The uranium bottleneck

Be prepared for continued volatility in the uranium market this year, but don’t expect the crazy price jumps of 2007, warned Ux Consulting senior vice-president Eric Webb at the recent Prospectors and Developers Association of Canada (PDAC) convention in Toronto.

A renewed interest in nuclear power across the world has spurred a topsy-turvy uranium price, which Webb said has left many wondering whether we’re entering a nuclear renaissance.

The short-term answer to that question is a simple no — at least for now, Webb said.

But with a potential 86 countries planning to either start or expand on nuclear power programs by 2050, the prospects for uranium over the long term are strong, Webb said.

“What we were seeing (last year) was potentially the start of a nuclear renaissance,” Webb said.

But much uncertainty remains in the near term for both the demand and the supply side of the market.

“We have questions about uranium production,” Webb said. “We don’t know how much new material is going to come out of the ground this year. . . Because of that, you will have a very volatile spot market this year.”

It likely won’t be another 2007, which, counting both upward and downward movement, saw the price move US$146.

Compare that with the average movement of US$2.50 per lb. per year between 1987, when the Ux weekly price started, and 2005, when the action began.

“That’s greater (movement) than the last twenty years combined,” Webb said. “Volatility is an understatement.”

For the two decades leading up to 2005, U3O8 averaged just US$10-15 per lb. Since then, the spot price climbed as high as US$136 per lb. last June before falling to the current US$74 per lb.

And in that time, production hasn’t responded to the dramatic price spike as other metals would. In fact, production even dropped in 2006.

Ux Consulting’s 2008 forecast illustrates the uncertainty. In 2006, Ux forecast world production at 145 million lbs. U3O8, then downgraded the figure to 123 million lbs. in early 2007 due to construction delays and revised forecasts from mining companies. This year, after a series of increases and decreases to forecasts, Ux estimates world uranium production will be about 124 million lbs.

Part of the problem is that exploration and development were next to nil during the 1980s and 1990s, so now the industry must catch up.

“Over the next five to ten years the uranium price will be a lot lower than people expect, but once you get past the bottleneck, it’s going to actually increase faster than what people expect,” Web explained.

The price will depend on the speed at which nuclear reactors come on-line and how quickly uranium mines are built and expanded. And with new, more stringent policies on everything from exploration to production, it will take some time before the industry irons things out, Webb said.

Another reason for the volatility is that at the moment, uranium is still finding its place in the commodities market, as it’s fundamentally different from precious metals and base metals — it’s the only major commodity that doesn’t have a daily price.

“We don’t need uranium and we don’t wear

it as jewelry,” Webb said. “We have one end user for uranium and that’s nuclear power plants.”

It was only 2004 when the first uranium hedge funds entered the market — before that there were too many hurdles.

“You can take your gold and go home, you cannot do that with uranium,”Webb said.

For uranium, one needs a licensed account in order to hold title to it. Actual purchases by utilities companies were the norm 10 years ago, but recently, thanks to uranium hedge funds, discretionary uranium purchases have become commonplace.

Webb said many wonder why the uranium price has fallen amidst the production shortfalls. The reason, he said, is that the market is largely driven by inventory.

“There are certain sellers out there who have material who need to move it,” Webb said. “So we’re seeing a good amount of material competitively priced.”