The Uranium Bull Market’s Now Beginning as Global Production Plummets

Adem Tumerkan November 26, 2018
Category: Research

For uranium investors – the suspense of a nearing bull market must be maddening. . .

We keep hearing – and being promised – that the uranium bull market’s “right around the corner” – only to be left deeper in the red.

But things actually have fundamentally changed in the uranium market recently. . .

And in terms of an asymmetric (low risk high reward) investment idea – there’s nothing quite as attractive as uranium today.

So let’s take closer look.

In mid-June, I wrote an article declaring that the uranium market was set to rally (you can read here if you missed it).

And since then, the price of uranium’s up over 18%.

Even more exciting is that this was during a monster U.S. dollar rally – which has crippled most other commodities.

This indicates that the underlying uranium fundamentals are changing – and finally for the better.

 

Here’s a little context.

All this started back in December 2016 when Kazakhstan – the world’s largest uranium producing country – slashed annual output by 10%. They did so because they didn’t want to waste mining their finite uranium reserves at a loss.

And although a 10% output cut wasn’t enough to end the brutal uranium bear market – it sent a powerful signal to the market. . .

That major uranium producers were at their limit and about to break. So they were going to kill the bear market themselves.

What I mean is – if the market wasn’t going to absorb the excess uranium supply, then the producers were going to force it.

And by next year – in January 2018 – Kazakhstan announced another 20% decline in annual uranium output.

Then Cameco Corp – the largest Canadian uranium producer and major player – followed their lead and shut down their McArthur-River mine (which remains on an indefinite shutdown). This mine alone produced 12% of the world’s annual uranium output (you can read the in-depth details here).

Now – this is a huge amount of uranium output that’s disappearing in less than 12 months. . .

But why is it all happening now when uranium prices have dragged lower for nearly a decade?

 

That’s because after the 2011 Fukushima Tsunami crisis – uranium producers thought they could weather the storm (aka survive temporarily weaker prices)

But seven years later and uranium prices are still at multi-decade lows. . .

Why? Because most producers of a commodity will try to ramp up production so that they make up for lower prices.

For example, if a pound of uranium (aka ‘yellow cake’) falls from $60 to $30, then producers must more than double output to make up for the lost revenue.

But when all producers do this – it floods the market with excess supply. Pushing prices even lower – and keeping them there.

So eventually as uranium prices fell to around $20 a pound, nearly 95% of global producers found themselves mining at a loss.

This forced producers to face the ‘tough-love’ stage and accept reality.

Which was: they needed to cut marginal uranium production – and a lot of it.

 

So finally – this year – there’s been a meaningful reduction of uranium production.  Output’s expected to decline to 135 million from a global peak of 162 million – a 16% drop – from 2016.

These are really deep cuts  – and this trend will continue for many years as producers slash output after facing the ‘tough-love’ of this brutal bear market.

 

But this is why there’s an opportunity now.

The kind of brutal bear market of which uranium recently suffered is the foundation for a multi-year bull market. Because the sectors had a significant drought of new investment. And diminishing supplies put a floor under prices.

That’s why speculators must be ready for the steady rebound in uranium prices as the market fundamentals re-balance.

Especially as uranium demand grows. . .

I know it’s hard to believe – but mining companies like Cameco are finding that it makes more sense at current prices to buy uranium instead of producing it.

What I mean is – they would rather keep their uranium in the ground instead of mining it at a loss. Thus they buy uranium cheaper on the open-market so that they meet their customer obligations.

And as long as top producers like Cameco continue holding back production and instead keep buying on the open-market – uranium prices will have support.

Also, we have emerging markets – such as China and India and Saudi Arabia – building more nuclear reactors than previously expected. These places will remain key for stimulating long-term uranium demand.

 

So – in summary – we’re finally seeing the deep uranium supply cuts happening. All while demand grows.

 

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