Commodity Bulletin - Uranium Q2, 2016 - Q3, 2016 | KPMG | GLOBAL

Commodity Insights Bulletin - Uranium Q2, 2016 - Q3, 2016

Commodity Bulletin - Uranium Q2, 2016 - Q3, 2016

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Commodity Lead, Uranium

KPMG Australia

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Overview

Uranium prices are currently at 10 year lows. Five years on from Fukushima, the uranium market has not only not recovered, but has taken a step back in 2016. This has placed a sharp focus on the key signals, the delay in the return of long term contracting whilst suppliers sit on the sidelines given oversupply in the spot market, slower than expected Japanese restarts and the slower pace of supply disruption.

With prices at ten year lows companies are reviewing production levels and having a close relook at cost structures. However, the real driver remains absent, being the return to long term contracting in significant volumes.

The fundamentals remain strong as energy security continues to be a global concern, including recent examples in Australia of real challenges in transition to renewables both on security of supply and energy cost.

Price outlook

  • Uranium was one of the few commodities for which the prices remained relatively stable through 2015. However, during 2016, uranium spot prices fell steadily as a result of excess supply and slower than expected progress in Japanese reactors coming online. This was in contrast to other commodities such as iron ore and coal which had unexpected increases.
  • In Q3 2016, uranium spot prices fell by 10 percent q-o-q and 33 percent y-o-y to US$24.57/lb. During the same period, uranium’s long-term prices fell 9 percent q-o-q and 15 percent y-o-y to US$37.83/lb.
  • Prices are expected to recover to US$59.1/lb by 2020 as excess inventories are expected to decline and due to the expiry of long-term contracts. However, downside risks remain, including uncertainty over the progress of Japanese reactors restarts.
  • In 2015, annual spot market volume for uranium increased by 15 percent y-o-y to 45 million pounds (Mlbs) from 2014 volume of approximately 39 Mlbs. Historically term contracting has been a multiple of the spot market but recent long term contracting has reduced significantly.

Prices of uranium, Q3 2004 – Q3 2016

Source: Cameco, accessed October 2016.

Market balance vs. prices, 2015 – 2020F*

Source: Capital IQ consensus prices; BMO Capital Markets, Uranium sector report, via Thomson Research, accessed October 2016.

*Market balance presents the difference between the world primary uranium production and the world uranium consumption.

Supply and demand

Supply

  • In 2016, inventory and secondary supply is expected to constitute nearly 17 percent of global uranium supply. In late 2015, it was estimated that there were sufficient inventories held by nuclear utilities to cover forward demand for about eleven years in China, five in Japan, and two and a half in both the US and Europe. These inventories should be considered in light of strategic inventory levels required by utilities.
  • Additionally, uranium producers are expected to reduce production and cut costs through 2017 and 2018, with high cost mines likely to scale back or close. New projects are expected to remain on hold.However, production may come on line from CGN’s Husab mine towards the end of 2016 or early 2017.
  • Kazakhstan, the world’s largest uranium producer do not plan to increase its production. On September 2016, Askar Zhumagaliyev — chairman of Kazatomprom, Kazakhstan state owned uranium miner indicated that the current uranium spot market conditions do not justify additional production from Kazakhstan.

World uranium supply, 2015 – 2021F

Source: BMO Capital Markets, Uranium sector report, via Thomson Research, accessed October 2016.

Demand

  • In 2016, global uranium consumption is expected to increase 8 percent to 189.7Mlbs, driven by the starting up of new reactors in China, India, Russia, South Korea and the US. Additionally, China is expected to bring online 10 new reactors with a combined capacity of 10,690 MW into commercial operation in 2016. Four of these reactors have already been commissioned.
  • Global uranium consumption is forecast to increase by 6 percent to 201.5Mlbs in 2017. A total of 22 new reactors are scheduled for completion in 2017 with a total capacity of 22,444 megawatts. A majority of the demand growth is expected to come out of China, which is expected to increase its consumption by about 160 percent to 2021. Additionally, Russia has signed a number of deals to supply reactors on a vendor-financed basis to a number of emerging nuclear nations such as Turkey, Jordan, Egypt, Tunisia and Algeria.
  • Consumption of uranium has been driven by the development of new nuclear power-generation capacity globally. However, there has been no significant progress in the restarting of the Japanese nuclear reactors, due to political and legal uncertainties, along with the effect of environmental concerns. Only Japanese reactors — Sendai units 1 and 2 and Takahama units 3 and 4 have been restarted under the new safety regulations. However, both Takahama 3 and 4 have been offline since March 2016 due to an injunction imposed by a district court. Although, the process of approving safety checks and restarting reactors under the new regulation standards is proceeding gradually, there is still concern in relation to the judicial ruling and local acceptance which is expected to impact the pace of restart. According to Japan’s Institute of Energy Economics, seven Japanese nuclear power reactors are likely to be in operation by the end of March 2017 and 12 more reactors to be restarted toward the end of March 2018.

World uranium consumption, 2015 – 2021F

Source: BMO Capital Markets, Uranium sector report, via Thomson Research, accessed October 2016.

World nuclear reactors, January 2010 – November 2016

Source: World Nuclear Power Reactors & Uranium Requirements, World Nuclear Association, accessed October 2016.

  • The number of proposed nuclear reactors increased to 345 as of November 2016, compared to 337 in March 2016. However, the number of planned reactors decreased to 167, from 173, in the same period. Similarly, the number of under-construction nuclear reactors decreased to 58 in November 2016, from 65 in March 2016.

Key developments

Ownership changes

The total value of deals increased more than three fold, from US$60 million in Q2 2016 to US$217.8 million in Q3 2016. The number of deals increased from one in Q2 2016 to seven in Q3 2016.

On 20 July 2016, Hong Kong-based CNNC Overseas Uranium Holding, a unit of China Uranium Corp, agreed to acquire a 24 percent ownership interest in Pty Langer Heinrich mine of Langer Heinrich Uranium Ltd, a Namibia-based uranium, radium and vanadium ore mine operator for US$175 million. This deal is still being finalised.

On October 2015, EDF signed Hinkley development deal with China General Nuclear Power Corporation for approximately US$22.4 billion (GBP18.0 billions). However, the project received a final go-ahead from the UK government on 15 September 2016 due to a change of government, and security concerns.

M&A deal number and valuations, Q2 and Q3 2016

Source: MergerMarket and Thomson One accessed October 2016.

References

Price outlook: Resources and Energy Quarterly”, Bureau of Resources & Energy Economics (BREE), Australian Government, September quarter 2016; Uranium spot price remains stable as 2015 transaction volume climbs, 7 January 2016, Marketwatch website, accessed November 2016.

Prices of uranium, Q3 2004 – Q3 2016: The uranium market is largely driven by long-term contracts (term price), with an historical uranium market of about 200Mlbs per annum versus the spot price market that is not a liquid market, with annual volumes of about 30Mlbs.

Supply: “Resources and Energy Quarterly”, Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2016; Lance projects - Wyoming USA, Peninsula Energy Limited company website; White Mesa Mill, Energy Fuels company website; Cigar Lake, Cameco company website; Husab to start production next month, 29 September 2016, Namibian website; BMO Capital Markets, Uranium sector report, via Thomson Research; Japanese institute sees 19 reactor restarts by March 2018, 28 July 2016, World Nuclear News website; Is Kazakhstan about to nationalize more uranium assets?, 30 May 2016, Oilprice website; Kazakhstan extends links in Ukraine, World Nuclear News, 21 September 2016, accessed November 2016.

Demand: “Resources and Energy Quarterly”, Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2016; BMO Capital Markets, Uranium sector report, via Thomson Research; Japanese institute sees 19 reactor restarts by March 2018, 28 July 2016, World Nuclear News website; Emerging Nuclear Energy Countries, October 2016, World Nuclear Association website, accessed November 2016.

Ownership changes: MergerMarket and Thomson One; Hinkley Point C nuclear power station gets government green light, 15 September 2016, The Guardian website, accessed November 2016.

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