Uranium is commonly known for its use in the power industry. It is used as fuel for nuclear power plants, which, according to statistics, provided around 16% of the world’s electric in 2007. At present, it is estimated that nuclear power provides about 20% of all US electricity. Its application also extends to a number of other industries – including the aerospace and defense spaces. With this background, there is no denying that uranium is a very important metal, which is poised to be even more important in the future. Its importance to the economy means that its price is susceptible a number of factors, many of which have caused a significant price swing in the past. Here are the top factors that move the price of this commodity.
The nuclear power industry
Being the most important use for uranium, demand outlook in the nuclear power industry bears huge weight on uranium prices. As you would expect, when analysts make predictions of high demand, the uranium prices would go up. On the other hand, if for some reasons, the demand in the nuclear power industry is expected to be weak, prices usually fall. The price change does not happen because the actual increase or drop in demand has happened. It happens because the outbreak of such information causes traders to react immediately. Such sudden movement causes the market to rethink the way it values the commodity – albeit on the short-term. Once everything is settled, the market latter balances up. However, when the actual change in demand comes along, you can expect prices to change over a long-term.
Here is an instance that supports this point. Bloomberg reported on July 16, 2014 that uranium might rebound from its lowest prices in nine years in the wake of Japan’s plans to restart the first of its idled nuclear reactors, which signals a potential ramp up in the consumption of the commodity. Since this news came out, the price of uranium has been on an upward trend as the chart above shows. While the price change is not huge, the most important point is that the market responded to the news. It would have been bigger if the uranium market had not been struggling in recent times. Now, you want to note that the nuclear reactors have not even restarted, let alone the increased consumption.
Geopolitical issues, especially in countries that produce or consume enormous amount of the atomic fuel, have also moved the price of the commodity in the past. Essentially, crisis in major uranium-producing countries poses threat to supplies, and hence sends prices higher.
This is another factor that contributed to the upward trend in the price of uranium that I mentioned above. The volume of trades in the uranium market went up almost four-fold in the week needed Friday, August 1, 2014. According to Platts, McGraw Hill Financial, the surge reflects, “Some utilities' concerns about potential sanctions against Russia that could affect the availability of material.”
The issue here was that utilities were concerned about potential, additional trade sanctions that the US and the EU could impose against Russian companies in reprisal for Russia’s suspected support of Ukrainian rebels. To connect with the initial thesis, this issue affected the uranium market simply because Russia is a major producer of uranium. Fundamentally, what happened was that the potential sanction made trader panic that the atomic fuel will be scarce in the near-term, causing an instant increase in the market demand for the commodity.
In the same stead, for instance, assuming that Ukraine were a major consumer of uranium, the ongoing crisis in the country would made traders fear that demands would drop, which is also likely to cause a decline in the price of the commodity.
The macro economy
With power being very important to the world economy, the macroeconomic conditions – or its outlook – can affect the price of uranium from the near term to the long-term. In general, weak economic conditions – or its outlook – would bring about a drop in the price of the commodity. There are a number of reasons for that. First, since uranium is used in some other industries, in weak economies, companies would be forced to reduce capacity at their plants, which would most certainly hamper the demand for the commodity. This goes to some extent to lower the value of uranium.
The second reason lies in the fact that it is used in the power industry. As you would expect, in weak economies, utilities would seek to cut cost by going for cheaper fuels. And unfortunately, coal is cheaper than uranium. This means that in weak economies, utilities would be forced to consider coal – and any other fuel that is cheaper – over uranium. This causes a decline in demand, and hence a sharp decline in price. The last recession, as shown in the chart above, presents a good example.
However, while improving economic conditions improve the uranium market, the effect is not always as huge as the effect of weak economies. As the chart above shows, even though global economies have been improving since the global financial crisis, uranium has not been able to attain the height it had attained before the financial crisis. Therefore, you want to be cautious about your expectations of the effect of a positive economic outlook on the uranium market, and keenly lookout for negative outlooks.
Inventory levels do not always matter very much when talking about the factors that affect the price of industrial metals. It is only considered very important for metals that are of high importance across industries. And since uranium is important in the power sector, you can expect that inventory levels would bear weight on the price of the commodity. When inventories are at low levels, uranium prices tend to go high. On the other hand, high inventory levels do contribute to declining prices. The effect becomes even bigger if rising inventories are met with dropping demands.
In summary, as we have seen over the last few years, a weak economy is the biggest factor that affects the price of uranium on the long-term. It takes quite a long time for the uranium market to recover from a weak economy-instigated decline. As a result of this, outlook of a weak economy could cause a big price swing that could last for months.