By guest author Jinjoo Lee from the Wall Street Journal.
Tensions with Russia and insensitivity to economic indicators make the commodity an appealing bet
June 28, 2023
Fears of an economic downturn have taken the luster off most energy-related commodities, but uranium is still glowing.
Uranium (triuranium octoxide) spot prices are up roughly 18% year to date. Canadian uranium miner Cameco’s CCJ 0.82%increase; green up pointing triangle share price is up 29% , while the Sprott Physical Uranium Trust UUT 0.00%increase; green up pointing triangle, an exchange-traded fund that owns physical uranium, is up 8 %. The Global X Uranium ETF URA 0.79 %increase; green up pointing triangle has risen 6%. That is quite a contrast from crude oil and natural gas, which are down 15% and 33%, respectively. Copper, a commodity that is seen as essential for electrification, is down 0.5 %.
Economic indicators have a tangible connection to demand for fossil fuels, which propel most cars, ships and planes around the world, and are also used to make everything from Vaseline to fertilizers and plastics. Meanwhile, copper is known as Dr. Copper precisely because it is used so widely across so many different sectors—from electrical wiring to building construction. Uranium, though, “doesn’t care if GDP is up or down 5%,” notes Arthur Hyde, portfolio manager at Segra Capital Management, which manages a nuclear power and uranium industry-focused fund.
Demand for uranium tends to be stable because nuclear power plants are so-called baseload power plants, or plants that run around the clock to meet the minimum level of electricity demand. And Hyde notes that even a run-up in the commodity’s price is unlikely to change demand for it: The cost of fuel (including the cost of processing the uranium) is a relatively small component of a nuclear power plant’s operating costs. The World Nuclear Association estimates that uranium prices would have to rise above USD 100 a pound and stay there for a prolonged period to have considerable impact on nuclear power plants’ operating costs. The commodity’s current spot price is around USD 56 a pound.
Does it have more room to run? Some industry analysts think so. Analysts at BofA Global Research expect uranium spot prices to hit USD 75 a pound by the end of 2025, while other brokers on average expect it to rise to roughly USD 60 by then. The uranium market is getting tighter, according to Jonathan Hinze, president of UxC, a nuclear fuel market consulting firm.
Uranium inventory held by owners of U.S. nuclear power plants declined 4.4% last year, according to the U.S. Energy Information Administration’s uranium report released earlier this month. While imports of uranium from Russia aren’t banned just yet, utilities in the U.S. and Europe are prudently trying to line up future supply from outside of Russia anyway.
Constellation Energy CEG 0.47%increase; green up pointing triangle, which owns the largest nuclear power fleet in the U.S., said in an earnings call earlier this year that the company “worked diligently” to secure enough nuclear fuel inventory and future contracts to meet its needs through 2028 even if existing contracted Russian fuel supply gets disrupted. Ukraine and Bulgaria this year signed contracts with Canada’s Cameco to source uranium. One clear sign of a tight market is the cost to enrich uranium, which surged from about USD 60 per separative work unit (SWU) before Russia’s invasion of Ukraine to roughly USD 140 today, according to Hinze.
Russia doesn’t mine much uranium, but it holds 35 % to 40 % of the world’s conversion and 50 % of enrichment capacity, according to a report from BofA Global Research. The country is thus a key supplier of so-called secondary uranium. The U.S. sourced about 14 % of its uranium from Russia in 2021, according to the EIA. Utilities in the European Union depended on Russia for a fifth of their uranium supplies in 2021. One of the factors keeping uranium-ore demand down was the oversupply of enrichment capacity, much of it in Russia.
Losing even a part of that can be a catalyst for demand for fresh ore from other enrichers.
Demand for uranium has also seen a boost as countries look to extend the lives of existing nuclear power plants. California last year decided to keep its Diablo Canyon nuclear power plant operating another five years to 2030. The plant supplies roughly 8% of power produced in the state. Other plants could follow: The U.S. Inflation Reduction Act created a tax credit for existing nuclear power plants, giving them an incentive to keep running. Other countries that decided to extend the lives of some nuclear power plants include Belgium, Japan and Finland.
On the supply side, BofA Securities forecasts a production deficit of 60 million pounds of triuranium octoxide in 2035, roughly equivalent to the annual output of Kazakhstan, the world’s largest producer. A flood of supply is unlikely for a while given that new uranium mines and enrichment facilities can take 10 to 15 years to build, according to the International Atomic Energy Agency. That is a snail’s pace compared with shale wells, which can be brought online within months. Meanwhile, uranium prices below $60 a pound likely aren’t enough to spur the building of new mines, UxC’s Hinze notes.
Investors looking for broad exposure to uranium can do so through the Global X Uranium ETF, which owns not only physical uranium but also a range of uranium mining companies and nuclear component producers. The ETF fetches an undemanding price of 1.7 times to trailing book, a 60 % discount over the S&P 500. The trade off, though, is that while uranium isn’t reactive to the state of the economy, it can melt down at headlines that hint at safety issues with nuclear power plants.
For investors comfortable with that risk, uranium looks like a solid shelter from today’s economic concerns.