Uranium Markets in Q4
Both spot and term uranium prices were flat during Q4. For all of 2020, spot prices advanced 21% and term prices were up 8%. Uranium related stocks did much better, advancing over 40% during Q4 after having been flat for the first nine months of the year. Investors responded favorably to President Biden’s election after his campaign prominently featured nuclear power in its plans to decarbonize the US.
On November 23rd, 2020, then President-elect Biden appointed John Kerry to the newly
created cabinet-level position of Envoy for Climate. While Mr. Kerry was critical of nuclear power in the 1990s, more recently he has spoken out supporting its role in curbing carbon emissions (a view we agree with emphatically).
In the near-term, a pro-nuclear Administration could result in the postponed retirement of several US reactors due to come offline over the next few years. While such a policy shift would only result in a 1–2% direct increase in global demand, it would serve as strong endorsement for the role of nuclear in delivering carbon-free energy. The increased demand might encourage US utilities to cover future uncontracted fuel requirements leading to increased tightness as well.
Even without delayed US reactor retirements, uranium demand is scheduled to grow dramatically as new reactors (mainly in non-OECD countries) come online in the coming years. Over the past two decades new reactor retirements have exactly offset new startups, resulting in mostly flat demand. From now to 2040, we expect 290 new reactors will be commissioned.
Even if none of the US retirements are postponed, total reactor shutdowns will only total 154, resulting in 135 new net reactors, or 30% of the current total, by 2040. At current prices, it does not make sense to sanction any new mine supply, leaving a massive deficit in the coming years.
Despite the bullish outlook (and the Q4 rally), 2020 in many ways, was a frustrating year
for uranium investors. Spot prices were strong between January and May, rallying from $24 to $34 per pound before retracing half the advance to end the year at $30.20 per pound on much lower volumes. Term prices rallied from $32 to $36 per pound between December and January and have been stable since on extremely depressed contracted volumes. Concerns over COVID related demand forced many term fuel buyers to the sidelines. US utilities are only 2% uncovered in 2021, but this level jumps to 35% by 2025, suggesting fuel buyers are vulnerable to any rise in price. With the recent speculation of delayed US reactor retirements, we believe we may see fuel buyers finally reenter the term contract market sometime in 2021.
Turning to supply and demand, trends exhibited in 2020 continue to be very bullish. Since nuclear reactors represent baseload capacity—much more so than natural gas plants—and rely on multi-year fueling programs, global demand was less impacted by COVID-19 than other areas in global energy markets. We estimate that global demand was only off 1%—or 1.2-mm pounds. Mine supply on the other hand was greatly impacted by curtailed production at Kazatomprom and the suspension of operations at Cameco’s flagship Cigar Lake due to COVID cases among employees. In total, global mine supply was down 20 mm pounds or 14%. After restarting in September, production at Cigar Lake was yet again suspended in December and remains shut as of today, implying continued tightness into the first months of 2021. Global uranium inventories likely drew in excess of 30 mm pounds in 2020 and we anticipate further draws this year as well.
All of this lines up for a bullish year in global uranium markets. The total market capitalization of the industry is extremely small and any shift in investor sentiment would likely result in material stock price rallies. Perhaps the new Administration will help provide the necessary sentiment boost to incentivize fuel buyers to finally cover uncommitted obligations.
Uranium remains the only way towards a less carbon intensive baseload energy supply and we are encouraged that policy makers and investors are finally beginning to acknowledge this fact. We believe uranium stocks will be some of the best performing in the coming commodity bull market.