Uranium prices nearly doubled in 2023. That was driven by a surge in demand from utilities securing supply against a potential cut-off from Russia, and little uranium to go around.
While that’s turned it into a hot commodity lately, the risk of owning uranium is that price may have risen too much, too fast. The setup today looks eerily similar to the boom-bust episode of the 2000s.
Excitement around uranium could be luring investors into a bull trap like in 2007. In today’s note we look at whether uranium is turning into a good short.
Bullish Fundamentals: There’s Not Enough Uranium
The surge in uranium prices in 2023 was driven by rising demand from utilities amid little supply:
- Utilities are rushing to source uranium given geopolitical risks around a potential cut-off in Russian imports to the U.S., due to either sanctions or Russia outright banning exports [1]
- Utilities buy uranium from producers via long-term contracts, but now they have to fall back on the spot market. That points to utilities getting desperate given very tight supplies
- Speculators are the biggest players in the spot market, creating significant price volatility amid thinning trading volumes as uranium has gotten expensive to trade
Worries around Russia’s imports are a worry for utilities, as they’re facing a shortfall in uranium over the next several years. By 2030, close to 60% of their requirements for uranium will go unmet.
The supply deficit in uranium is a result of miners not producing enough of the metal:
- The ’11 Fukushima meltdown crushed demand for uranium, leading to a secular price slump
- Low uranium prices decreased the incentive for miners to produce, given high fixed costs
- Prices reached cycle lows in 2016, and by 2018 production fell significantly behind increased demand for nuclear energy
- The top two miners, Kazatomprom and Cameco, are struggling with operational issues
- By 2022, production met only about ¾ of global demand, leading to a run-off in inventories
Bearish Technicals: Uranium Looks Overextended
While the fundamentals point to a bullish long-term outlook for uranium, the short-term technicals looks much less constructive:
- The supply deficit in uranium is now a well-known story (i.e., a lot of it is priced-in)
- The Sprott Physical Uranium Trust (U.UN), a bet on uranium spot prices, has surged to trade near channel resistance [2]
- We believe this is a vulnerable level for uranium spot prices, not an objective entry
- Instead, the asymmetry points to more downside, favoring a short position
The surge in prices has left uranium overextended, pointing to a higher odds of downside in coming months:
- The Sprott Physical Uranium Trust has risen by nearly 50% in the last 20 weeks. Gains over 40% have historically been associated with subsequent weakness [3]
- The average 6-month return was -3%, compared to a normal return of about 4%
- The maximum gain was about 35%, compared to a maximum loss of about 38%
- The positive return hit rate was only 41%, compared to a normal hit rate of 50%
Conclusion: Monitoring a Potential Short on Sprott Physical Uranium Trust
Putting it all together, we’ll be monitoring uranium for a potential short in coming months.
Long-term fundamentals that look constructive have driven speculators to bid up the price of uranium, leaving the short-term technicals looking highly vulnerable to various risks:
- A de-escalation in the Russia/Ukraine war could reduce Russia supply chain risks
- Demand could fail to materialize, particularly if a recession hits in 2024 as we expect
- Hedge funds, could be forced to fire-sale their uranium holdings in a global liquidity shock [4]
- They could also dump it if momentum breaks down, rotating into more opportunistic assets
- A nuclear accident that raises doubts about nuclear energy as a safe alternative to fossil fuels
The surge in prices in the 2000s was also driven by fundamentals. However, the collapse happened quickly, with 53 pp. of the 75 pp. drawdown registering in the 4 months post the 2007 peak.
We’ll be on the lookout for signs of a top being made similar to the 2007 one.
We believe that the uranium spot market is a more attractive opportunity than uranium miners because it’s much less correlated with U.S. equities.
That’s consistent with our efforts to look for differentiated trades that increase the diversification of our asset allocation. Miners are more correlated to the S&P 500 given their equity component.
Lastly, in this note we used the Canadian vehicle of the Sprott Physical Uranium Trust (U.UN) given its longer price history. But U.S. investors could use the U.S. version (SRUUF) instead. [3]
Footnotes
[1] Russia sources about 12% of all U.S. imports of uranium.
[2] The Sprott Physical Uranium Trust has two vehicles: a U.S. one (SRUUF) and a Canadian one (U.UN). We use the Canadian version in the chart because it offers a longer time series. SPUT is the biggest uranium player in the spot market, comprising about 73% of the holdings of all uranium investment funds.
[3] We use the Canadian vehicle of the Sprott Physical Uranium Trust (i.e., U.UN as opposed to SRUUF) given that the Canadian version (i.e., U.UN) has a longer time series extending to the 2000s. The U.S. version (i.e., SRUUF) only started trading in 2021, but would be the vehicle of choice for U.S.-based investors.
[4] In a global liquidity shock, hedge funds may be forced to sell assets quickly to raise cash, which could lead them to sell at big losses (i.e., fire sales)