What price uranium?

It had to happen, eventually: the price for spot uranium has stopped falling. Industry consultant TradeTech reports it has lifted its weekly spot price indicator by $US1 to $US58 a pound over the past week. The rise heralds the end of the significant price correction that started in the final week of June 2007 and took the price of uranium oxide (U3O8), the favoured form of yellow cake, from $US138 to $US57, a fall of 59%.

Share prices of uranium companies had already appreciated over the past weeks in anticipation that this moment would come, sooner rather than later. Now that the spot price slide has come to a halt, investors in companies such as Energy Resources of Australia (ERA), Paladin Energy (PDN), Bannerman Resources (BMN) and A-Cap Resources (ACB) no doubt are anxious to find out what comes next? Is the long, drawn-out misery finally over for the industry? Will we see a swift return to spot prices above $US100, and possibly back to the former peak?

Those experts and commentators who have stuck to a rosy view throughout the past 12 months often referred to the views and forecasts of analysts at Deutsche Bank (the market’s most bullish), who have maintained a firm belief that yellow cake would soon recover to $US125 and beyond.

Most other experts have gradually lowered their price expectations and some, like Macquarie, now seem convinced that in the absence of any major shift in supply-demand dynamics (caused, for instance, by another major mine shutdown) we won't see uranium back above $US100 anytime soon.

One such example is the team of analysts at JP Morgan, who updated their views on uranium only last week. They concluded that overall spot pricing was likely to remain weak throughout the coming third quarter, because the northern hemisphere summer historically brings subdued activity. JP Morgan does anticipate a stronger overall pricing environment from the final quarter of 2008, but even then a swift return to $US90 and higher, as suggested by Deutsche Bank, might not necessarily be on the cards. JP Morgan’s new price forecast for calendar 2008 is an average of $US69.60.

Spot uranium started the year at about $US90 and has averaged $US63.20 for the past three months. Meeting JP Morgan’s average would assume a gradual price recovery from this week, to finish the year above $US90. However, JP Morgan's average price forecast of $US75 for calendar 2009 implies investors should adopt more moderate price expectations if they want to avoid a repeat of the frustrating experience of the past 12 months.

Such modest expectations would also be in line with TradeTech's less-than-euphoric market assessments that accompanied the first upward movement in spot uranium since early December last year. Although financial traders and investors have re-entered the spot market, leading to a remarkable uptick in market volumes achieved, the industry consultant also points out demand remains predominantly "discretionary".

To quote TradeTech directly: "While buying interest is on the rise, the majority of this demand is highly discretionary in nature. Buyers continue to shop for bargains and, as a result, there remains a gap between willing buyers and willing sellers."

This is a far cry from the market frenzy from October 2006 to June 2007, which culminated in spot uranium peaking at US$138.

In line with what appears to be the underlying message in TradeTech's recent market assessments, JP Morgan analysts believe that in the absence of any major production disasters the uranium market should remain well-balanced, possibly even slightly over-supplied, in the near to medium-term future. The broker has currently pencilled in an average price forecast of $US75 (unchanged from 2009) for 2010 and of $US70 for 2011.

This doesn't necessarily mean investors should infer that there is virtually no price upside left for uranium in the years ahead; similar to price forecasts for other commodities, one would assume these forecasts will be subject to multiple revisions. It does indicate, however, that experts such as JP Morgan have by now developed an allergy to blue-sky potential when it comes to uranium price forecasts. The broker does consider firmer demand from countries such as China represents "significant upside risk to demand" over the longer term.

Note that JP Morgan does not only see potential upside risks to its current price forecasts; it also considers it possible the US Department Of Energy might "dump" some of its inventory on the market, further depressing the price.

In May, securities analysts at GSJB Were put forward a more positive scenario, predicting spot uranium prices would start to recover in the second half of this year (it started a week early) to average $US78 for the whole year. For 2009, GSJB Were anticipates an average spot price of $US93.

If correct, this would still imply that spot uranium, on average, will not be able to return to the price levels of 2007 and 2006, when they averaged close to $US100 for each year, but it would also mean that current prices below $US60 are unlikely to be seen again in the years ahead.

Well not before 2010, anyway, because GSJB Were analysts anticipate a tighter market than colleagues at JP Morgan and Macquarie, but only for the two years ahead. After that the broker anticipates "fairly steep price decline" as global production is expected to catch up with demand. GSJB Were's longer-term price forecasts are for an average of $US85 in 2010, $US65 in 2011 and $US60 in 2012. The broker's long-term price forecast of $US48 is significantly lower than JP Morgan's $US65 forecast.

Analysts at Merrill Lynch also reviewed their industry forecasts in early May. Remarkably, many of their assumptions are fairly close to what colleagues at GSJB Were put forward with "high confidence", including the prediction that spot uranium prices should soon climb above $US70 and stay there until 2010. After that, Merrill Lynch sees a catch-up by producers creating surpluses for the global uranium market, which it says will gradually push the price lower to $US65 by 2015.

Merrill Lynch's price forecasts are a combination of a somewhat rosier outlook than JP Morgan and Macquarie, but without any of the blue sky that still characterises projections by Deutsche Bank. Merrill Lynch's average price forecasts are for $US72.10 this year, $US75 next year and $US70 the following year. Although these projections seem to indicate spot uranium is unlikely to revisit the price levels of the past months, they also seem to indicate investors should not hope for prices running past $US100 anytime soon.

Part of Merrill Lynch's price projection is based on the fact the broker believes many of the industry's newer producers require a price of at least $US63 to remain profitable. As such a spot price below $US60 would seem unsustainable, even though only an estimated 5% (Merrill Lynch estimate) of global uranium production sells on the spot market. Most long-term contract prices are currently being negotiated at about $US75.

Merrill Lynch also believes financial speculators were solely responsible for the spot price reaching $138 last year, a view that is in line with FNArena's analysis and conclusions as expressed numerous times.

Those investors who have remained loyal to their investments in yellow cake during the price correction over the past year could soon be joined by Deutsche Bank, whose investment bankers have been presenting the case for a dedicated uranium investment fund to investors in the US earlier this year. So far any follow-up action has remained absent.

Deutsche Bank is forecasting an average price of $US89 calendar 2008 (well above any other expert forecast known by FNArena). For 2009, it has pencilled in an average price of $US108. Even the two following calendar years still carry price forecasts of $US94 and $US85 respectively.

The main difference between Deutsche Bank and the rest? Deutsche Bank is still prepared to price in some of the blue-sky potential that will come from supply interruptions and other unforeseen events. This raises the obvious question: Are Deutsche Bank's current price forecasts above the rest of the market because it has the ambition to launch a dedicated investment fund – or is the latter merely a result of the former?

Macquarie analysts, once upon a time widely quoted for their projection that spot uranium prices might well reach $US200, are currently the most bearish in the market with average price projections of $US65.10 and $US60 for this year and next. This is compensated by higher price forecasts for the years thereafter: $US80 for 2010 and $US90 for both 2011 and 2012.

Rudi Filapek-Vandyck is editor of FN Arena, an online news and analysis service.