Investment Matters

Yellow to green for uranium

Late last week, the US Department of Commerce announced that a decision has been made regarding a petition lodged by US uranium producers.

The petition, lodged under Section 232 of the Trade Expansion Act, prompted the Department of Commerce to assess whether US reliance on foreign uranium is a threat to national security.

Under Section 232, the President of the United States has the power to put in place various forms of protective measures to ensure domestic supply (in the interests of national security). These include tariffs and quotas.

The petition has been a cause of inertia in the uranium market globally, as US utilities have been reluctant to sign long term contracts with foreign uranium producers until a decision had been made.

This has been significant for the market overall, with US-based nuclear power producers (utilities) constituting approximately 30% of the demand for uranium globally (Source: World Nuclear Association).

The outcome

On Saturday, President Trump announced a decision to not implement any form of protective measures.  This has cleared the way for US utilities to re-enter the market and begin contracting.

The published price of uranium is reported daily by two global uranium brokers who collect data on daily transactions between parties.

The amount of uranium sold off-contract (or on the spot market) represents a fraction of total uranium demand, with a majority of uranium supplied via long-term contracts at significantly higher prices.

 

Uranium Contracting Graph

 

The current “spot” price of uranium is below the cost of production for a majority of producers.  Thus, new contracts will have to be written at more rational prices and a natural price-discovery mechanism should now begin, as existing contracts roll-off.

As the demand for uranium exceeds current supply (and inventories begin to reach critically low levels) utilities will have to contract at prices that incentivise production to bridge this gap.

S232 and your Portfolio

The two uranium producers in your Australian Shares portfolio, Paladin (PDN) and Deep Yellow (DYL) appreciated on the Monday after the announcement (by 7.1% and 5.7% respectively).

We see the conclusion of S232 as positive, as it has removed a considerable amount of uncertainty that has hindered the recovery of the price of uranium and set the price-discovery process into motion.