uranium articleUranium Price May Rise 25% as Supply Falls, New Reactors Start
Jan. 4 (Bloomberg) -- Prices for uranium, used to generate 16 percent of the world's electricity, may rise a quarter this year as stockpiles of the nuclear fuel dwindle and demand is set to rise from reactors being built in China and India.
``You have gone from a buyers to a sellers' market,'' said Bob Mitchell, who holds physical uranium worth more than $26 million for Adit Capital Management in Portland, Oregon. ``Most reactors under construction haven't secured long-term supply and there is no inventory left among utilities.''
Commercial stockpiles of the fuel dropped 50 percent between 1985 and 2003 because mine output couldn't keep up with demand, according to a September report by the Massachusetts Institute of Technology. Mine expansions may not meet demand, boosting prices for uranium at miners such as Cameco Corp., the world's biggest, and Energy Resources of Australia Ltd.
Cameco shares rose 68 percent last year and Energy Resources of Australia, which is 68 percent-owned by Rio Tinto Group, surged 94 percent. Paladin Resources Ltd., an Australian company that plans to mine uranium in Namibia, rose ninefold.
China is preparing to award an $8 billion contract to build four reactors in the world's biggest nuclear power construction program. The country plans to build 27 plants to meet a target of boosting nuclear energy output fivefold by 2020. India aims to build 17 reactors to triple nuclear power capacity by 2012.
``Uranium prices will advance in 2005,'' said Mitchell, 51, at Adit, who also owns Cameco shares as part of the $200 million he helps manage at another fund, Touchstone Investment Managers. ``In China, they'll have to build a couple more reactors a year.''
Reference Price
Spot prices of uranium rose to $20.50 a pound as of Dec. 31, according to Metal Bulletin, on concern about supply shortages. That's the highest since 1984, said a September report by Jeff Combs, president of Roswell, Georgia, U.S.-based Ux Consulting Co., which publishes spot uranium prices.
The spot market, which makes up about 12 percent of uranium sales according to the World Nuclear Association, sets a price reference for long-term contracts between miners and utilities. Uranium prices rose to a record of more than $40 a pound in the late 1970s, according to Ux Consulting's Combs.
Contract prices paid by power companies may rise to $27 a pound this year from $20 a pound last year, National Bank Financial analyst Ian Howat said in a Nov. 24 report. Long-term prices may rise to $26 a pound, Goldman Sachs JBWere Pty analyst Ian Preston said in a Dec. 14 report after attending a uranium conference in Sydney.
``It looks like current prices are here to stay and possibly rise significantly,'' Craig Kinnell, acting chief executive of Energy Resources of Australia, the world's third-biggest uranium miner, said in an interview Dec. 31.
``Inventories are falling and there has been little response to that in the way of more mine supply. Our contract prices have risen to reflect the spot price rises.''
Demand From China
China, the world's biggest energy consumer after the U.S., aims to double total power generation capacity by 2020. It needs to add two reactors a year by then to meet a target of generating 4 percent of its power from nuclear plants.
Demand from China may help uranium prices double in the next two years and triple demand for nuclear power by 2020, said Quinton George, managing director of Trinity Asset Management, which owns 18 percent of Afrikander Lease Ltd., holder of South Africa's biggest uranium deposit.
``The supply deficit will affect this market for at least the next 10 years,'' said Trinity's George. ``In the next two years we could well see uranium touching historical highs, at least doubling current prices.''
China has begun talks with Australia, holder of the world's largest uranium reserves, to enable the fuel to be exported by London-based Rio Tinto, the world's third-biggest miner, and WMC Resources Ltd., which owns the biggest deposit of the radioactive metal.
``We're working with the Australian government to get the ability to sell uranium to China,'' Bruce Brook, WMC's chief financial officer, said in an interview Nov. 30. ``These guys have announced 32 nuclear power stations to be developed over the next 16 years.''
$30-a-Pound Forecast
Melbourne-based WMC in November increased its long-term uranium forecast to $30 a pound and said its Olympic Dam deposit could become the world's biggest uranium mine if a A$4 billion ($3 billion) expansion is approved. Cameco plans to increase production 18 percent at Canada's McArthur River, now the world's biggest uranium mine.
``We've got customers who are highly-concerned about the supply chain of uranium,'' said WMC's Brook, who's also in charge of the company's uranium marketing. ``I can assure you the pricing that they have in mind is not going backward. Our expansion and one planned by Cameco won't fill the gap'' between supply and demand, he said.
World demand will outpace supply by 11 percent in the decade ending in 2013 as inventories decline, the World Nuclear Association estimates.
The decline in stockpiles has been hastened by the decision of Russia, the world's biggest uranium exporter after Canada, in October 2003 to limit its exports to conserve fuel for 25 plants it wants to build by 2020.
Reactor fuel made from former Russian nuclear weapons powers one out of every 10 U.S. homes, according to the Washington-based Nuclear Energy Institute trade group.
Lack of Transparency
Fund manager Tim Barker at BT Financial Group in Sydney said a lack of transparency in the uranium market and potential increases in supply from dismantled nuclear weapons makes it hard to tell the extent of supply shortages.
``We've been waiting for the supply gap to appear for quite a while and have heard stockpiles are running down so many times I've lost count,'' said Barker, who helps manage $30 billion, including WMC shares. ``I'm not sure the ultimate size is very well known. I suspect there's a fair amount of self-interest in the information that's available.''
Mines produced about 55 percent of the 66,000 tons of uranium used in 2003, according to the nuclear association's Web site. The 30,000 ton shortfall was made up from other sources, such as stockpiles that the association says are ``largely depleted'', and former weapons-grade uranium.
``There has been a 15-year period of inventory liquidation, there is not a lot of new mine supply,'' said Mitchell at Adit Capital, who says the fund he started in October is the first to buy physical uranium. ``Even at $30 a pound you won't get the world flooded with uranium.''