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Uranium Spot Price November Bottom Threatened But Still Holding

Includes: URA, URG
by: Zoltan Ban
Zoltan Ban
Commodities, macro, gold & precious metals, long/short equity

Even though the uranium spot price has been declining steadily for a few months now, the November bottom is still holding, which is a good sign.

While many supply/demand forecasts out there are already on the bullish side, showing a supply shortfall starting perhaps this year, the long-term trend may be even more positive than forecast.

Current electricity generation forecasts by fuel source tend to give renewable sources and natural gas a very significant role, which could lead to disappointment, leading to larger nuclear role.

As I wrote in an article back in December, there is a good chance that we may have hit the bottom in uranium prices back in November, 2016. The price that month was $18.50 per pound and we so far managed to keep above that level seven months later, even though since March, there has been a steady downward trend and after the spot price rising all the way to $25/pound in February, and the price is now at $20/pound, which is closer to the November bottom than it is to the February high.

Source: Index Mundi.

As I pointed out in my first article on this subject, I will not be surprised if the November low will be re-visited and breached, and we may see another bottom this year or next. But I do expect to see the bottom by the end of next year at the latest, after which there should be a sustained rally. It is based on this conviction that I started building a position in uranium miners. I bought Ur-Energy (NYSEMKT:URG) stock as a first step in building up a position in uranium this year and next. I fully expected to see some more potential downsides, which is why I am doing it in a very incremental fashion. I am not overly concerned in regards to the stock performance of this investment as well as my future investments in uranium miners for this year and next. I see any downturns this year and next as additional entrance opportunities, while if such opportunities do not arise, I will be content with the smaller than planned allocation to this sector.

While I cannot pinpoint the bottom in the uranium market, I do see plenty of signs that suggest the decade-long slide is nearing its end. For one thing, there are the various uranium supply/demand models out there, which suggest that prices will have to rise in order to satisfy longer-term demand. Source:

I like the chart above because it highlights the fact that primary mining production has been in deficit compared with total demand, while right around this time we should be going into supply deficit even when factoring in secondary sources. As with all forecasts, the timing and magnitude may not be perfectly matched up with impending reality. It is nevertheless a good indicator in regards to approximately where we are in terms of the global supply/demand situation.

In terms of any recent news which might further change the picture of the forecast above, I am continuing to look at Germany, to see whether there might be any changes to the nuclear power plant shutdown plan. In this regard, there is growing anxiety about the coming electricity price increase that German consumers are likely to encounter as a result of losing the current nuclear generating capacity which provides 13% of Germany's current electricity needs. The cost of subsidizing the current wind & solar output is estimated to be about $26 billion this year. Wind & solar currently make up about 18-20% of total German electricity supply. If these sources are to be the main source that will close the gap left by nuclear, it is possible that German consumers will be asked to pay billions or even tens of billions of Euros in extra subsidies. The alternative is to start up some of the coal plants that have been idled lately, which would greatly undermine Germany's commitment to reduce emissions.

In my personal opinion, Germany is looking to replace its nuclear power not so much with wind, solar or coal, but with new supplies of Russian gas via a second nord stream pipeline, which might be completed by the end of this decade. If by any chance this project is delayed or obstructed altogether as was the South Stream project in 2014, it will likely mean that Germany will reconsider shutting down the remaining reactors. As things stand right now, there is still a lot of pressure on the European Commission to get involved and move against the project, even though Germany, the unofficial hegemon of the EU is in favor of it. Given that we are currently factoring in the German nuclear phase-out, if it were not to happen, it could be a significant boost in uranium demand.

Other than that, Japan is continuing with its nuclear power re-start policy. In terms of new reactors being built, there are currently 60 under construction as of the beginning of 2017. The EU approved two new reactors in Hungary back in March, and construction should be starting soon. This is a sign that perhaps in the longer run nuclear power will not necessarily shrink in the EU, or at least not by as much as being currently contemplated. Even if Germany will shut down all of its reactors, new ones are still being built in Europe. with interest shown in a number of countries for new reactors.

Another factor I am looking at is electricity demand, the prospects of which keep changing. On one hand, it seems that global economic growth has permanently downshifted since the 2008 economic crisis. The previous economic cycles since the end of the Second World War on average registered annual growth rates that were about 1% higher compared with the current one, starting from the 2008 downturn. For instance, according to the World Bank data, average global economic growth in the 2008-2016 period was about 2.33% per year, while in the 2001-2007 period it averaged 3.43%. In effect, the global growth rate has now declined by about a third compared with the previous cycle. This of course suggests that we are also looking at a new trend of lower rates of energy demand growth.

We may indeed be in a long-term trend of slower energy demand growth, but it is the energy mix which also counts. For instance, liquid fuel demand is widely reported to be in declining favor as EVs are increasingly rising out of niche market status. As I pointed out in my last article on Tesla, this year we may see EV sales in the one million range, which at current rate of sales growth could become ten million EV sales per year in a decade or so. This of course means that liquid fuels demand will take a further hit in addition to the slow growth in global GDP, but those EVs also need energy to function, which is where increasing global electricity demand comes in. If EV sales will increase to 10 million per year in a decade, it will mean that a decade from now, we will have about 55-60 million EVs on the global roads. Given that it takes about 10 kWh to go about 100 kilometers in an average EV, and the average car travels about 10,000-20,000 kilometers per year, each EV is likely to need about 1,000-2,000 kWh per year. If there will be as many as 60 million EV on the road in a decade, that means that between 60-120 billion kWh of electricity will be needed to keep those EVs moving. To put it into perspective, it is the equivalent of adding about 6-12 million US households in terms of electricity use. For full disclosure I rounded average US household electricity use data for 2015 down to 10,000 kWh/year, from the official EIA number of 10,800 kWh, for simplicity's sake. This is not an insignificant shift in global energy demand patterns, and it is a boost to the global electricity demand outlook.

Electricity demand should further be boosted as the world works to try to bring electricity to all households on the planet. Currently there are still about 1.2 billion people without access to electricity around the world according to the IEA. That is about 16% of the world's population, which itself is increasing by about 80 million people per year. Looking at these facts, I am inclined to believe that even within the context of the current lower global economic expansion, we can still see a dramatic increase in global electricity demand.

Finally, we have to consider the possible sources of electricity supply. In this respect, we know that coal is falling out of favor globally, out of political-environmental considerations. The Paris accord did receive broad commitments from most countries in the world to either decrease emissions, as is the case with most OECD countries, or to curb the growth in emissions, as is the case with most developing nations. Even though the US pulled out of the agreement and even most of the countries that did make a pledge, will most likely fail to meet that pledge if it means a meaningful economic sacrifice, there will be some broad global effort made to curb emissions. This will mainly be manifested in a more or less global effort to curb the growth in coal use, or even shrink it, meaning that what is currently the most dominant individual source of electricity generation is being wished into playing a more obscure role.

Source: EIA.

As we can see from this EIA forecast, the wished-for shift is towards renewables playing a much larger role, as well as cleaner burning natural gas. Nuclear power is set to expand as well. I personally think that renewables and natural gas are facing some very formidable barriers to becoming such dominant players in the global electricity generation mix. I will not go into great detail on this issue, but some of the things to think about include the unreliable nature of renewables such as wind & solar, which depend on the weather for output level. In my view, this is a barrier to these sources of energy ever becoming dominant. As for natural gas, the recent shale gas glut in the US has given the world a perception of overall global glut conditions, while the decline in oil prices caused a significant decline in global natural gas prices as well, because many exporters such as Russia tied the price of natural gas to the movement in the oil market. I personally think that we are way too optimistic in regards to future long-term natural gas availability.

Looking at all these factors put together, I believe that there is a definite chance that the uranium story is likely to be even more positive than the supply/demand forecast chart above may suggest. It may take a few years for this fact to be realized, which is why I decided to only start investing incrementally, because I am aware of the fact that uranium prices may remain weak for a little while longer, until more confidence in the turnaround scenario will be built in the market. It is very hard to build up that confidence, after a full decade of decline, but once the turnaround scenario becomes more fully embraced, it will most likely take on a life of its own. Utilities will most likely want to stock up on more fuel in order to take advantage of the current lower prices, which will then drive demand, therefore prices up.

While we wait for this to happen, I intend to continue looking for decent entry points, where I will pick up more uranium mining stocks. I personally see any more uranium price weakness this year and next as more of an opportunity, rather than a reason to be upset. As for the price of uranium still holding above the November bottom, I see it as a positive sign, regardless whether that bottom will be breached at some point this year or not. It means that there is significant price support at these levels, which also means that even if the November bottom will turn out to not be permanent, its more than likely that we are not far from the bottom at this point, which means there is little downside left.

Disclosure: I am/we are long URG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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