Uranium futures is one of the few contracts that has experienced price gains in recent weeks, as the economic impact of COVID-19 continues to weigh heavily on prices for most commodities.
Front-month uranium futures settlement prices have traded up to $32.50/pound in late April, compared with around $24/pound in early March, when most of the world’s advanced economies began shutting down
In contrast to the bull run on uranium, prices for most energy products have sharply declined since the shutdowns began, while prices for industrial metals like copper and steel have also been under pressure amid low end-user demand.
A Fundamental Shift
Electricity consumption has held up relatively well in the slowdown caused by the virus. As a key power generation fuel, uranium has been less impacted by the spread of the virus than other commodities that are used more for transport or construction.
Uranium also benefits from a supply-demand balance that is relatively supportive at present. COVID-19 has emerged as a threat to global uranium supply. Indefinite mine closures in Canada, Kazakhstan, Australia, and other countries are expected to drive the price of U3O8 uranium higher as utilities fight to secure supply and producers either turn to market purchases or draw down on inventories to meet contractual obligations.
On March 23, Cameco, a Canadian uranium producer, announced that it will be temporarily suspending operations at the Cigar Lake mine, home to the largest high-grade uranium deposit in the world.
Kazatomprom, Kazakhstan’s national atomic company, and the world’s largest uranium producer announced on April 7 that it will be suspending production nationwide for three months to slow the spread of COVID-19.
Electricity consumption has held up relatively well in the slowdown caused by the virus. As a key power generation fuel, uranium has been less impacted by the spread of the virus than other commodities that are used more for transport or construction.
In 2019, Kazakhstan accounted for 42 percent of global uranium production. Supply-side disruptions caused by mine shutdowns and suspensions are sweeping across the uranium industry and continue to drive a bullish trend.
In the long-term, demand for uranium is growing, particularly from Asia. In April 2020, there were 55 nuclear reactors under construction across the globe, 22 percent of which are in China. China also plans a further 44 reactors and is considering adding another 168 in the future.
At the same time as demand is increasing, supply has fallen. A run of consistently weaker prices between February 2011 and December 2017 led some operators to close down mines or suspend operations, reducing uranium output around the world.
New Entrants
The lack of correlation between uranium and other energy and metals commodities is also attracting new participants into the uranium futures markets. Fund managers and general investors have noted the recent price activity and are beginning to get involved in uranium futures trading, many for the first time.
At the same time, the relatively volatile nature of uranium prices in recent years has led to a significant upturn in interest in risk management from electricity producers and project developers that are looking to hedge their fuel price exposure. The changing nature of the physical uranium market is ensuring that market participants are increasingly focused on managing price risk.
Owain Johnson is a London-based Managing Director of Energy Research and Product Development with CME Group. This piece was first published by CME Group’s digital publication, Open Markets.
