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Uranium Rally Still Has Fuel

The price of the nuclear fuel has hit its highest level since 2007. The market is only getting tighter.

Uranium has been a hot commodity, and its rally could have a long half-life.

Spot prices for triuranium octoxide, the form of the commodity that is widely traded, hit $92.50 a pound on Monday, more than doubling since Russia’s invasion of Ukraine and the highest since 2007, according to uranium market-data firm UxC. This has buoyed stocks of mining companies like Cameco, which gained 71% over the past 12 months, as well as funds that hold the physical commodity such as the Sprott Physical Uranium Trust and Yellow Cake, which have gained 74% and 58% over 12 months, respectively.

These funds played a role in driving up spot prices in 2021 and 2022 as they bought up large quantities. But the commodity’s more recent rally was driven by utilities’ demand, according to a report published Sunday by BofA Global Research. Utilities signed contracts for nearly 160 million pounds of the commodity last year, the highest annual volume since 2012, according to UxC.

The market is only getting tighter, according to Jonathan Hinze, president of UxC. Commercial reserves of uranium held by U.S. utilities have been declining since 2016, according to data from the U.S. Energy Information Administration. In the European Union, they have been declining steadily since 2013, according to the Euratom Supply Agency.

Unlike other commodities, high prices haven’t put a damper on uranium demand: Nuclear power plants must run around the clock to meet electricity demand and the cost of fuel is a relatively small component of such plants’ operating costs. Spot prices are, however, approaching the point at which they could affect overhead. The World Nuclear Association estimates the commodity’s price would have to rise above $100 a pound and stay there for a while to have a considerable impact on operating costs. BofA Global Research forecasts that spot uranium prices will reach $105 a pound this year and $115 a pound in 2025.

Just how high prices can get depends in part on how quickly countries wean off Russian supplies. Russia holds about half of the world’s enrichment capacity. Utilities in the U.S. and Europe have started lining up supplies outside Russia since the country’s invasion of Ukraine, but geopolitical events could hasten that process.

The U.S. House passed a bill to ban Russian uranium imports in December; the next step is for the Senate to vote. While the proposed bill allows for waivers through January 2028, one risk is that Russia could retaliate by immediately banning uranium exports to the U.S. That doesn’t seem too remote: RBC equity analyst Andrew Wong estimates that the value of annual Russian nuclear fuel sales to the U.S. is $500 million to $1 billion a year, equivalent to just 1-2 days of Russia’s revenues from oil and gas.

A hasty cutoff would be consequential. Outside of Russia, there are only two main enrichment providers in the West: Urenco and Orano. While Orano is expanding its enrichment capacity by roughly 30%, that new capacity isn’t expected to be online until 2028. Enrichment, which cost about $60 per separative work unit, or SWU, before Russia’s invasion of Ukraine, now costs more than $150 per SWU, according to UxC.

There are other supply risks, too. For one, it is unclear when Niger, where uranium exports effectively stopped following a coup last year, will start being a supplier again. The country was the European Union’s second largest supplier of natural uranium in 2022. Production shortfalls are always a risk, too. The world’s top two producers both faced setbacks last year. A shortage of sulfuric acid, which mines use to extract uranium from raw ore, held back production at Kazakhstan’s uranium miner Kazatomprom. The company announced last year that it plans to start building a sulfuric acid plant in 2024. Canadian producer Cameco also failed to produce as much as it had forecast, partly because of equipment reliability issues and ramp-up delays. If uranium funds started buying spot uranium more actively again, that would add another layer of jumpiness to prices.

The market could ease in 2025, when Kazatomprom expects to end its self-imposed output restrictions. Until then, there are plenty of uncertainties that could fuel this commodity’s rally further.

Source: The Wall Street Journal