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MACQUARIE: China's uranium demand is surging

In a year in which the vast majority have been pummeled, uranium is one commodity that has managed to buck the trend.

According to analysis conducted by Macquarie Research, it’s been the best performing mined commodity so far in 2015, buoyed in part by “a positive demand story and the willingness of buyers to pay for supply security” in the bank’s opinion.

Despite it’s somewhat controversial nature, analysts at Macquarie believe the commodity remains a “good defensive exposure going forward”, suggesting that a continuation of the themes seen in 2015 “is likely to result in continued price support”.

Analysts at the bank point to two years of consistent year-on-year growth, and output at levels not seen since the Fukushima disaster of 2011, as evidence that “nuclear power has been making a quiet comeback”.

“Ultimately this trend indicates that despite public pressure on the global nuclear industry, cheap (on an operating basis) and consistent baseload power generation is not easy to replace,” say analysts at the bank.

While nuclear power generation in the US and Europe looks set to wind down in the years ahead, analysts at Macquarie suggest that growth from China, India, Russia and South Korea, along with a ramping up of nuclear power generation from Japan, suggests that nuclear power will remain a growth industry in the years ahead.

The chart below, supplied by bank, shows the expected growth in power production from the four nations in the years ahead.

“China’s annual uranium requirement is likely to grow by more than the rest of the world’s combined requirement over the next five years,” notes Macquarie.

“In addition, Japanese units are now returning to the network. We expect that by 2020 we will have a total of 20 Japanese reactors back online.”

Despite slumping gas and coal prices, the bank forecasts that demand from the US will also remain firm.

Here’s why.

The hard data indicates that not only is 2015 YTD US nuclear generation at its highest level since 2009, utilisation is at its highest level in many years. And despite the recent collapse in the gas price, the average cost of nuclear power generation is still below that of its fossil fuel counterparts, while government focus on tackling coal means that the US needs a reliable source of baseload power generation.

As a result of new power generation coming online – particularly from China and India – Macquarie forecasts that reactor demand is likely to increase by 1% in 2016 before accelerating by an additional 4% in both 2017 and 2018.

While the uranium market is likely to remain in surplus for the foreseeable future – something that would normally weigh on prices as a consequence – the bank believes the spot price will push higher in the years ahead.

“When prices drop to what are perceived to be more attractive, buyers enter the market and this is what helps to establish a price floor,” note Macquarie.

“One of the reasons US, Chinese and other buyers behave like this is the perception of uranium as a strategic commodity, with the largest consumers not producing enough, or any, uranium domestically to meet their annual needs.”

From its current level around $35.80 a pound, Macquarie expects the spot price for U3O8 will average $36.30/lb next year before accelerating to $39.00/lb in 2017.

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