Uranium bulls and bears agree to disagree

Divergent views on the forces that will determine the future uranium price. Bears say bull demand scenarios are too aggressive.

JOHANNESBURG - 

Uranium bulls believe the recent run in uranium prices is not over yet, while bears say forecasts of a continued strong price and supplier dominated market are too aggressive.

Canadian investment dealer Haywood Securities said in a recent research report the different views of uranium bulls and bears could indicate how future uranium prices will play out.

Bulls argue that the recent run in uranium prices "is far from over" as significant increases in future demand and technical problems at new and existing projects will continue to support high prices.

The primary focus of healthy and increasing demand for uranium was "a growing acceptance of nuclear means for power generation" to meet escalating global needs.

Some estimates project that nuclear reactors will reach an installed capacity of 700 GWe by 2030, with annual requirements of approximately 400m pounds of uranium. The vast majority of the metal will have to be supplied by new production as this forecast represents almost a 90% growth from current capacity of 370 GWe.

Although these projections are more than two decades into the future, there have been no major advances in production over the past decade. Production will have to increase by more than 3.5 times to meet these requirements.

The bullish view also rests heavily on supply considerations, which involve the ability of primary and non-primary sources of uranium to meet current and future demand.

Supply of uranium from non-primary sources - especially the 1993 Russian agreement to convert 500 tons of highly enriched uranium from dismantled warheads to low enriched uranium - is decreasing as uranium supply from Russia is expected to stop by 2013.

Volatility in supply is exacerbated by recent challenges and setbacks in delivery of new primary uranium supply.

"These supply challenges and setbacks have resulted in lower than expected 2006 global uranium production last year. Highly enriched uranium has helped to offset current supply disruptions, but it is not expected to contribute beyond 2013.

"In addition, the lack of new uranium discoveries in recent years, resulting from poor market fundamentals in the 1980s and 1990s, does not ‘bode well' for future supply from a pipeline of new discoveries."

Bear Beliefs

However, the bears say the market has already accounted for production challenges and the uranium price already reflects production problems and delayed starts.

In addition, not all of new production is committed and downward pressure will be felt on the price when this supply (Paladin, Uranium One) hits the spot markets.

"The bulls also haven't considered the Goliath of new uranium production, namely the proposed expansion of BHP Billiton's (LSE:BLT) Olympic Dam project in Australia.

"The planned expansion could see Olympic Dam's current production of 8m to 10m pounds increase to 30m pounds production in 2011. There are also talks of ramping up production even further - to an "astronomical 60m pounds" - representing over 50% of annual global uranium production."

A number of projects from French public multinational Areva (PI:CEI), will also add to global production from 2009 to 2011. This includes the Midwest property expected to produce 9m pounds from 2011, the Imouraren project in Niger, expected to start ramping up to 10m pounds of production in 2011 and the Trekkopje project in Nambia, expected to produce at least 4m pounds from 2009/10.

Apart from primary production, there are a number of other uranium sources with the potential to flood the market with about 16m to 18m pounds if these vehicles seek more lucrative investments. The sources include hedge funds and U.S. government reserves.

The U.S. Department of Energy also holds a considerable inventory of uranium and long-term disposal plans are already underway. "Aside from current sales, future sales could potentially reach 5m pounds per year."

As a result, uranium bears believe the outlook for a market dominated by suppliers and strong prices is "excessive".

On the demand side, China and India are expected to build up nuclear capacity dramatically over the next decades, but many argue that uranium requirements for nuclear power generation will not be as aggressive as initially thought - owing to electricity forecasts and delays in nuclear construction.

Bears don't dispute there will be a need for increased power generation globally, but they argue that many of the forecasts and scenarios presented are "too aggressive".

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