Uranium Prices Going Higher?

What’s Driving Uranium Prices?

Uranium prices used to be the talk of the town – the commodity with perfect fundamentals and massive profits from those trading uranium miners – but in more recent times it’s practically dropped off the face of the earth. Or is less advantageous to remove anyway. The price skyrocketed from $20/lb in 04/05 to $135/lb in 2007, but was crushed during the global financial crisis, and then again by the Japanese disaster and investors shied away from riskier commodities. So is this the end for the uranium mining companies? Just because they're always impressive, here's the Ranger Mine in Australia.

First let’s look at some of the drivers of the price in recent years. Like most assets, supply and demand is the crucial factor. The supply is generated from uranium mining companies such as Cameco and Rio Tinto, who own mines (the most uranium is mined in Canada, Kazakhstan and Australia) and sell this to consumers.  The demand side is primarily driven by power companies owning nuclear reactors, and whilst they want to build more reactors and global power consumption increases, the market will be in a state of undersupply as it had been until 2008.  

Uranium Miners

Building a nuclear reactor is a little like one of those arduous tasks that never seems complete or successful until the final moment when it all comes together. Think of it as pre season training, or revising for an exam. It costs around $2.6 billion to build a nuclear reactor, meaning it won’t start generating income until it comes online. Pre-GFC, funding wasn’t so expensive, so the process was as easy as signing away you spare cash and waiting for your goldmine to pop out in 6 years time. Consequently, uranium miners just couldn’t keep up with the demand for the commodity, and disused nuclear warheads from the US and Russia were even dismantled and reprocessed to be used as fuel. Scary, but a true story.

When the credit crunch hit in 2007 and 2008 it all became a different story. Unusually for the time, leveraged power companies realised that the cost of the reactors was too high now that borrowing costs had moved away from record lows (if only the rest of the world had listened), and as such the demand side of the equation fell away very sharply. The Japanese disaster exacerbated this further, reducing the demand for uranium in future by highlighting that when things go wrong they have devastating consequences.  

The fuel is still one of the cheapest to produce at 8.8 cents per kilowatt hour, compared with 7.4c for coal and 10.6c for natural gas. The reason why prices have fallen from $135 in 2007 to $50 at present is that there just isn’t the same demand for uranium in the future. Unless this changes, the price won’t be going anywhere quickly. The rising borrowing costs associated with the European crisis will keep a lid on development for a couple of years, assuming their blind faith pays off. What could move prices upwards above the $70 (where the price recently peaked in 2011) would be signs of a global recovery, a shortage of supply and European borrowing costs falling significantly. It’s a risky one to play, whether you trade the underlying commodity or uranium miners, but if its your thing then keep a look out for the above factors as the key signs that new reactors will be announced and prices will rebound once again.

In the pipeline: Could the S&P reach 1700?

Bullish on: AUDUSD (high Australian interest rates will create demand for the currency and any global risk favouring move will see this currency appreciate)

Bearish on: US 10 year Treasury Notes (still want to be short them, inflationary pressures will arise), copper (supply/demand doesn’t favour prices at these level, could come off quickly)

As always please leave any comments or feedback that you might have and I’ll try to respond as soon as possible. If you are looking for a beginner’s guide to trading, try www.tradingpimm.blogspot.com.