Stop & Go for Uranium?

Marco Mencini, Head of Research di Plenisfer Investments SGR

The second quarter of the year was characterized by substantial stability in uranium prices.

After a rally lasting over two years, which saw the price exceed $100 per pound last February (+120% over 24 months), the market seems to have taken a break, with valuations around $85/$90 per pound[1].

At Plenisfer, we believe that the current phase is a physiological stabilization of prices. The question to ask today is: is there room for further growth in valuations?

In our opinion, yes.

Firstly, the current uranium price ($84 on July 22) adjusted for inflation is still below the record level of 2007-2008 ($137 per pound) and is more than 50% discounted compared to the level reached before the tragic events of Fukushima in 2011.

However, what makes us believe that valuations are set to rise further is primarily the expectation of growing demand in a context of limited supply.

China aims to quadruple its installed nuclear base with 150 new reactors by 2040. China's uranium demand will therefore increase from the current 26 million to 80 million barrels per year[2]. Confirming this growing need, China has been very active in contracting uranium with utilities, seeking large, strategic contracts over the long term aimed at securing supply volumes.

Globally, there are currently about 440 active nuclear reactors, generating approximately 390 GW of energy, which is about 9% of the global electricity supply, and consuming about 180 million pounds of uranium annually[3]. This annual uranium demand is currently met through a production of about 140 million pounds, supplemented by supplies from the secondary market.

Based on the announced investment plans, nuclear power generation is expected to roughly double by 2050[4]. However, this calculation does not consider small modular reactors or the potential achievement of net zero emissions targets, which we believe could easily push nuclear energy demand to exceed 1000 GW by 2050. Since producing 1 GW consumes about 460,000 pounds of uranium annually3, the supply - currently about 180 million pounds - must more than double in the next 25 years to meet a potentially 460-million pound demand.

This potential supply must be generated almost entirely by producers. The secondary market, which has compensated for missing supply in recent years, is increasingly thin and now marginal. For instance, Japan is restarting its nuclear plants, all of which will be operational again within the next 24 months. The uranium Japan had offloaded on the secondary market over the past decade is thus set to disappear. Simultaneously, the secondary market cannot rely on stockpiles from plants slated for decommissioning, whose productive life is being extended, or from inventories from decades-long disarmament programs now coming to an end.

Looking in detail at the demand and supply dynamics over the next 10 years:

• nuclear plants expected to come online by 2035 that will drive demand;
• approved extraction projects (mines have a time to market of at least a decade) will support supply;
•  

We foresee that the uranium market will remain in deficit over the next 10 years, with this deficit reaching about 60 million pounds annually by 2035, one-third of global production.

The need to increase supply is clear. However, for producers to be incentivized to invest in new projects, it is estimated that the uranium price must exceed by at least 30% the marginal cost of uranium production that is currently $90-$100 per pound3.

Excluding natural consolidation pauses like the current one, we therefore confirm our hypothesis of a long-term structural trend for uranium.

[1] Source: Bloomberg

[2] Source: China Atomic Energy Authority

[3] Source: UcX

[4] Source: IEA 2024 outlook

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