According to analysis from Cantor Fitzgerald, uranium is likely to reach an inflection point this year as for the first time since the middle of the last decade demand is set to outstrip supply.
It’s an imbalance that is only likely to increase over the coming years. Although uranium production from both primary and secondary sources is set to increase over the next decade, the rise in demand will outpace this production by some margin.
Key to this set of forecasts is a recent decision by Kazatomprom to curtail production from its Kazakh mines by 10%. According to Cantor Fitzgerald, this will amount to a cut of more than 5.2 mln pounds of uranium, and equates to 3% of global production.
Recent talk in the mining industry has painted Kazakh domination of the uranium supply as something akin to OPEC’s one-time dominance in oil.
It’s not quite there, but it’s something close. In 2015 Kazakhstan accounted for 39% of global production, and even after the output cut the national champion Kazatomprom will continue to be the number one producing company in the world.
But a statement from Kazatomprom highlighted a strategic thinking on the part of the Kazakhs that is largely new to the market’s understanding of the way the country has managed its commanding position.
Because the Kazakh uranium mines are such low cost, the thinking hitherto has been that any drift in the uranium price can be compensated for locally by an increase in production. The parallels to the Saudi experience as cornerstone member of OPEC are obvious.
Equally, the recent Saudi decision to curtail oil supply and support a higher price also has some echoes here.
Kazatomprom chairman Askar Zhumagaliyev is unequivocal about the reasons for the cut.
“While the outlook for nuclear energy growth continues as strong as it has been in many years, the realities of the near-term uranium market remain in oversupply,” he says.
Accordingly Kazatomprom aims singlehandedly to swing the market back into deficit. But it’s not for altruistic industry reasons that Zhumagaliyev has taken the decision he has.
“These strategic Kazakh mineral assets are far more valuable to our shareholders and stakeholders being left in the ground for the time being, rather than adding to the current oversupply situation. Their greater value will instead be realized when produced into improved markets in the coming years.”
That’s a clear bit of thinking that will also serve to warn the market against over-exuberance in the face of the forthcoming supply shortfall – given its low production costs Kazatomprom’s idea of an “improved market” may not be everybody else’s idea of an improved market.
Even so, cutting a significant percentage off supply will have a positive effect on other uranium equities, like Berkeley Energia (LON:BKY), now at a 64p five-year high, as well as more established names like Cameco (TSE:CCO) and Denison Mines (TSE:DML).
At C$6.85, Denison is now at a 12-month high, while Cameco, with a market capitalisation of nearly US$4.7bn and often viewed as the standard uranium proxy, has risen by more than 50% in value since the beginning of November.
Meanwhile, in a further analytical flourish, Cantor Fitzgerald points out that the Uranium Participation Corporation (TSE:U), which is simply a vehicle that holds stocks of physical uranium, has now been trading at a premium for three months, following a 25 month straight stretch of trading at a discount.
Uranium Participation Corp has historically been a leading indicator for the uranium market, according to Cantor. “We view this change as a signal that U3O8 prices will head higher in the future.”
Story by ProactiveInvestors