Monday, June 24, 2013

RBC - Uranium Price Coming From US$65/lb in 2014 - US$80/lb by 2017

Published on Monday June 24 2013 (AEST)  

Japans Reactor Restarts To Be The Turning Point For Uranium 

RBC - Uranium Price Coming From  US$65/lb in 2014 - US$80/lb by 2017

Japan must restart nuclear fleet to keep recovery on track - US$80+ needed to incentivise new supply RBC sees US$65/lb in 2014 - US$80/lb by 2017 Commodities analysts at RBC Capital Markets expect uranium demand to increase at a rate of 4.7% per year out to 2020 on the back of the planned nuclear power growth in China. 

Near term price prospects are a different story, with increasing expectations for a quick restart of the Japanese nuclear fleet underpinning the hopes of a slowly growing number of analysts. The Canadian investment bank is predicting a slow but steady re-starting of idled reactors as idled plants come to grips with what is a fairly stringent new regulatory environment. Excluding Japan's three reactors that are more than 40 years old and a few more that sit on known fault lines, RBC sees the fleet back to generating 80% of pre-Fukushima levels by 2018. Canadian brokerage house Toll Cross notes the idled fleet once generated 30% of the nation's power and used up 18-20 million pounds of uranium every year. 

Since the fleet was mothballed, Japan's imports of oil, LNG, coal and LPG have risen from 1.4tr yen per month in March 2010 to 2.2tr yen per month in March 2013. That's US$8.4bn per month, or more than US$100bn a year. Recommencing nuclear power would cost only US$5bn. The broker pints out that Japan may well boast a US$6tr economy, but it cannot afford this kind of hit to its trade balance. The broker reasons that Abenomics just can't work if the devalued yen is offset by such a drastic increase in the cost of energy imports. Thus, expect reactor restarts sooner than one might expect, says Toll Cross. 

The supply picture looks pretty much as it did three months ago, although the bank has trimmed its 2013 supply estimate by 2 million pounds to account for the disruption at Areva's Somair mine in Niger. While by no means a huge amount, on recent trends it's about a month's worth of volume on the spot market. Still, the surfeit has reduced the bank's forecasted 2013 surplus by around 25% to 5.1m pounds. Out year assumptions are unchanged. These unchanged assumptions are pointing to this year's surplus turning into a supply deficit in 2014. 2015 and 2016 are expected be balanced years in terms of supply and demand as mega-project at Cigar Lake ramps up. But from 2017 onwards, the market will be facing increasing deficits. In fact, the bank sees supply to the market falling some 35 million pounds short by 2020 on current levels of supply. Thus new supply will need to be added, but prices are not only going to need to push back above the US$40 they are sitting just under now, but will really need to exceed US$80/lb if there is going to be sufficient incentive to develop and bring that new supply online and to the market. 

This lack of demand and too much supply is not a new dynamic, rather it is one that has been playing out for more than three years. During this time, both spot and term market prices have remained under significant pressure. There was a bit of false hope sparked in the beginning of the year when spot prices ticked consistently higher, but that wore off long before the end of this year's first quarter and the price has been in steady, if slow reverse ever since. Prices have flip flopped a dollar above and below US$40/lb for months now and RBC sees this level as being a reasonable support. But once those Japanese reactors start coming back on line, the absence of highly enriched uranium from the US and Russia's now expired deal will surely be felt. RBC expects prices will start to track slowly higher towards the end of this year. 

 The bank's uranium spot price assumption for 2013 has been trimmed US$3.29 to US$45.00/lb to account for market movements so far this year. The spot price forecasts for 2014 through 2017 are unchanged at US$65, US$75, US$75 and US$80. The long-term price forecast remains at US$65.00/lb. . 


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