Uranium offers a perfect distillation of a world that is heating up and a world order that is breaking down. Plus a market eager to capitalise on both.
The metal at the heart of zero-carbon reactors and zero-civilisation warheads has so far this year beat every member of the Bloomberg Commodity Index, except orange juice. That jars with the sinking prospects of a US nuclear renaissance, just dealt another blow by the collapse of the leading small modular reactor project that was being developed by NuScale Power Corp. Along with the setbacks nuclear power has suffered in Europe, notably Germany's mass shutdown, it seems puzzling that uranium prices have jumped from about US$30 (1,042 baht) a pound (.45 kg) in the summer of 2021 to more than $80 today, the highest since 2008.
While output from nuclear power plants fell by 4% in 2022, it remained close to the level it has fluctuated around since the early 2000s. Moreover, two-thirds of last year's drop related to an unusual number of outages in France. In the US, modular reactors may remain aspirational but a new conventional reactor, long delayed, has opened in Georgia, with another due to start up soon. Meanwhile, California's Diablo Canyon plant looks set to get a reprieve from closure. And existing nuclear plants now benefit from what amounts to a soft price-floor in the form of credits from the Inflation Reduction Act. Elsewhere, China's rapid expansion of nuclear capacity continues and Japan has restarted some reactors closed after the Fukushima accident in 2011.
Nuclear power's long-term growth prospects also look bright, albeit mostly in Asia. The International Energy Agency projects global capacity rising almost 50% by 2050 even under a conservative scenario, and more than doubling in a world that realises its net-zero ambitions. But uranium's current strength relates less to a cleaner future and more to our darker present.
A history of strategic stockpiling, recycling and dismantling of nuclear weapons has meant an outsize role for inventories in fulfilling demand. Drawing on such secondary sources met 15% of demand overall this past decade, and more than a quarter last year. Uranium mining is relatively concentrated, with just two countries, Kazakhstan and Canada, accounting for almost 60% of production.
Higher prices should pull more production and inventories into the market, cooling it down, but mining snafus and rising geopolitical risk now interfere with that. Cameco Corp, Canada's biggest uranium miner and the world's second largest by production, recently scaled back output targets due to a variety of operating issues. Meanwhile, a coup in Niger this summer has hampered uranium mining and processing operations in the seventh-largest producing country, accounting for about 4% of mined supply, and put a question mark over expansion plans.
Russia is not a particularly large supplier of mined uranium, being the sixth largest. But its reserves -- the fourth largest in the world -- strategic stockpiles and the prominent role of state-owned Rosatom Corp in the global nuclear industry make it an important supplier of fuel to reactors worldwide. And while Congress disagrees on a lot when it comes to energy and climate, support for nuclear power and antipathy toward Russia remain reasonably bipartisan pursuits.
The fiscal year 2024 National Defense Authorization Act passed by an overwhelming majority in the Senate this summer still hangs in limbo as the House convulses its way through year-end spending stopgaps. But it contained two important riders; one providing money to encourage domestic production of uranium -- the US accounted for 0.2% of global mined supply last year -- and the other giving the administration powers to block nuclear fuel imports from Russia or China.
Given the fractures opened up in energy trading by the war in Ukraine, the possibility of an outright ban on Russian fuel is rising. About one-eighth of the uranium purchased by US nuclear plants last year came from Russia. Add in Kazakhstan and Uzbekistan, closer to Moscow's influence, and the share coming from the three former Soviet republics is almost half. Reactors in the EU, a region at the sharp end of disrupted energy flows from the east, depended on those countries for a similar proportion of uranium purchases.
Rather than releasing stockpiles, therefore, nuclear plant operators have good reason to bolster them instead, through a combination of hoarding existing inventory, bidding for cargoes and seeking new mine production -- all of which necessitate higher prices.
Financial markets have injected some animal spirits into all this. Uranium is a relatively small, illiquid market -- think about it, it's best that way -- worth only a nominal $14 billion a year even at the current spot price, making it smaller than the relatively nascent lithium market. So it doesn't take much in the way of speculation to move the price. There are three listed investment funds physically backed by uranium of which the largest, the Sprott Physical Uranium Trust, just surpassed $5 billion in net asset value. Altogether, they added about 23 million kilograms to their stockpiles between 2020 and 2022 as money flooded in, an amount equivalent to almost 30% of annual regular demand for uranium, supercharging the initial rally in prices.
Such investment vehicles are a double-edged sword for any commodity market, introducing a volatile new element and representing an overhang of potential supply that can flood back in quickly when sentiment inevitably turns. For the foreseeable future, their hoarding is in sync with a uranium market being reshaped by war and warming. ©2023 Bloomberg
Liam Denning is a Bloomberg Opinion columnist covering energy. A former banker, he edited the 'Wall Street Journal's' Heard on the Street column and wrote the 'Financial Times's' Lex column.