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The uranium spot price has risen sharply in recent weeks, up more than 50% to US$44/lb since its June low of US$28.25/lb - and one of the only commodities whose price is firming.
Uranium prices are increasing as utilities enter the market to shore up their dwindling nuclear fuel stockpiles. Utilities usually maintain a 3-year supply, but inventory levels have fallen so low that they'll need to start covering their requirement of 70 million pounds ("Mlb") of uranium for 2016 and 2017, and another 60Mlb for 2018 (Figure 1). These uncovered requirements represent an additional 35% in demand in a uranium market that is more or less in equilibrium at present, and should lead to further gradual strengthening of the uranium price. And as Japan moves towards its first reactor restarts, demand from that sector should be positive for the uranium market.
Utilities need to accumulate >130Mlb of uranium inventory ahead of a large number of contracts expiring in the next few years - Utilities typically buy uranium fuel for their reactors in 7-10 year terms, and many of those contracts are nearing expiry. And long-term contracts are usually arranged so a utility holds at least three years' worth of inventory at any one time for security of supply.
~90% of supply is typically through long-term contracts, but fell to ~20% in 2013 due to an oversupply in reactor fuel available at depressed prices on the spot market. So far in 2014, the situation has reverted closer to the norm with >70% of uranium fuel being sold under long-term contracts. This strengthening in the long-term market suggests that utilities are becoming more cautious about the availability of cheap fuel on the spot market, and are moving to lock in supply.
Figure 1 - Global Utilities' Uncovered Uranium Requirements Each Year
First Japanese reactors poised to restart in early 2015 - All local approvals have now been granted for the restart of two reactors at Sendai. And once final operational safety checks are done by the regulators, these two reactors would be the first to resume operation in Japan - and should pave the way for other reactors to come back online. Another 18 applications for restart have been submitted. As a result, Japan would begin drawing down on its excess inventory, which has been one of the principal reasons for the overhang on uranium prices. Restarts also signal to the other 90% of the world nuclear utilities to resume contracting, further supporting uranium prices.
Sources: Dundee Capital Markets, Raymond James
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