Uranium Outlook 2016: Supply Deficit in the Cards

The old saying “once burned, twice shy” was definitely at play in the uranium market this year — investors took the difficulties seen in 2014 to heart and approached the space with cautious optimism. But while 2015 forecasts missed the mark, hopes are high for uranium prices in 2016. 
For 2015, experts and analysts forecasted average uranium spot prices of US$40 per pound and long-term prices in the US$58 range. However, with only a few short weeks left in the year, prices aren’t up to snuff. Uranium spot prices have averaged US$37 in 2015, whereas long-term prices have checked in at an average of $46.50.
“With almost all other commodities off so sharply in 2015, perhaps we should feel fortunate that uranium prices rose 2 percent year-to-date, from US$35.25 per pound to US$36 per pound,” Dundee Capital Markets senior analyst David Talbot told the Investing News Network. “There were signs of recovery earlier this year, but that stalled and the spot market continues to have excess supply.”
He added, “the term market is even more of a head scratcher … only 80 million pounds were contracted compared to over twice that much consumed this year. We still need utilities to return to contracting to see some firming in prices, which should happen as 2017 approaches. But until then, we expect both spot and term prices to remain somewhat stagnant in the absence of any catalysts.”

Uranium outlook 2015 missed the mark

Talbot said quite a few drivers contributed to ambitious 2015 price outlooks, including supply disruptions at Olympic Dam and Rossing and the Russia/Ukraine fallout, which “seem[ed] to dissipate after a tense Q1 2015.” Ongoing Japanese reactor restarts also played a role, as did the Chinese resurgence, which “is gaining momentum and, notably, is starting to go external as China begins to sell reactors, services and financing abroad.”
However, ultimately those factors did little to move uranium prices. One key element that kept prices suppressed during 2015 was the lack of buying by US utilities. Despite an estimated 15 to 20 percent of uncovered requirements, many utilities refrained from buying uranium due to excess inventories. That said, in the shorter term, it will likely be US utilities that boost uranium prices as contracts are expected to open up after next year and new deals will need to be signed.
“Excess inventories have been supplying many utility needs for the past few years. These are somewhat price insensitive,” explained Curtis Moore, Energy Fuels‘ (TSX:EFR,NYSEMKT:UUUU) vice president of marketing and corporate development. “Therefore, business has been extremely competitive. However, while overall global inventories are significant, most of these quantities are never going to enter the market. It is our belief that ‘excess’ inventories are limited, and when levels of ‘excess’ inventories get low, uranium prices will rise.”

Supply crunch on the horizon

Moving forward, growing demand for uranium paired with depleting supply should help move uranium prices up in 2016.
Cantor Fitzgerald estimates global uranium demand for 2017 and 2018 at 198 million pounds and 201 million pounds U3O8, respectively; as of 2017, about 25 million pounds U3O8 will be uncovered, with that number falling to 40 million pounds by 2018. These numbers translate into uncovered amounts of 13 and 20 percent, respectively, with the uncovered portion growing at a rapid rate in the following years.
What’s more, available supply from stockpiles and existing uranium operations likely won’t be able to match the new demand coming into the market.
“Because of these sustained low prices, very little new investment is going into uranium projects around the world. Yet we all know new mines will be needed. But by the time prices rise to the levels needed to incentivize new project development — the $60s or $70s — production may not be there. You don’t just ‘turn on’ large-scale mine production. You need many years — or decades — of permitting, financing and development before a pound of uranium is ‘put in the can.’ The long-term supply deficit is likely growing and becoming more intense,” Moore said.
Kivalliq Energy (TSXV:KIV) CEO Jim Paterson believes the upcoming supply/demand imbalance will bode well for those with high-quality projects underway. “We are in a stealth bull, with consumption of U3O8 growing steadily based on existing reactors and reactors under construction, while supply from uranium mining is very fragile due to the low pricing environment. It is creating a perfect storm for a big jump in value in the companies that own high-quality uranium projects.”

Talbot said Dundee believes investors should be looking for three market, three demand and three supply factors in 2016. The market factors include: “increasing uncovered uranium requirements towards 2017, suggesting that utilities must resume contracting soon; dealing with what UxC calls an inventory-driven market (we note that not all stockpiled uranium is readily available); and perhaps a shift to mid-term pricing as opposed to long term.”
On the demand side, Talbot said to watch for aggressive Chinese and Russian nuclear reactor sales and subsequent fuel supply deals, as well as Indian nuclear liability laws and the economic survival of parts of the US nuclear fleet in regulated markets. The three supply factors he mentioned are: “incentive to build uranium mines or starve out new production; [the] realization that some companies are suitably contracted and current production may be profitable; and [the] ongoing preference for high-grade Athabasca Basin exploration projects.”
He also said his firm believes that an overlying climate change theme will come into focus in 2016, spurred by the UN Climate Change Conference in Paris.
“The difference between this conference and those past is that members must come to the table with a game plan in hand. Climate change and clean air commitments by governments worldwide should help solidify nuclear as a chief option for base load power. This is evidenced by Japan’s recently announced clean air plans of 44 percent nuclear and renewables by 2030,” Talbot said.

Uranium outlook for 2016 and onward

In September, Dundee Capital Markets expected uranium spot prices to reach US$55 in 2016, and while the firm has yet to update its uranium forecast, it expects a slow start to the year.
“We believe that uranium market pressures may continue through at least the first half of 2016. While we haven’t adopted an updated uranium price forecast for 2016, we do believe that there is strong potential for higher spot and term prices as we move towards a significant increase in uncovered reactor requirements starting in 2017,” Talbot said. “Our concerns about the uranium market remain largely centered on spot market supply, market manipulation at month end driving down prices (which never seem to rebound as quickly) and term market volumes.”
Meanwhile, Moore said Energy Fuels expects a better market in 2016. “We saw slow, steady progress in 2015 — a bit of two steps forward and one step back. And we think 2016 will build on the positive fundamentals we saw in 2015. Excess inventories will still play a role in 2016.”
“A recovery to at least $50 at some point should happen, and it would not be a surprise to see $50 in 2016. In addition, while we’ve certainly been surprised before, it’s hard to see much more downside in this market,” Moore added. 

Securities Disclosure: I, Kristen Moran, hold no direct investment interest in any company mentioned in this article. 
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