O8Price Outlook updated as of November 5, 2018