Uranium has outperformed major commodities this year, even as the energy sector has suffered from a drop in petroleum demand tied to the coronavirus pandemic.
The crisis was a “black swan event” that pushed supply-demand fundamentals into a “structural shortfall,” says Scott Melbye, executive vice president at Uranium Energy Corp. “Substantial global uranium mine disruptions” due to Covid-19 health and safety precautions provided a “tipping point” for a market that went through years of rebalancing in the wake of depressed prices.
Going into 2020, global nuclear utilities were expected to require roughly 182 million pounds of uranium concentrate to run reactors for the year, while expected global mine production was seen at 142 million pounds, he says. The pandemic has affected 50% of global uranium mine supply, or over six million pounds a month, so even a three-month loss would push production down to just over 120 million pounds this year, he says.
The expected supply shortfall led to a price rally. Weekly spot uranium prices stood at $33.40 a pound as of May 11, up nearly 40% from this year’s low of $24.10 in mid-March, according to data from nuclear research and analysis provider UxC. On the New York Mercantile Exchange, uranium futures settled at $33.55 a pound on May 13, nearly 34% higher year to date. By comparison, U.S. benchmark crude futures prices have lost almost 59% so far in 2020.
As production declines, uranium demand remains “relatively inelastic,” says William Freebairn, senior managing editor at S&P Global Platts. “The end-users are nuclear plants, which typically operate at full power whenever they can, regardless of demand or price of electricity.” Uranium must also be “secured up to two years before it is needed in a reactor,” so a steady supply is needed even during tough economic times.
With uncertainty over when these mines, including Cameco’s (ticker: CCJ) Cigar Lake, the world’s highest grade uranium mine, might return, “producers have become buyers, and prices have surged,” Freebairn says.
All of this comes nine years after massive tsunamis created by the strongest-ever recorded earthquake in Japan flooded the Fukushima Daiichi power plant, leading to the one of the worst nuclear disasters in history and expectations of nuclear power’s demise. Globally, nuclear output has recovered to pre-Fukushima levels, with contributions from China, Russia, and South Korea, says Bruno Brunetti, head of global power planning at S&P Global Platts Analytics.
In the U.S., the Nuclear Fuel Working Group released a report in April detailing policies to revitalize the U.S. nuclear energy industry, including the establishment of a uranium reserve. President Donald Trump’s fiscal year 2021 budget had included $150 million for the Energy Department to purchase uranium from domestic suppliers, says Jonathan Hinze, president of UxC.
Hinze says the reserve wouldn’t have much, if any, impact on uranium prices because the U.S. isn’t producing much. Government data show domestic uranium concentrate output in the first quarter was down 86% from a year earlier. The U.S. also won’t be drawing from global commercial uranium supplies, he says.
Still, supplies overall are getting tighter, with inventories drawn down more rapidly because of the production suspensions, and utility demand remaining mostly steady, he says. Spot uranium prices have already seen a “rapid increase,” so it’s possible the market won’t see the same quick rise in the coming months. But “as long as producers continue to purchase uranium to cover supply shortfall, the price will remain on an upward trajectory.”