The uranium sector: one of the hottest investment themes in the coming years!
Investors who are looking for a countercyclical investment theme with an excellent chance to risk ratio for the next 3 to 5 years should look more closely at the uranium sector. As with all commodities, there are also long-term cycles in the uranium sector exist which include supply and demand trends. In addition the sector is driven by political decisions as well psychological sentiment which results often in manic & depressive moves in uranium and the related stocks.
The uranium sector is very small compared to other commodity markets e.g. copper, iron ore or crude oil. In 2016, according to a survey conducted by the ‘World Nuclear Association’, the uranium demand for the existing 448 reactors was about 161 million pounds of uranium. This corresponds to a trade volume of only USD 3.2 billion based on a spot price of 20 USD.
Since the nuclear disaster in Japan’s Fukushima in 2011, the price of a pound of uranium fell from 65 USD to below 18.50 USD in the fourth quarter of 2016. This crash by more than 70% for the raw material has also resulted in a core meltdown among the companies left in the sector. For example, the share price of the largest listed uranium producer, Cameco, fell from 42 USD to 7.75 USD during the period from 2011 to the end of 2016.
However, the bear market with falling uranium prices and companies from the sector since the Japanese nuclear disaster in Fukushima in 2011 is likely to end for fundamental reasons. Even if an immediate bull market might not be imminent in the coming months, we are very bullish for the sector in the medium to long term.
A first taste of the market dynamics in the uranium sector could be observed when the spot price for one pound increased from 18.5 USD in November 2016 to over 25 USD in January 2017. The reason for this 35% price increase was the announcement of the market leader Kazakhstan to reduce the uranium sales volumes in 2017 by 10%. This reduction on the supply side corresponds to 2,000 tons of uranium, or about 3% of the world production. With a 39% market share, Kazakhstan is the number one uranium producer worldwide.
Let’s look at the supply and demand situation of uranium
According to a survey conducted by the ‘World Nuclear Association’, primary production in 2016 was 73.130 tonnes of U3O8. This corresponds to about 161 million pounds of U3O8, with more than two-thirds of the annual production coming from the countries of Kazakhstan, Canada and Australia. The annual demand for uranium from the power plant operators is also ensured by the secondary market supply as well as from inventories in addition to the mentioned primary mine production. The secondary market supply is estimated to be 15-20% of total uranium demand.
There are only a few significant uranium producers worldwide. The four biggest companies KazAtomProm, Cameco, Areva and ARMZ-Uranium One have a market share of 65%.