Uranium is one of the best-performing commodities these days as the world seeks alternatives to oil as a source of energy.
Supply
Between the late 1980s and early this decade secondary supplies hung over the market, resulting in very low prices and inducing little to no investment in uranium exploration and output capacity. Since the late 1980s primary mine supply has not been sufficient to meet demand and so large quantities of non-recyclable secondary supplies were 'used up' in filling this gap over this period.
Demand
The drying up of secondary supply sources and tight uranium market has driven the massive increase in demand for future primary mine supply over the past three years, evidenced by a massive increase in long-term contracting in recent years. Current supply shortage is being exacerbated by speculators/hedge funds entering the market and holding large quantities of uranium (roughly 8-10,000tU is estimated be held of the market).Unlike other metals, the initial boom in the uranium price was not directly tied to China (actual demand from China to date is reportedly negligible), it is more of a traditional underinvestment / tight market related cyclical price boom.
Speculative activity has been playing a big role in the boom in spot prices. On and off-market uranium futures began trading on NYME on 7 May (no physical delivery) - the June 2007 contract is trading at $134.9/lb and the February 2008 contract last traded at $150.0/lb.
Reasons to Buy into the Uranium Story ---
Concerns over future supply fuelled by the delays at Cameco's massive 18mlbpa
Recent flooding at ERA's Ranger mine -- the world's second highest producing mine -- will reduce supply from the mine significantly in 2008, taking much-needed supply off a market already in deficit.
High levels of reactor procurement of future mine supply is likely to continue to spill over to the spot market
The real need for clean fuels, corelation with carbon credits and global warming.
Uranium held by speculators/hedge funds appears to be in tight hands (at current prices).
Producer, consumer and (strategic) government inventory building (China in particular), is likely to keep the market tight in the coming years.
Uranium futures (no physical delivery) are giving bullish guidance as to uranium prices going forward with the June 2007 contract trading around $135/lb and the early 2008 contracts at $150.0/lb.
Srinivasan Venkataraghavan is Chief Executive Officer, Altos Advisory Services
