|Uranium was notoriously over-supplied following the Fukushima disaster in 2011. That oversupply combined with extremely negative sentiment towards the sector to decimate prices over the next six years.
The oversupply situation started to change when Kazatomprom made its first major production cut in January 2017, reducing output by 10% or 5 million lbs. per year. That was a really important move because for years – decades even – Kazatomprom had focused solely on gaining market share. To cut production was an important signal that a sector leader was going to act on the part of producers to turn this sliding market around.
Other producers agreed and the cuts have continued since then, with Cameco suspending operations at the world’s largest uranium mine in November 2017 and Kazatomprom cutting another 10 million lbs. of annual production shortly thereafter, plus reducing output by 28 million annual lbs. over the following 3 years. And just last week the Kazaks took it a step farther, announcing plans to cut annual output by another 5 million lbs.
These are serious cuts in a market with approximately 129 million lbs. of annual production and just over 170 million lbs. of total supply.
The Kazak cuts keep coming. As for Cameco, when it suspended MacArthur River last November the company said it would wait for 10 months and see if prices were strong enough to justify resuming production. Haywood estimated the hurdle was approximately $40/lb. Term prices remains below that level.
Meanwhile, Cameco has been reducing inventories and even communicated that it would buy in the spot market to meet forward sales if needed. A recent note from Canaccord on the uranium spot market mentions, “All buying groups… have been active seeking material across a wider spot delivery period…” How much of this buying is coming from Cameco? How contrarian-bullish is it when a major producer starts buying back its own production?
You can see the effect of these cuts in uranium prices, as below. The Long Term price was declining in the months going into January and November/December 2017, but the cuts stopped the downward moves in the Long Term price and drove rallies in BAP afterwards.