Looking for a Glowing Commodity? Try Uranium

Uranium is having a moment in 2020, climbing a third in six weeks while much of the commodities universe melts down. Years of poor economics and weak investment, combined with the impact of pandemic-related mine closures, are adding up to a supply squeeze, despite demand softened by industrial lockdowns. There will be no swift return to lofty levels last seen over a decade ago, but the metal may still be the only one to end the year with a record shortage and higher prices.

The start of the last bull run had plenty of similarities to today. Supply was suffering the effect of a long run of unimpressive prices. Thanks to revived interest in nuclear power, the spot market price for uranium surged by a factor of 13 between 2003 and 2007. That hastened a production splurge that put the industry into a steady downward slide, worsened by the Fukushima disaster in 2011. It then bumped along at levels that, adjusted for inflation, were near historic lows.

With little incentive to explore or produce more at depressed prices, the supply-demand balance was still delicate even in 2019. Then the coronavirus epidemic struck, triggering even more curtailments at top producers Kazatomprom and Cameco Corp., among others. Canada’s Cameco has suspended production at its giant Cigar Lake mine in Saskatchewan. Kazakhstan’s behemoth, meanwhile, expects a deficit for 2020 and quoted third-party estimates Monday that primary uranium supply could decrease over 10% from a year earlier. Chinese operations in Nambia have been impacted.

It’s true that almost all metals have seen a blow to supply from Covid-19, yet for the most part that’s dwarfed by the drop in demand from customers, whose own factories have been shut down. For uranium, despite some reactor closures and longer stretches of maintenance, appetite is a lot less flexible. Production has taken a worse hit. Analysts at BMO estimate that 2020 production expectations are already down by a fifth compared to earlier forecasts. Copper, despite stark headlines, has fallen a fraction of that. Only platinum, dented by restrictions in South Africa, has tumbled by anything like the same magnitude.

The shock has been sharply felt. Futures on the New York Mercantile Exchange are trading at around $34 per pound, up from $24 in mid-March. Shares in Cameco have almost doubled from March lows. Others have climbed, too: London-listed Yellow Cake Plc, which purchases and stores physical uranium, is up by roughly half. Exchange-traded funds like North Shore Global Uranium Mining ETF and Horizons Global Uranium Index ETF have recovered from their 2020 nadirs.

The real question is what happens next. Even $34 is far below the price required to encourage digging. A significant proportion of producers still don’t make money at those levels, once expenditures to maintain production are included. Meanwhile, utilities are sitting on a still-substantial four years or so of inventory and can afford to wait a little longer before piling in to buy, even if there is already anecdotal evidence of activity. It could take until almost the middle of the decade for them to get back to, say, three years of material.

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