Recently, considerable attention has been paid to the decline in both uranium prices and uranium price forecasts, specifically pertaining to how much they have fallen. Ux Consulting* suggest that the decline in uranium prices can be thought of as a three-step process. In the first instance, reactor requirements dropped considerably, largely because of the Fukushima accident. Those Japanese reactors that were not destroyed were taken offline. Germany shut down some of its reactors and has decided to prematurely shut down the remainder of its reactors. Add to this mix the fact that reactors in the United States and several other countries are being shut down prematurely for economic or political reasons.
Of course, with lower nuclear fuel requirements, less enrichment is needed as well as less uranium. However, uranium and enrichment are substitutes in the production of nuclear fuel, and with declining overall requirements, more enrichment is being substituted for uranium as enrichment plants are operated at lower tails assays as centrifuges keep spinning. Thus, uranium requirements have dropped even further than overall nuclear fuel requirements as natural uranium makes up a smaller portion of the now lower nuclear fuel requirements. This is the second step of the process.
The third step is the drawdown of inventories. To the extent that reactors are shut down and their restarts (if any) are delayed, inventories continue to build up. This is especially true if the shutdowns are unexpected, as the fuel is likely to be already contracted for and deliveries scheduled. In addition to the falling overall requirements and the greater decline in uranium needs due to the substitution of enrichment, the need for produced uranium is reduced to the extent that accumulated excess inventories are worked off in the future.
I strongly believe that uranium prices will increase in the future, but not in the short term, and the fundamentals remain in place for both the mid- and long-term demand. Other factors that could serve to accelerate the recovery of uranium prices, aside from increased consumption, would be if sanctions were placed on Russian nuclear fuel supplies; the market could take on quite a different complexion.
In subsequent messages, I will look at some uranium sector fundamentals and why they point to a sustained recovery of uranium prices.
Marcel Hilmer, CEO
* – Extract from recent article, see www.uxc.com
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