A Turning Point in the Nuclear Industry?
Channel: InvestorCoffee
Date: 2018-01-03

January 3, 2018 -- 2017 was an extraordinary year for the uranium industry: against a backdrop of steadily increasing nuclear energy generation and uranium demand, the world’s largest and lowest-cost producers cut output to essentially eliminate the oversupply that has dogged the uranium market since the Fukushima meltdown almost seven years ago.

Underscoring the fact that today’s uranium prices are too low for profitable production, the State-run uranium producer in Kazakhstan, that produces 40% of the world’s uranium and is the world’s lowest-cost producer, has set up a trading arm that will allow its uranium to be sold at higher prices.
Electricity Generation from Nuclear

World-wide nuclear electricity generation has been growing steadily since the post-Fukushima low reached in 2013 (Figure 1). 49 TetraWatt-hours (“TWh”) more power was generated from nuclear in 2017 than in 2016 - a year-over-year increase of 2%. Uranium prices appear to have finally bottomed (Figure 2) in response to these developments.

Production Cuts to Lead to Supply Deficit in the Uranium Market

The latter part of 2017 saw two of the largest uranium producers cut production that should result in supply falling short of demand in 2018 and beyond. In November, Cameco announced a production cut of 13.7 million pounds (“Mlbs”) of uranium in 2018, and a few weeks later, Kazatomprom followed suit with a cut of 10.4Mlbs in 2018 and 9Mlbs in 2019 and 2020. This means that supply will fall by 24.1Mlbs in 2018 – that is 17% of world uranium production. To put this in context, a similar supply cut in the oil industry would require removal of all USA and Canadian oil production from the market. Cameco also indicated that it may buy uranium in the spot market to fulfill its higher-priced term contracts – which should apply upward pressure on the uranium price.
Kazatomprom Sets up Trading Arm

Kazakhstan has an anticorruption law that stipulates that State organizations are required to sell their production in a transparent market – one in which purchase and sale prices are quoted openly. Compliance with this law means that Kazatomprom, the Kazakh state uranium company, is forced to sell most of its production in the spot market instead of the higher-priced term market in which the uranium price is negotiated privately between buyer and seller.

By setting up the trading arm, Kazatomprom can comply with Kazakh law by selling to its trading arm in Switzerland at the spot-market price and the trading arm would then be free to negotiate a contract price with clients at term-market prices. This business structure should significantly increase Kazatomprom’s revenues and bottom line prior to its listing later in 2018.

The End of the Bear Market in Uranium?

The world’s largest and lowest-cost uranium producers signaling that it isn’t worth selling their production at current prices: doesn’t this mark the end of a bear market? Isn’t this what happened with Glencore cutting production in late 2015 to ignite the zinc market after five years in the doldrums?

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