Judging by the headlines, you’d expect 2024 to have been a bumper year for nuclear fuel. After more than a decade in hibernation, since Japan’s Fukushima Dai’ichi meltdown, political and corporate support for atomic energy is probably stronger now than it has been at any point since the 1970s.
Hitting the target announced at the COP28 climate conference last December for a threefold increase in nuclear
capacity by 2050 will be tough. It would require about as many reactors globally each year as were connected over the previous two decades put together. And yet governments — from atom-loving France, through vacillating Japan to anti-nuclear Italy — are putting their shoulders to the wheel.
Most notable has been the shift in the US, which still generates about 30% of the world’s nuclear power. Michigan’s Palisades plant, closed down in 2022 after nearly 50 years in operation, has received $2.8 billion in federal funding to support its restart. In June, a generator in Wyoming broke ground after being promised $3 billion from the government and Bill Gates. Three Mile Island, the Pennsylvania plant where a 1979 accident ended the first era of atomic power, is being restarted to provide always-on power for Microsoft Corp. data centers. Alphabet Inc. this week cited the same justification in announcing a deal with a start-up wanting to build small reactors.
The most curious fact amid all this positive news is the moribund state of the fuel these power plants will need. Prices for uranium oxide, or U3O8, the raw material from which the pellets slid into reactors are made, are down 22% to $83 per pound from a peak of $106/lb in mid-January. Why is it failing to pick up on all the great mood music?
One reason is that uranium could hardly be more different to crude oil, one of the largest and most liquid trades on the planet. U3O8 largely changes hands via long-term contracts between miners, processors and utilities, making the spot market a sort of safety valve for smoothing out unexpected imbalances, rather than a place where price discovery happens. The prices realized by Canada’s Cameco Corp., the largest listed seller of atomic fuel, haven’t come close to those in the spot market this year.
Inventories are another factor. In commodity markets, stockpiles in warehouses and storage tanks are like guitar strings: When they’re tight, they can communicate information loud and clear, but when they’re too loose, the signal can become dull. In contrast to the two months’ supply of oil in commercial inventories, there’s typically enough uranium on hand to keep reactors humming for about five years, so headline news doesn’t cause a rush to secure supplies and send prices surging.
Investor enthusiasm may be making this problem worse. The Sprott Physical Uranium Trust, a vehicle for retail investors to buy directly into the atomic renaissance, has been quietly assembling a formidable stockpile of U3O8 since it started three years ago. It’s now got about 65.9 million pounds of the stuff, enough to keep the world’s nuclear plants going for nearly six months.
Keep all that material locked away in warehouses, and the market looks far tighter than it was a few years ago. If spot prices fall back toward the levels that Cameco is receiving, however, there’s always the risk that Sprott’s investors will seek redemptions and the trust will have to sell, something that happened with its platinum holdings during a long bear market in the 2010s. The value of fund units is currently trading about 4.1% below the market, suggesting investors think spot pricing is still too high.
The long-term picture for uranium, as with copper, should be fundamentally bright. China’s project pipeline on its own should be enough to push up fuel demand substantially over the coming decade. A US ban on imports from Russia went into effect in August and should tighten the market more, given that country’s central role in mining and processing. A tripling of mine taxes in Kazakhstan, which produces nearly half of the world’s uranium, ought to further lift prices to compensate.
It’s troubling that all this bullish news isn’t producing more of a price response, because miners will only bring needed new projects on stream if they are confident they’ll get enough revenue to offset their capital outlays. Financial investors like Sprott can help that process by providing a lively secondary market for producers to offload tonnage. In a tiny market like uranium, however, they can also introduce volatility (or even the fear of it) that will deter, rather than encourage, new spending. There’s a warning in that: If you want less fossil fuels to be sold and burned, your strategy for the clean nuclear alternative should be to use it, rather than buying and holding it.
Credit: Bloomberg
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