A Look At The Fundamentals Of The Uranium Market As Japan Prepares To Return To Nuclear Energy
Japan's Kyushu Electric Power Company will apply to regulators for the final safety inspection of its Sendai 1 nuclear reactor. If all the necessary checks are completed in time, Sendai 1 should restart on August 10th. With the restart of the nuclear reactor, Japan will once again return to nuclear energy, although opinion remains deeply divided in the country over safety issues.
Of course, this is just one of the 50+ reactors that were idled post the Fukushima nuclear power plant accident in 2011. Before the accident, these reactors provided 30% of the country's electricity. According to the World Nuclear Association, the share of nuclear in Japan's energy mix was expected to increase to 40% by 2017 had it not been for the accident which led to the shutdown of all nuclear reactors.
This development, not surprisingly, had a major impact on uranium prices, which are now trading 50% below the levels they traded prior to the nuclear power plant accident. Indeed, the restart of the reactor in Japan is positive news for the uranium market. Despite opposition, the government of Shinzo Abe sees a future in nuclear. Regulars have already cleared five reactors, including Sendai 1 and there more than 20 reactors that have applied to restart operations. By 2030, Japan now expects nuclear energy to account for 20%-22% of electricity generation.
Japan is just one of the reasons why the outlook has improved on uranium in the past year or so. Indeed, China and India are seen as the most important drivers of long-term demand. In a presentation last month at the Global Uranium Conference in New York City, Canadian miner Cameco Corporation (CCJ-NY) noted that long-term uranium demand will be driven by continued increase in world energy demand. Energy demand is expected to rise significantly in countries like China and India.
Data from the World Nuclear Association shows that mainland China has 26 nuclear power reactors in operation currently. In addition, there are 25 reactors under construction. By 2020-21, China is looking to increase its nuclear capacity by more than three-fold. By 2030, China is targeting 150 GWe. The need for nuclear power is driven not only by China's energy needs, but also by the need to cut down reliance on coal. Cameco expects that by 2024, there will be 83 nuclear reactors operable in China.
India's need for nuclear energy is even greater, considering the poor state of the country's power sector. India's long-term target is very ambitious. The country wants 25% of its electricity to be generated from nuclear power by 2050. According to Cameco, the country could have 37 reactors operable by 2024. Earlier this year, India's Department of Atomic Energy signed a 7.1 million pounds supply agreement with Cameco. The deal was signed while India's Prime Minister was visiting Canada. It is one of the few long-term contracts signed this year, and Cameco believes it is just the start of significant supplies to India.
Overall, Cameco noted in its presentation in June, a total of 518 nuclear reactors are expected to be operable worldwide by 2024, up from 437 in 2015. Cameco expects consumption to increase to 230 million pounds per year by 2024, up from around 165 million pounds per year currently consumed by 437 nuclear reactors globally.
While demand for uranium is expected to increase significantly, supply is not expected to keep pace. Indeed, by 2024, Cameco forecasts a deficit of 90 million pounds per year. Some analysts expect the market to turn into a deficit by 2018. One of the reasons for supply side constraints is the end of the Russian HEU Agreement that has taken away 24 million pounds per year from the market. In addition to this, the last few years have seen very little investment in new production. This is not surprising given the weak prices.
Despite a favorable fundamental picture, uranium prices have remained flat this year. Prices are still hovering below $40 per pound, and the reason for this, as I have noted before, is reduced long-term contracting activity. Given the weak prices, utilities have been hanging back, expecting further price decline before they enter into new long-term contracts. Most of the long-term contracts were signed by utilities in 2006 and 2007, which means that many of these contracts will end by 2016-2017. In normal circumstances, utilities should be in the market right now to sign long-term contracts. However, this is not happening right now. Since there is still oversupply in the market, utilities are expecting prices to go lower. The strategy seems to be working so far but the fundamentals could change quickly, as I noted in an article earlier this month.
The strategy adopted by utilities could backfire if too many of them rush to the market at the same time, especially considering that the uranium market is expected to turn into a deficit in the medium term. Most analysts expect a deficit between 2019 and 2022. David Talbot, Senior Analyst at Dundee Capital Markets, expects a deficit even earlier than that (by 2017-2018).
I am long Cameco Corporation, as I believe that the company is best positioned to capitalize on a rebound in uranium prices. The company's average realized price has been higher than spot and long-term price in the past few quarters. In addition, Cameco has long-term commitments through 2018 so it is in no rush to enter into long-term contracts currently.
The company's strong positioning in the uranium market was once again confirmed on Thursday when it reported its financial results for the second quarter. CCJ's average realized price for uranium was $46.57 per pound in the second quarter of 2015, which is above the $45.93 per pound the company realized in the second quarter of 2014 and well above the spot price of $36.50 per pound.
Importantly, the company remains in a comfortable position even though utilities remain on the sidelines. As I noted, CCJ has commitments until 2018, which the company reiterated in its conference call on Thursday. Therefore, it can sit back and wait for pricing to get better before signing any long-term contract with utilities.
Despite the positive outlook for the uranium market and Cameco's strong position in it, the company's shares have struggled this year, falling more than 16%. One of the reasons for this is the CRA tax dispute, which I discussed in an article back in March. CCJ continues to believe that it will have a favorable outcome in the case against CRA. But even if it does not, I believe that the impact of the tax dispute is already priced into the stock. CCJ remains an attractive proposition for long-term investors, who want to capitalize on rising energy demand globally. |
