S&P Global is bullish on the Uranium market. In a recent article their analysts point out how Uranium has been the strongest performing commodity so far this year, and build a strong case that Covid-19 is going to drive uranium prices higher. The pandemic has not reduced demand for nuclear power, but it has cut off supply as uranium mines close.
On the demand side, its clear that people aren’t using less electricity because of the pandemic. When people work from home they still need to use all the same home appliances, and have continuous access to the internet. Its even possible that people will use more power during the summer because they will use less efficient air conditioning systems in their own homes, rather than relying on more efficient HVAC systems in major office buildings.
Social distancing regulations also favor demand for nuclear power. Its relatively easy to shut down a coal or gas fired plant. In contrast, its difficult and even dangerous to quickly shutdown a nuclear power plant. Consequently, coal and gas fired plants might temporarily shut down, but nuclear power plants can’t shut down. Nuclear power plants find away to continue operating, and they pick up additional demand that had previously gone to coal and gas fired plants.
On the supply side, the nuclear industry is just beginning to wake up to how serious the crunch could become. Prior to the pandemic, JSC NAtional Atomic Co. Kamzatomprom and Cameco Corp were already sharply curtailing production. Cameco was even buying on the secondary market to fulfill its contracts, since it saw mining as so unprofitable. In April Kazatomprom announced further reduction in operations at its mines in Kazakhstan, due to the Covid outbreak. Cameco also suspended production at its Cigar Lake mine in Saskatchewan. They have no choice but to leave these mines closed, due to the risk from Covid-19. Continued outbreaks in Kazakhastan and Canada could have sever consequences for the reliability of uranium supply.
The article also cites Cantor Fitzgerald analyst Mike Kozak, who estimates that Covid-19 has taken 46 million points, equivalent to about 35% of the world’s uranium production offline. Analysts are just beginning to grasp how severe the wave of closure is going to become. Also note, that its difficult to restart uranium mining once it is shut down, so even if prices rise, supply won’t respond immediately.
The article included a handy chart showing how much uranium supply is at risk due to Covid-19:
In our view, the supply crunch is just beginning. Nuclear utilities could find themselves scrambling to find supply later this year. Since the price of nuclear fuel is a small part of their overall cost structure, and the cost of shutting down a nuclear plant is high, they will be price insensitive, looking to secure supply at almost any cost. They have already almost run down their excess inventories. Those mines that do manage to stay open will get higher prices. This will lead to major profits for investors that select the right miners.