Uranium Demand Higher, Supply Lower Over Long-Term

WNA-1We all know that China, Russia, India and Brazil are deploying a large number of nuclear reactors. England and a few middle eastern countries like Saudi Arabia and the UAE also have big plans. Not only is the world’s population reportedly growing from about 7 billion to 9 billion + by 2050, the proportion of the population using significantly more electricity, i.e. middle-class citizens of the world– is growing as well. The world’s middle-class could rise from 4-5 billion today to perhaps 7 billion. On top of that, there’s the possibility (some would say likelihood) that the mix of base load power generation (coal, gas, nuclear, hydro, etc.) will shift towards nuclear. I’m certainly in that camp.

Only about 30 countries currently utilize nuclear power at all. That’s less than 20% of the world’s nation states. No matter how one slices it, there’s going to be a huge increase in the amount of uranium required. Cameco’s 10-yr forecast of uranium demand is a CAGR of 3.5%. Where will an additional 70 million pounds of annual supply come from? That’s a good question. There are many problems on the supply side, ranging from terrorist activity and resource nationalism in select African countries, to severe water scarcity concerns, to depleting reserves in key countries, most notably Kazakhstan. While we may not be looking at, “Peak Uranium,” it appears that the low hanging fruit has been harvested in many parts of the world, especially the lower-cost supply.

Supply challenges could be more problematic than pundits realize

But, here’s where it gets interesting, virtually all of the talk about uranium revolves around when will demand pick up to move spot and long-term contract prices higher? Some pundits are calling for a shortfall in supply as soon as 2016, others say 2018-21. But, in looking at the data from the World Nuclear Association, a different worry surfaces in my mind. Of the top producing uranium countries (those producing at least 1,000 tonnes in 2013) are countries such as Kazakhstan, Niger, Namibia, Russia, Uzbekistan, China, Malawi and Ukraine. This is not all that comforting. Yes, supply could keep up with demand over the next few decades, but I would not count on consistent growth or no supply disruptions from some of these countries. In addition, Russia has considerable influence in Ukraine and Russia’s power base is increasingly centered around its abundance of natural resources. Do I trust Russia (or China) to supply the world with uranium without fail for the next several decades? Has Russia ever used oil or natural gas delivery as a sanction or threat against another country? I’m not saying that Russia or China will be the aggressor in some sort of geopolitical event, just that $%^& happens!

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Global demand is probably understated by the World Nuclear Association 

Switching gears to the demand side, many commentators refer again to the World Nuclear Association’s list of global reactors that are; “operable, under construction, planned and proposed.” I think this data underestimates long-term demand. Consider this–3 of the top 10 populations on the planet have virtually no nuclear aspirations (yet). Indonesia, (5 reactors planned or proposed), Bangladesh (2 reactors planned) and Nigeria, (0 reactors planned or proposed). Japan is a top 10 populated country with zero reactors in operation. I believe that 20-25 reactors will return to service in Japan before the end of this decade. That’s as important as China and India’s aggressive growth plans for intermediate-term demand.

Compare Bangladesh to Canada with about 1/5 the population and 24 operable, under construction, planned and proposed reactors. I think that long-term demand will be greater than expected, especially as BOTH the World Bank and IMF have recently proposed curtailing or heavily taxing the construction of new coal-fired plants. Other global agencies and countries are following the World Bank’s lead in just saying no to coal. Therefore, countries like Indonesia, Bangladesh and Nigeria, will have to turn to nuclear in a much more meaningful way.

Who will pay for third world countries multi-billion dollar nuclear programs? 

Giant conglomerates and/or State sponsored entities in France, Russia, China, South Korea, Japan and the U.S. are fighting for this business. Programs to build and operate nuclear facilitates can be very lucrative. For some countries it’s a matter of pride and power projection to get as many contracts as possible. Contracts including permitting, design, testing, building and maintaining reactors as well as selling the uranium, installing the fuel and removing spent fuel rods. Better still if the World Bank or IMF guarantees the loans from the third world countries!

WNA-2Conclusion
I believe that there will be a widening gap between supply and demand that may grow to levels not anticipated by market participants who rely largely on World Nuclear Association data. The WNA is an excellent source of information on all things nuclear, but it’s a snapshot in time. I believe that both supply will be lower due to some questionable countries as the world’s top producers and that demand will be greater due a number of the most populous countries with virtually no nuclear programs.

Graphics, special thanks to the World Nuclear Association — for more information, click here


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Peter Epstein

About Peter Epstein

Peter Epstein is a Chartered Financial Analyst, (CFA) and has an MBA from NYU: Stern School of Business. He worked for over 20 years as a research analyst with his most recent role a six year stint at a $3 billion hedge fund as a senior natural resources analyst. More recently, Mr. Epstein has established himself as a respected and sought after investment writer on a number of well known websites. Mr. Epstein is a consultant for Groundstar Resources, American Sands Energy and a private company, QE2 Acquisition Corp.
  1. An area I didn’t focus on is that the cost of mining commodities, largely tied to increasing labor costs (in most countries) and longer time frames and capital costs to get green field projects into production–virtually assures that many commodity prices, including uranium, will rise. In some cases by a lot, as global cost curves move higher. This will be excellent news for low cost suppliers who can control their own respective cost structures.

  2. Reading your article got me thinking the uranium industry will have more of a mid term problem too.

    A recent Cameco presentation suggested the gap between mine production and consumption by 2023 to be around 120 million lbs of U. That gap based on current producing mines along with closures and the increased demand from existing and new power plants.

    With Husab, Imouraren, Cigar Lake, Kazakhstan and a few other new smaller mining operations, supply appears to easily meet demand to 2020 especially with a Japanese overhang supply of uranium. With secondary supply possibly coming in around 10 million lbs, I calculate, however, a shortage of around 30 million lbs per annum by 2023.

    Sometime in the next few years, current uranium prices will have to rise high enough to incentivize producers to meet the upcoming demand. Sure there’s discoveries out there in the world. They cost money to build and building a mine doesn’t happen over night or at least not yet. So while some pundits suggest we have ample supply until 2020, that doesn’t take into account the need for uranium prices to be much higher long before then to meet the needs of 2023.

    You mention several producing nations and possible supply challenges. However, what I see is several sovereign nations amongst that group that are changing the current dynamics of the uranium industry. In my opinion, especially China. I suspect that China has looked after their future needs quite well and suggest that we don’t expect the Chinese to share the resources they are locking up.
    As you pointed out, WNA may suggest that there is an abundance of uranium and it’s probably true. However, I suggest to you a more important scenario is who controls supply and at what grade and cost to produce. With some sovereign nations taking a more active role in uranium supply and enrichment, a race to lock up some of the richest known resources may happen sooner than anyone may realize. Hasn’t China recently looked at locking up resources in Greenland? It appears some nations are winning a game other nations don’t even know they are playing.

  3. Thank you L.N for your well thought out response. I believe you’ve made several good points. One of your points, “a more important scenario is who controls supply and at what grade and cost to produce” I think I covered when I alluded to Russia’s growing appetite for all resources, including uranium. Russia also controls a large % of the uranium enrichment market.
    In my comment beneath the main article I covered another important point that you made– the global industry cost curve of uranium production is going to move up. Most deposits in Africa are low grade and some have infrastructure challenges- to say the least.

    I also take you point that China’s production of uranium (and gold for that matter) is probably not leaving that country! A main takeaway is that utilities have not seen any need to contract long-term so they’ve been out of the market. But, (timing uncertain) as soon as 2016 I believe that long-term contracts for say, 2019-23 will be signed at prices above $45/lb. Uranium stock investors don’t have to wait until 2019 for the stocks to move. We could see a modest to moderate rebound in uranium pieces in 2015.

    Thanks again for your meaningful analysis.

  4. There’s a lot of noise from witless analysts and their sheep-like followers, about the supply overhang. They are suffering from chronic amnesia or Alzheimer’s. The overhang of uranium supply has been far, far worse than it is today, and it was in such a state for decades. During the 40s and 50s, the mining of high-grade uranium around the world was so vast an enterprise that hundreds of millions of pounds were stockpiled. This was all for military purposes, before the first civilian nuclear power station was ever built. Over the ensuing decades, these massive stockpiles were added to, and then eventually, starting in 1986 or so, when primary supply became outpaced by demand, the stockpiles slowly began to decrease. For nearly 30 years, they have decreased, to the point in 2010 where they were facing imminent depletion within a few years. So, now, post-Fukushima, the inventories have built back up a bit. It is nothing compared to what these inventories have been historically. As usual, the investment community has been easily misdirected.

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