Uranium: Part 3
Don’t Forget to Subscribe by Scrolling to the Bottom of this Article
This is the last article on my industry breakdown of Uranium and where I see the direction over the next 3-5 years. Also, I would like to say that I am not abiding by any rule that says I need to post every week, or every other week. As I have things to discuss, I will write them down in this blog. I will try to have a relatively steady stream of content for each of you to enjoy, but I cannot promise that will be on a consistent basis. I don’t want the quality of the information I provide to go down just to stick to an arbitrary schedule.
Uranium Part 3: What the Future Holds
This article will be focused on how demand has shifted in the very recent past, how supply looks into the future, and a short description on how the industry operates. To understand Uranium, it is key that we see the association between the nuclear energy trends discussed in Part 1, understanding the current price and the current state of supply which was discussed in Part 2, and finally how the future of demand is shifting and how the current state of supply interacts with this change in demand to create a picture for the future. This is the longest part, so please bear with me.
At the beginning of this series, we described a very bleak outlook for Nuclear Energy demand. Fear mongering was rampant, and growth had stagnated with a huge increase in supply coming from Kazakhstan leading to a decades long decline in Uranium prices. I have strong conviction that all of these narratives are changing as sentiment changes and growth becomes driven by new places.
Uranium Supply/Demand Overview
World Uranium production in 2022 was roughly 135 million pounds. 2023 expectations are for supply to reach around 150 million pounds (was 155 million pounds but since Kazatomprom announced they would be producing 5 million pounds less than expected this number is now down to 150).* I won’t go into demand pound counting in this article as it would create an article that is too long but I expected demand to be around 145-170 million pounds for 2023. Keep this in mind as I discuss the below (I believe my estimates for demand were relatively conservative). Also keep in mind that any gap in long term contracts will most likely remain for numerous years.
Demand Outlook
When Russia attacked Ukraine in February of 2022 it set off a chain of events that led to Europe and China looking for a means of energy outside of natural gas. This caused a sudden awakening that nuclear energy might not be as bad as many initially thought (seems that once things got expensive, nuclear security looked a lot better). Countries that had initially been in the process of shutting down their nuclear reactors have since changed their minds leading to numerous countries turning these plants on or investigating into turning already shut down plants back on. See the list of countries below that plan on reinitiating nuclear plans or have shown a sentiment change:
Japan is currently looking to turn reactors back on (turning 17 reactors by summer of 2023 back to operational). If LNG prices go back up this will reinforce this urgency (seems extremely likely that worries about Europes natural gas supply will resurface next winter). Japan also plans on building new reactors. For the first time since Fukushima, a majority of Japanese citizens support nuclear energy.
Germany is still continuing with its Nuclear shutdown plans but of course this could easily change if natural gas prices increase next winter. They have already delayed the shutdown of 2/3 reactors that were meant to shut down in 2022. 71% of Germans want continued use of nuclear energy.
Netherlands is building two nuclear plants by 2035 (their first builds since 1973)
Belgium is delaying its closure of some of its nuclear powerplants after initial plans to completely shut nuclear power down by 2025.
US is investing $6+ billion into keeping some nuclear reactors going longer.
UK has had new polling showing a 25% increase in support for nuclear power.
France is reinvesting more money into nuclear as more than 70% of individuals favor plans to increase investment (up from 30% in 2019)
What this shows is that a lot of the demand that the industry was expecting to go away is going away much slower than expected and could possibly even completely reverse. My hypothesis is that if Europe doesn’t have another historically warm winter, then they will be experiencing higher NG prices again. If their storages empty (which the odds seem just as high next winter as it was at the beginning of this winter) then the spike in NG prices will come as it is still much harder to replenish their storages without Russian gas. Combine this thought process with an anti O&G infrastructure (this doesn’t seem like it will change seeing how Europe reacted with their windfall taxes last year) and you get an unfortunate long term issue that will need to be addressed. This only puts more pressure on countries to reopen or continue running nuclear plants as it becomes much cheaper to run than NG and cleaner than both coal (the other alternative) and NG. With roughly 50% of the worlds decommissioned reactors coming from western Europe, it is hard to find a bearish scenario for them (it can’t get much worse).
Asian Demand Outlook
Of course, Europe isn’t the only reliance on an increase in demand. The amount of demand coming from China and India is astonishing over the next decade as they rapidly ramp up their reliance on nuclear energy. Over 60 reactors are being built globally, with India and China leading the way.
Number of reactors under construction by country as of 2022. Statista.com
There is one issue with my thesis though because when NG prices grew to extraordinary highs, China switched their coal plants back on. Though, this could be seen as a negative for my thesis regarding nuclear energy demand, proving that they are not afraid to go against their green strategies to keep costs low for their citizens, I believe this is the wrong way to view it. This has two counter points:
If natural gas prices shoot up, leading to secondary effects of coal prices moving up, then I imagine this encourages further nuclear reactor planning for China. Of course, it doesn’t help that oil and NG reserves in China are far below adequate and this encourages alternate modes of energy.
The second part is that China is greener than most individuals believe. Although a lot of pollution does come from China, there have been serious efforts to reduce their pollution as their middle class is against it, which operates as a constraint on the Chinese government. If the Chinese government cares about one thing, it’s not pissing off their 700m+ middle class citizens, so there is still motivation to build long term solutions that do not include heavy pollution.
IEA Demand Sentiment
Overall, the infrastructure for nuclear seems like it will get a boost in the coming years squeezing the supply side of things even more.
Image from IEA
This is the IEA’s graph for what they see as Energy supply (this can be viewed as energy demand) differences in the coming years. Of course, I would take the numbers with a grain of salt, but the thing to pay attention to specifically is the sentiment for nuclear energy which seems like it is vastly increasing over the next 7 years.
The near future (3-5 yrs) and a very bullish case for Uranium
To give a slight overview of the uranium industry as it can get a little technical here, I’ll explain the process in the steps below:
1. When uranium is mined and sold it needs to be converted to be enriched and then an enrichment facility turns it into EUP (enriched nuclear fuel).
a. When demand is slow, enrichment plants get charged by the hour (and cannot stop producing) and make strong fuel by enriching the uranium for a longer time, hence using less uranium but supplying the same amount of energy needed for nuclear reactors in a longer period. The reasoning for this is they can then take the leftover converted uranium that hasn’t been enriched (remember because they used less uranium than they needed by taking longer) and sell it on the spot market to make some extra cash. This process is called underfeeding. Total uranium supply increases during macro underfeeding (since they are using less Uranium by going slower, they are increasing the spot supply by being more efficient).
b. Now in the opposite direction, when uranium demand is extremely high you get overfeeding which is when enrichment plants are using uranium as fast as possible to get it out of the door to customers. This causes them to use even more uranium in the process (shorter time = more uranium) and without having any leftovers to sell into the spot market it reduces supply and constrains miners even more.
2. Any Supply not covered by the miners is taken from the spot market to cover long term contracts. During underfeeding the spot market increases as enrichers try to make extra money by selling their extra supply. During overfeeding the spot market shrinks as enrichers try to cover the extra supply burn they are experiencing.
3. This uranium is sold in the form of long term contracts.
4. After long term contracts, any change in utility company usage is covered by the spot market where they buy the left-over uranium.
As I explained, production has been lagging demand for a while and now that inventories are starting to empty this has squeezed the available supply. This takes years to fix and, in the meantime, will cause a spike in Uranium prices. The demand most likely won’t slow down as uranium is a low-cost input for a nuclear plant and for all the reasons I explained before. Also, you have to remember that western mined supply/demand is even more skewed since roughly 60% of global fleets are only using western enriched uranium, due to the enrichment plant in Russia.
With the increased demand on Nuclear plants this will lead to overfeeding on enrichers. This is going to rapidly empty the supply of uranium, which as I explained before will use more uranium as demand increases. This will cause enrichers to take from the spot market, which was expected to be growing this year due to underfeeding. This obviously leads to an even bigger impact in 2024 (which if you notice in the figure from the IEA, that is when demand for nuclear energy escalates). Many expected nuclear closures that have already stopped, most likely already skewed demand more than expected and I expect this to continue (especially in 2024, when I think European NG prices will experience a more realistic winter impact, causing countries to panic again), which is probably close to an impact of 10m pounds of uranium. If you look at Kazatomprom, they are producing 5m less pounds than expected in 2023 and will most likely have to rely on the spot market to supply this gap.*
We’re talking about a possible scenario where 20m-40m pounds of uranium will be demanded from the spot market when all of the following things are considered: China Demand, Kazatomprom miss, nuclear backsteps, overfeeding, switch from Russian supplies, and you can’t forget future SPUT spot market buying. This is in a spot market that will have a supply of roughly ~25m. Assuming prices don’t increase this year, it is really hard for me to imagine a scenario in which uranium prices don’t increase meaningfully over the next 3-5 years. This is why I think uranium is only in the beginning stages of its bull super cycle and will have room to run. This is, again, a long term bet that the uranium supply/demand balance will slowly deteriorate until prices have to rise and any unexpected demand increase could drastically change the balance as the margin for error gets thinner and thinner due to underproduction.
Risks
Warm global winters could reduce pressure on western countries to increase their nuclear exposure.
New reserves of supply could be found unexpectedly.
Although citizen sentiment is changing, governments do not have to change with this sentiment.
There are reserves of uranium being built around the world and this could lead to some being released if prices were to get too high.
Specific estimations of demand could be wrong.
A nuclear event could occur that changes sentiment.
As the trend toward smaller nuclear reactors occur, uranium prices could become a bigger part of the input price, making prices much more elastic.
*Note: Kazatomprom announced today that they had a 3% decline in production which will lead to larger pressure on the spot market.
Although this is the last post in this industry breakdown, in the future I will be covering various uranium companies.
Disclaimer: The author of this idea has a position in securities discussed at the time of posting and may trade in and out of this position without informing the reader.
Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment adviser capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC and CSA filings, and consult a qualified investment adviser. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication and are subject to change without notice. The author and funds the author advises may buy or sell shares without any further notice.
This article may contain certain opinions and “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms. All such opinions and forward-looking statements are conditional and are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors, any or all of which could cause actual results to differ materially from projected results.
