Macquarie Research reports that Kazakh uranium production continues to boom, and the short-term spot market outlook is soft. Kazakh uranium production was reported to be 8,500 t U in 2008 (+28.1% YoY) from 6,637 t U in 2007. While the number looks too ’round’ to be final, it is nevertheless indicative and Macquarie says it is in line with its forecast of 8,360 t U in 2008 (140 t below reported figure), and “makes us more confident that the uranium market will be in moderate oversupply in 2009.”
Kazakhstan has been the driver of global uranium production over the past five years – production has risen by ~5,200 t U (from 3,300 t to 8,500 t) over the period, taking the Kazakh share of global production from 9% (of 35,600 t U) in 2003 to 19% (of 44,500 t) in 2008. Macquarie currently expects Kazakh output to rise to 9,700 t in 2009 and 11,000 t in 2010 (~15% YoY over both years), which represents a decline in production growth from the 20-30% per annum. The forecast decline in production growth owes to Macquarie’s view that Kazakh output will run into infrastructure (road, rail, drill rigs, electricity) problems as the base of production increases (dramatically). Current credit/capital market conditions also indicate that investment in new mines and mine ramp-up is unlikely to proceed at prior rapid rates over the medium term.
Kazatomprom (the Kazakh state-run nuclear company) is on track to edge out Cameco as the world’s number one uranium producer in 2009.
In line with Macquarie’s forecast for moderate oversupply in 2009, it continues to believe that the uranium spot price will remain under pressure (from its current level of $53/lb) in the first half of 2009. Producers are set to remain net sellers above $50/lb, the US DOE is expected to sell some material in 2008 (but no more than 1.6 Mlb U308 or 600 t U), and there are still some other market participants looking to sell in the coming months.
On the demand side, Macquarie expects utility demand for spot material will be price sensitive in the current environment, especially given that a significant amount of material was purchased from distressed sellers in 2H08. However, this should present some opportunities to enter/accumulate in the space, given that Macquarie believes the downside to uranium prices received by producers is limited. Medium-term contract floors are being set at $40-50/lb, some long-term fixed price deals at between $70-80/lb for delivery between 2009-2013 (Uranium One, Paladin), and spot prices are expected to be very strongly supported around $40-45/lb.
Recent re-modelling of the uranium market supply/demand (lowering both profiles) in response to the downturn in demand still leaves Macquarie confident of a rebalancing of the market in 2010 and deficits in 2011/12. Indeed, Macquarie is becoming increasingly confident about the outlook for Chinese new reactor build (with 16 currently under construction), given the economic, political and environmental benefits of nuclear and the governments recognition of these factors.