China, Japan power uranium demand

The positive correlation between economic growth and energy consumption is well known. Countries have begun to lay greater emphasis on energy security and a mix of different forms of energy sources, including fossil fuels and renewables.

Major economies around the world favour nuclear power plants for which uranium is a critical input.

The world uranium market has been unimpressively steady in recent times with spot prices staying put at around $35 a pound. The spot price in 2012 averaged $49/lb, but fell to $39/lb in 2013. Uranium supplies fell marginally last year due to lower volumes of recycled material and slower mine supply growth.

While production in Kazakhstan grew, there were disruptions elsewhere (Niger, Namibia and Australia).

However, muted demand growth, burdensome inventory and contract coverage of utilities for forward positions pressured prices lower. In 2014, fundamentals should be relatively more positive. This follows improving demand and start of supply rationalisation.

Taking a three-to-six-months view, while demand growth will be modest, supply growth will be weak and inventory levels high; a steady sequential gain in prices can be expected in the second half of the year. Prices are expected to be in the $35-40 range, projected to gradually move up by $4-5 a pound each year over the next three years.

At the same time, inventory overhang and existing contract coverage of utilities over the next few years means the pace of price strength will be modest.

Although the current spot prices are below estimated costs, higher prices from contract selling appear to have provided enough relief to keep miners going, according to industry experts. At the same time, some miners have buckled under pressure and announced mine idling or capacity reduction.

Some have postponed capex expansion plans. Although weaker supply and rising demand should tighten the market, uranium is still a surplus market and will remain so until 2017.

As can be seen from the table, market balances are set to tighten progressively and by 2018 the market is projected to get into a first deficit of over a thousand tonnes. This will have implication for prices. If 2013 saw muted demand growth, 2014 is likely to turn out to be more positive as the first Japanese reactors return to the network. As much as a third of Japan’s nuclear capacity will be back by the end of this year which means demand for uranium will surge.

A number of new Chinese units are also set to begin operations this year. China’s nuclear capacity is set to rise three times by 2018 to 45 GW.

As usual, China has been a savvy buyer, taking advantage of the current low prices and buying well ahead of its current requirements. It has accumulated huge stocks that may last for several years. The Asian major continues to mop up cheap concentrate supplies.

So, a significant price action will not occur until the surplus declines and inventories are drawn down.

In February, the Japanese Government released a draft energy policy which highlighted a commitment to nuclear power as part of energy mix.

Although this has boosted the uranium market sentiment, Japanese utilities are well covered for many more years, almost toward the end of this decade, according to industry experts.

So, the scope for additional demand is limited.

If anything, it is China’s current demand rather than Japanese policy that will drive the uranium market.

China’s imports of more than double the current requirement are attributable to the possibility of rapid expansion in nuclear capacity, apprehension of slowing domestic output to meet future demand needs, not to speak of attractively low current prices.

For a quick rebalancing of the uranium market, supply cuts are needed and new reactors must come online as planned.

Supply cuts have been limited thus far due to mitigation provided by contract selling.

Nuclear power plants, of course, face newer challenges in the form of higher costs and superior engineering design to withstand natural disasters.

Any sustained pullback by China is a big downside risk to uranium prices, although it is seen as an unlikely event.

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