Seeking Alpha, a publication for stock investors, has published an article on 'the death spiral of nuclear energy and the demise of uranium miners', written by 'independent professional value investor' Caiman Valores.1 It's rare for such publications to carry such an analysis. Typically, in the upside-down, glass-half-full universe that stock investors live in, bad news is good news: the further the uranium market slumps, the further a particular company slumps, the closer the turn-around and the upwards swing.
Valores points to data showing that uranium production increased by 50% from 2007 to 20162 despite the failure of the nuclear 'renaissance' to materialize and generally stagnant demand. Hence the large and growing stockpiles of yellowcake and further downward pressure on already very low prices. "Despite claims of a looming supply cliff and higher demand which will support higher prices," he writes, "demand for uranium is set to weaken in an environment where supplies are growing."
Valores is much more bullish about renewables: "The desire to limit global warming as well as the dangers posed by nuclear energy in the wake of Fukushima sparked a significant uptick in investment and research into cleaner more sustainable and less dangerous sources of energy. That culminated in renewables receiving a record level of investment totaling $349 billion in 2015. While investment declined in 2016 by 18% compared to 2015 it was still a very respectable $287 billion.
Valores concludes: "Despite claims that uranium prices will receive a leg up from greater demand and constrained supplies, it is clear that the tide has turned against nuclear power and the radioactive metal. Not only has sentiment turned against nuclear energy after Fukushima but cleaner safer renewable forms of energy are increasingly becoming cheaper and more efficient. The surge in investment in renewables now sees the vast majority being competitive with or even cheaper than nuclear power as well as fossil fuels. For those reasons alone it is difficult to see the substantial demand growth required to lift uranium prices significantly higher, particularly when global uranium supplies will keep growing weighing further on prices. That means primary uranium miners remain value traps despite their attractive valuations."
Credit Suisse's Robert Reynolds and Anita Soni estimate that some 40% of operating reactors will be decommissioned by 2035, with fewer new units brought online to replace them.3 They write: "We estimate an average of ~9 reactors per year will need to be constructed from 2017-2035 just to keep uranium demand steady at 2016 levels. In 2016, 11 new reactors were brought on-line. However, this includes seven reactors in China where we see nuclear capacity growth slowing due to power market oversupply and a decline in the relative economic competitiveness of nuclear."
If the uranium market recovers, it will be a long time coming
Then Paladin Energy chief executive John Borshoff said in 2013 that the uranium industry "is definitely in crisis ... and is showing all the symptoms of a mid-term paralysis".4 His prediction was accurate. Long-term contract prices and spot prices are much lower in 2017 than they were in 2013.5
Former World Nuclear Association executive Steve Kidd said in May 2014 that "the case made by the uranium bulls is in reality full of holes" and he predicted "a long period of relatively low prices, in which uranium producers will find it hard to make a living".6 So far, Kidd's prediction has proven to be accurate. Long-term contract prices and spot prices are much lower in 2017 than they were in 2014.5
An October 2015 report in Nuclear Engineering International noted that "there may not be much upward pressure on market prices until the next decade" as "excess supply is expected to persist."7
Nick Carter from Ux Consulting said in April 2016 that the spot uranium price could stay in the low $30s/lb "for quite some time" because supply is expected to exceed demand by 25‒30 million pounds U3O8 each year from 2016 to 2019.8 Carter said he did not see a supply deficit in the market until "the late 2020s".8
UBS analysts noted in July 2016 that a turnaround in the market could be years off due to the slow reactor restart process in Japan and the slow pace of global nuclear expansion.9
The Wall Street Journal reported in September 2016: "There is too much of nearly every commodity in the world today. Then there is uranium. The outlook for the element that powers nuclear reactors may be worse than for any other, and there is almost no prospect for improvement soon. Unlike other commodities, low prices won't stimulate demand. No commodity faces the unique pressure that uranium and nuclear fuel do and there is little prospect of a near-term recovery."10
Expectations that the uranium price would rise have repeatedly been foiled:
- Reactor restarts in Japan were meant to stimulate the uranium industry ‒ but only five reactors are operating as of August 2017.
- The December 2013 end of the US‒Russia 'Megatons to Megawatts' program (converting highly enriched uranium from weapons into fuel for power reactors) was meant to stimulate the industry ‒ but it had no effect.
- The global nuclear power 'renaissance' was meant to stimulate the uranium industry ‒ but it didn't materialize.
- The industry hoped that the drawing down of inventories would lead to increased prices ‒ but inventories are massive and still growing (as discussed below).
The industry is getting increasingly desperate, looking for a bounce from political conflicts upsetting existing production and supply networks (e.g. the Russia / Ukraine conflict) or from further mine failures and closures. According to an April 2015 Mineweb.com article: "What could bring a major price surge forward though remains major supply interruptions – either for geopolitical reasons, or for debilitating technical problems at one or more of the key producers."11 Yet long-term contract prices and spot prices have fallen since April 2015 ‒ indeed they have fallen sharply.5
Explaining the uranium market's malaise
There are numerous reasons why the uranium market is likely to remain depressed for the foreseeable future. The most important are as follows:
1. Nuclear power is unlikely to expand. Stagnation or slow decline are the most likely scenarios over the next 20 years, and if there is any growth it will be slight.
2. Uranium is plentiful. At the 2016 level of uranium requirements (63,404 tonnes of uranium12), identified resources13 are sufficient for 121 years of supply of the global nuclear power fleet (at its current capacity of 392 gigawatts). From 2012 to 2014, uranium was produced in no less than 21 countries.13
3. Stockpiles (inventories) are massive and still growing. Global stockpiles have grown sharply since the Fukushima disaster and now amount to more than 1.4 billion pounds U3O8 according to Ux Consulting14 or 1.2 billion pounds according to the OECD's 2016 Red Book.13 Thus stockpiles alone would suffice to keep the entire global reactor fleet operating for around eight years. And stockpiles continue to grow ‒ supply from mines and secondary sources currently exceeds demand by about 30 million pounds U3O8 per year or 18%.14,15
4. Secondary sources ‒ i.e. sources other than newly-mined uranium ‒ continue to contribute significantly to oversupply. Secondary sources include government and commercial inventories, reprocessed uranium, underfeeding at enrichment plants (extracting more U-235 per given volume of feedstock), uranium produced by the re-enrichment of depleted uranium tails, and low-enriched uranium produced by blending down highly enriched uranium (typically from military sources).
5. Enrichment oversupply. The overcapacity and low cost of uranium enrichment services has emerged as a significant factor undermining the uranium industry. Cheap, abundant enrichment capacity can substitute for newly mined uranium, either by extracting more uranium-235 during uranium enrichment, or re-enriching tails. This has and will continue to keep uranium prices down.6,16 Platts noted in April 2016 that enrichment companies are using their excess enrichment capacity to bring an estimated 15 million lb U3O8 equivalent to the market annually8 ‒ that equates to almost 10% of annual demand.
References:
1. Caiman Valores, 28 July 2017, 'The Death Spiral Of Nuclear Energy And The Demise Of Uranium Miners', https://seekingalpha.com/article/4091999-death-spiral-nuclear-energy-dem...
2. www.world-nuclear.org/information-library/nuclear-fuel-cycle/mining-of-u...
3. Teresa Rivas, 1 Aug 2017, 'High Costs Of Nuclear Projects Could Be Bad News For Uranium', www.barrons.com/articles/high-costs-of-nuclear-projects-could-be-bad-new...
4. Nick Sas, 18 July 2013, 'Uranium industry in crisis: Borshoff', The West Australian, http://web.archive.org/web/20130725060831/http://au.news.yahoo.com/thewe...
5. www.cameco.com/invest/markets/uranium-price
6. Steve Kidd, 6 May 2014, 'The future of uranium – higher prices to come?', www.neimagazine.com/opinion/opinionthe-future-of-uranium-higher-prices-t...
7. Thomas Meade and Julian Steyn, 2 Oct 2015, 'Treading water in the uranium market', www.neimagazine.com/features/featuretreading-water-in-the-uranium-market...
8. Bejamin Leveau, 29 April 2016, 'Uranium industry focuses on costs as supply glut continues', http://blogs.platts.com/2016/04/29/uranium-cost-supply-glut/
9. Donald Levit, 27 July 2016, 'Uranium Prices Remain Below Cost of Production, Recovery is Years Away', www.economiccalendar.com/2016/07/27/uranium-prices-remain-below-cost-of-...
10. Spencer Jakab, 18 Sept. 2016, 'Uranium Investments Grow Radioactive', Wall Street Journal, www.wsj.com/articles/why-uranium-investments-will-remain-radioactive-147...
11. Lawrence Williams, 22 April 2015, 'Uranium outlook positive but perhaps not outstanding unless … ', www.mineweb.com/news/energy/uranium-outlook-positive-but-perhaps-not-out...
12. www.world-nuclear.org/information-library/facts-and-figures/world-nuclea...
13. OECD's Nuclear Energy Agency and International Atomic Energy Agency, 2016, 'Uranium 2016: Resources, Production and Demand', www.oecd-nea.org/ndd/pubs/2016/7301-uranium-2016.pdf
14. 9 Aug 2016, 'Uranium: the world's worst commodity', Nuclear Monitor #828, www.wiseinternational.org/nuclear-monitor/828/uranium-worlds-worst-mined...
15. Rhiannon Hoyle and Mayumi Negishi, 31 July 2016, 'Japan Nuclear-Power Jitters Weigh on Global Uranium Market', www.wsj.com/articles/japan-nuclear-power-jitters-weigh-on-global-uranium...
16. Steve Kidd, 8 Dec 2016, 'Uranium enrichment – why are prices now much lower and what is the impact?', www.neimagazine.com/opinion/opinionuranium-enrichment-why-are-prices-now...