Conventional economics dictates that a product’s price rises when it is scarce and in demand. Global production of uranium, a raw material for the nuclear power industry, fell to 123 million pounds- the lowest since 2008 - in 2020, due to the pandemic shutdown.
After years of stagnation, its price has been ticking upward. One pound of uranium cost around $24.50 at the beginning of March last year. Slightly more than two months later, it had reached a peak of $34.54 per pound. As of this writing, it is changing hands at $32.06 per pound.
Like the prices of other commodities, uranium has had its price cycles based on demand for the fuel and production supply. But the increase this time around may not be temporary.
According to a Wall Street Journal report, hedge funds have begun stockpiling uranium reserves in anticipation of future demand and a further bump in prices. New York-based Anchorage Capital has amassed a holding of approximately five million pounds of uranium. (The daily turnover of uranium’s spot market is between 60 million to 80 million pounds, according to the same report). Other firms, like Segra Capital and Sachem Core Partners, have also sniffed out a profit-making opportunity in uranium markets and are investing in it.
Uranium: A Profit Machine?
At first glance, the facts don’t seem to line up. In its Annual Energy Outlook this year, the Energy Information Administration (EIA) stated that the share of nuclear power in the overall energy mix will decline from 19% in 2021 to 11% in 2050 during a time of increased electricity demand. Even if the price increases, a declining market share is not really the best thesis for investment.
Then there’s the fact that price increases for the fuel in the past have not really translated into more percentage of nuclear in the grid. Nuclear power’s share of electricity generation remained constant during the first decade of this millennium even as the price of uranium peaked in 2007. The same held true between 2011 and 2017, when the price of uranium doubled but the share of nuclear power in electricity generation grew roughly by 0.7%.
There are a couple of factors driving Anchorage’s enthusiasm for uranium.
Electric utilities have not inked major long-term contracts for uranium supply for some time now, leading to a buildup of requirements. Even though the number of nuclear reactors in the United States has declined over the years, demand for nuclear as a source of baseload generation is expected to grow in the future. Requirements for uncovered uranium, which is the raw material used as fuel at reactors used to generate power, will grow. Research consultancy UxC estimates that there will be an annual shortfall of almost 100 million pounds between uranium supply and demand by 2025.
With a nine percent share of the uranium market, Cameco is the world’s biggest uranium producer. During the company’s latest earnings call in May, Tim Gitzel, Cameco’s chief executive officer, detailed supply curtailments at his company amounting to roughly $205.5 billion since 2016. Such curtailments across the industry have concentrated uranium supply in the hands of the commodity’s top five producers. Gitzel estimated that 70% of the supply is now distributed among this quintet. The spot market for uranium is no longer driven by inventory supplies available in the market, he said.
An Expensive Future
What does this have to do with electric utilities?
Again, back to the Camecho earnings call. “Where (uranium) inventory is playing a role is clearly some utilities they’ve been consuming off their (existing) term contracts but they haven’t been replacing them, so where is that coming from? Well, that’s coming from their inventory mobilizing their own inventory, chewing down a little bit of their strategic inventory position,” said Grant Davis, the company’s chief financial officer.
The WSJ piece states that Anchorage will embed options in its contracts with electric utilities. It will sell the fuel at a discount to utilities in the short term but plans to charge a premium in the future.
That future is one of scarcity. Russian exports of uranium to the United States, which constitute 15% of overall imports, are being curtailed. In October last year, the United States and Russia signed the Russian Suspension Agreement amendment to lower Russian export limits to United States over time. Thus, U.S. utilities, whose term contracts are the biggest source of revenue for imported uranium, will have to look elsewhere for their needs. No prizes for guessing who will mint profits from such agreements.
Nuclear power may have a diminished and expensive role in the future electric grid of the US.