- The uranium spot price is under pressure once more - Excess supply is expected in the medium term post Fukushima - Goldman Sachs does not nevertheless see a longer term Chernobyl impact

By Greg Peel

At end-May, the global spot uranium price indicator as derived by industry consultant TradeTech had risen by US$1.50 over the end-April price to US$56.50/lb, having traded down to US$50 after the March tsunami damaged the Fukushima reactors and suddenly sparked a rethink on global nuclear energy policy. It appeared that demand destruction was not as significant as a panicky market first assumed. But June has brought a different story.

TradeTech has marked its end-June spot price indicator at US$51.50/lb, representing a 9% drop from May. The consultant notes there was a big rush to sell in the last couple of days of June at a time when buyers are still uncertain over what path global nuclear energy might take from here. One "aggressive" seller was looking to place material quickly, but the fact remains that in the short term at least, the supply-side looks overladen.

What does trading company Traxys plan to do with the 5.2m pounds of U3O8 equivalent it acquired from US government stockpiles via a clean-up payment the government made to Fluor-B&W? The market doesn't know. The US government is also moving to re-enrich depleted tailings for sale to finance further clean-up projects, and traders assume that supply may come onto the market in coming months. Japan has shut down many of reactors and some may never be restarted, including the six at Fukushima, so stockpiled uranium inventories also add to potential near-term supply. There seems little reason for buyers not to back off in price.

June saw sixteen spot transactions totalling 2mlbs of U3O8 equivalent, TradeTech reports, down from 3.5mlbs in May. After somewhat of a hiatus, one medium term transaction was reported for deliveries beginning in 2013 and stretching over five years. TradeTech has moved its medium term price indicator down to US$58/lb from US$60/lb as a result. Yet amongst all this apparent weakness, commodities analysts at Goldman Sachs have, at the end of June, chosen to increase their long term uranium price forecast.

Good heavens, why?

Well let's first put things into context. Goldmans has raised its long term price to US$65/lb from US$54/lb. By contrast, TradeTech's long term price indicator has, for a long time, remained at US$68/lb. TradeTech sets its indicator based on actual contract deals signed today for long term uranium delivery. Goldman Sachs uses its forecast to calculate expected cashflows into time and thus value the shares of uranium producing companies. The analysts' forecast price represents 2016 dollars so to discount back against inflation that price would be higher today. In other words, Goldmans has largely brought its forecast up to meet today's market.

Mining stock analysts nevertheless prefer to keep their long term forecasts at conservative levels given the increase of risk with time, and historical price averages are a popular benchmark. But for most commodities China has come along and rather shattered historical price average modelling with its step-jump impact on the longer term demand side. The fact remains, nevertheless, that at a time when the world is wondering whether the nuclear energy game might be up again, as it was after Chernobyl, Goldmans has increased its uranium price forecast.

Nuclear energy had seemed like the way of the future post the seventies oil shocks, but the Three Mile Island (1979) and Chernobyl (1986) accidents brought new reactor construction to a standstill. Massive stockpiles of uranium had been gathered previously to fuel projected reactor growth so existing plants no longer needed fresh supply. The spot uranium price dropped from US$43/lb in 1978 to US$9/lb in 2003. By 1995, global uranium production had halved from its 1981 peak.

By 2004, the world was just starting to wake up to the China story. By 2007, speculation had driven spot uranium up to US$138-136/lb before the bubble and bust which saw the price plummet ahead of the GFC and bottom out again at around US$40/lb. Here we are in 2011 sitting in the wake of the second worst nuclear accident in history with a price around US$50/lb, and Goldmans suggests the market is pricing in the worst case scenario ? that being a global reaction similar to those post TMI/Chernobyl.

However today's outlook, says Goldmans, is very different.

Japan has shut down the six Fukushima reactors and they are not expected to ever come back on line. Further Japanese reactors have been shut down temporarily for safety checks, as have reactors all over the globe. Safety checks have basically been globally ubiquitous, Goldman notes, but the same cannot be said with regard to policies on existing reactor fleets and on future nuclear ambitions.

In Germany, seven older reactors will be decommissioned immediately and all others closed down by 2020 to be replaced by renewable energy sources. This is widely recognised as a purely political decision from a government already losing ground to the Greens due to financial support for Greece and other eurozone members, and as such, and given the immense cost of renewable energy development, it is a decision most expect may be tempered over time.

Switzerland has cancelled new reactor construction plans and limited existing reactor life to 50 years, suggesting to Goldmans a full phase out between 2019 and 2034. Italy has put all reactor plans on hold for 12 months.

The UK, Czech Republic, Finland and a number of other countries are undecided, Goldman notes. Project delays and maybe some cancellations are possible but commitment to nuclear energy is expected to continue, with no talk of wholesale reactor shutdown forthcoming.

In the US, the government continues to broadly support nuclear energy as a strategic necessity. The Fukushima response from individual utilities has nevertheless been mixed.

In France, Russia and South Korea, it's business a usual. Political support for nuclear energy remains strong and expansion plans should be little changed.

In India, which suffers from a lack of its own energy sources, the government has stated clearly its planned nuclear program will not be impacted. And in China, projects have been suspended pending review but the government has reiterated its commitment to nuclear power.

Chernobyl may have killed off the global nuclear energy market for two decades, the impact from Fukushima will not be nearly as substantial, Goldman suggests. Global uranium inventories are much smaller today than they were in the nineties. On that basis the longer term outlook for the uranium industry remains intact, albeit somewhat dented.

In the medium term, the Tokyo Electric Power Company (TEPCO) is now looking to sell its uranium inventories which are understood to be substantial. Existing German utilities may no longer need to consider additional inventory carry unless the government's reaction is subsequently modified. And China no longer needs to pursue an aggressive inventory accumulation policy with Fukushima having dampened global demand. China is well covered for reactor start-up supplies for the next 3-5 years, Goldman suggests.

Industry consultant UxC estimates global reactor requirements for uranium will now be, comparing pre-Fukushima to post-Fukushima estimates, 3.5% lower in 2015, 9.7% lower by 2020 and 14% lower by 2030. Goldman Sachs does not concur. The analysts envisage a 1.8% drop in 2011 followed by a 1.2% rebound in 2012. From 2010 to 2015 Goldmans is expecting a compound annual growth rate in requirement of 1.7%.

One must consider that Fukushima will also impact the supply side of the uranium market as well as the demand side. Financiers are likely to become more reluctant. Most vulnerable are junior miners with projects planned in countries of high sovereign risk, Goldman suggests. Already uranium major Areva has decided to slow its investment in mine developments based in Niger and Namibia. And the uranium industry is subject to the same production cost inflation impacting on every commodity at present.

The rush to commence new uranium mining projects accelerated in the 2005-07 period of soaring spot prices. Yet global consumption was still running ahead of mine production before the tsunami hit. The gap has nevertheless been reducing and will continue to reduce, Goldmans forecasts. In the meantime, the shortfall has been made up from the release of US and Russian Cold War strategic stockpiles as well as the decommissioning of Russian warheads.

Warhead supply is expected to run out in 2013. The US government has released stockpiles recently and intends to release more, albeit only after re-enrichment. US stockpiles are substantial but complex in composition, Goldmans notes, meaning its not just a matter of releasing material straight onto the market. The same is true for Russia, where inventories are substantial but sales opaque, and the bulk of supply would need to be further processed before it could hit the market.

On the flipside, China may well slow its immediate inventory scramble but both China and India are expected by Goldmans to build inventory over time under state control, thus absorbing notional global surpluses.

The wash-up is that Goldmans expects the global market to be comfortably supplied until 2013. Assuming there is nothing to replace Russian warhead supply, it will be a much tighter market after 2014. After 2015, fresh supply from sources such as Canada's Cigar Lake will ease market pressure once more.

The analysts expect the annual average uranium spot price to trough in 2012 at US$55/lb before rising again in 2013-14. Their long term price premium to spot is set at US$8 in 2012 rising to US$11 in 2014.