Wednesday, October 18, 2006

Ux Price Ready to Vault in 2007

by Garth Theunissen

The uranium price has been tipped to average $53/lb in 2007, representing a 14.5% year-on-year increase, said the Australian Bureau of Agriculture and Resource Economics (ABARE). It forecasts price strength for uranium for at least two more years.

Analysis: 2 years is a good conservative number. I would be hesitant to believe ABARE if they had the ability to forecast beyond 2 years.

An expected decline in secondary uranium supplies is one the factors behind good prices, particularly from the Russian Federation, Abare said.

Secondary supplies have predominantly been sourced from the conversion of highly enriched uranium from disarmed nuclear weapons, government inventories and reprocessing. ABARE expects the supply from secondary sources to decline only marginally in 2006 and 2007. It foresees "substantial reductions" beyond 2013.

Analysis: beyond 2013 is when the HEU agreement runs out to melt Russian warheads into uranium.

A further supply constraint is that world uranium consumption currently outstrips supply by more than 28,000 tons/year.

With the growing acceptance of nuclear power generation as an energy source - the only significant commercial use for uranium - ABARE predicts plenty of demand-side support for uranium in the near to mid-term future.

For 2007, ABARE sees a minimum 4% increase in consumption to 80,500 tons as a number of new nuclear reactors start production in India, China and Romania.

Analysis: see my latest sxr Uranium One (TSE:SXR) update for more validation of this fact

However ABARE's average spot price forecast of $53/lb for 2007 seems conservative.

Gary Stoker, marketing manager at Nufcor International, is far more bullish and reckons the average uranium price will be even higher given. At $55.75/lb, the current spot price it is already higher than the ABARE prediction.

We are optimistic that the uranium price will continue to increase over the medium term, and anticipate an average price in 2007 of well over $60/lb, says Stoker.

Fundamentals are driving uranium prices rather than investor speculation, he says. Although there has been a lot of talk of speculators driving up the price, if you look at the volumes they take up in the market it is very small, he says.

Although there are a lot of initiatives around the world to increase production, we're of the view that not a great deal can be achieved to boost supply in the short term. As such we see continued upside support for the uranium price at least in the short to medium term.

Says Neal Froneman, CEO of sxr Uranium One: I believe that the constraints on the supply side are grossly underestimated. I also think Gary is one-hundred percent correct in that a lot of the predicted new supply will not come on as forecast. My estimate will be that we will see $60/lb by the end of this year and that by the end of next year we will see at least $75/lb. This will put the average at about $68/lb. These estimates I believe are conservative.

Incidentally, according to the website UXC, investors and hedge funds accounted for just over 24% of the total spot trading volumes in the uranium market for 2005. In the year to date, UXC says around 34% of overall uranium trading volumes have been purchased by the investment community, which suggests that speculators are exerting some degree of upward pressure on prices.

Analysis: good writing..instead of regurgitating calming sentiments about this increasing secondary/investment uranium demand, the author has actually done a little research. In my opinion, not only is the absolute number 34% somewhat alarming but the rise from 24% to 35% in a year, coupled with my coverage of new hedge funds coming into the uranium sector makes me wary. As a uranium investor, I want to monitor these numbers very closely, however unpopular the notion that uranium prices are to an extent being artificially inflated.

Not to toot my own horn, but check back to what I wrote over half a year ago in mid to end-March:

I was wary of speculators back then, and I'm wary of speculators now. Don't get me wrong, I love uranium (why else would I write a uranium blog), but it never hurts to be cognizant of where you're putting your money into..


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