The uranium opportunity – the good and the bad

Source: Trading Economics

Since then, there has been a moderate pull-back; uranium is now consolidating just above $90 per pound.

So, can uranium rip higher from these elevated levels?

Well, that depends. Last year’s terrific run was driven by strong demand outlooks.

Uranium, the fuel for nuclear reactors, has benefitted from renewed interest in building global nuclear capacity. That’s partly due to the push to go green.

Here, nuclear power offers baseload power that’s carbon-free and reliable. Whether night or day, cloudy or windless, nuclear provides uninterrupted power.

But there’s another important side to the nuclear story: costs are rising.

Despite central bankers’ claims to the contrary, inflationary pressures continue to loom.

Rising tariffs and trade tensions between the world’s two largest economies, China and the US, threaten to bifurcate global trade.

This is highly inflationary and occurs just as the US ramps up broad trade embargoes against Russia, one of the world’s most resource-rich countries.

Meanwhile, conflict could erupt at any time in the Middle East. A regional spillover could have drastic implications for global oil supply.

This 1970s setup could be good for uranium

I’m not the first to draw similarities between today’s inflationary environment and those from the 1970s.

Back then, the war in Vietnam helped drive copper prices to extreme levels, above $15,000 per tonne. Meanwhile, OPEC oil embargoes in the early 70s caused the price of oil to quadruple in the US.

As inflation rocketed higher, households sweated under a cost-of-living crisis. Governments were forced to find solutions.

However, these economic conditions laid the foundation for rapid nuclear energy expansion throughout the 1970s.

As a source of relatively cheap baseload power, nuclear power offered a proven long-term solution to the global energy problem.

As you can see below, the US had fewer than 20 nuclear power facilities at the beginning of the 1970s. But by the decade’s end, the country had around 75 reactors in operation.

Source: Data from US EIA

Undoubtedly, nuclear was viewed as a long-term strategy to tackle the 1970s cost-of-living crisis.

Not surprisingly, the commodity fuelling these reactors went skyward.

Adjusted for inflation, the price of uranium shot past $200 per pound by the late 1970s. A record that stands today.

According to a report by the OECD, the tripling of the uranium price between 1973 and 1975 was brought about by concerns over uranium supply shortfalls related to growing reactor orders and ongoing military requirements.

Today, uranium trades at less than half that price.

It begs the question… Could we see another record high at some point in the 2020s?

If you believe the 1970s offers a blueprint for today’s economy, it’s certainly possible. 

Inflationary pressures loom large against the backdrop of war, tariffs, embargoes and threats to energy security.

The political will to push nuclear will only increase because of these stresses.

But what about the other side of the uranium story… supply?

As the Canadian mining magnate Robert Friedland once stated, the set-up for higher commodity prices consists of one-third demand and two-thirds supply.

So, how does the uranium supply story stack up?

The outlook here is slightly less rosy.

Kazatomprom, the world’s largest uranium miner, is set to resume full production next year, removing production cuts adopted during uranium’s prolonged bear market following the Fukushima nuclear disaster.

Meanwhile, the world’s second-largest miner, Cameco, is looking to ramp up its McArthur River operation in Canada. This will add a further 6.9kt of uranium to the global feedstock.

According to GlobalData, worldwide uranium production is expected to grow with a compound annual growth rate of 4.1% from 2024 to 2030, with output reaching 76.8kt by 2030. 

Source: GlobalData

So, what does that mean?

Rising output could defuse uranium’s long-term bullish outlook.

That’s set to be dampened further as several new sources of supply hit the market…

Operators coming back online

Paladin [ASX: PDN] is underway with restarting its Langer Heinrich uranium mine in Namibia.

The mine is expected to deliver 6 million pounds annually at full production, enough to supply over ten 1,000 megawatt nuclear power plants for a year.

Then there’s South Australia’s Honeymoon operation.

This was set to become Australia’s second operating in-situ recovery uranium mine well over a decade ago.

But the timing was unfortunate; production kicked off alongside the infamous Fukushima disaster in 2011.

Operations at Honeymoon were suspended just two years later due to falling uranium prices.

In 2015, Boss Energy [ASX: BOE] acquired the project and finally recommissioned the mine, with production resuming earlier this year.

Then there’s the Kayelekera Uranium Project in Malawi. Its new owners, Lotus Resources [ASX: LOT], also plan to bring the mine out of care and maintenance.  

So why is this a potential threat to the uranium market?

Fully permitted mines with infrastructure already in place means several operations could come online simultaneously, easing any potential supply squeeze driven by demand.

So, should you be getting into this market?

For now, investors remain laser-focused on the demand outlook. That means there’s still plenty of room to ride momentum in the uranium market.

In the long term, though, demand must overcome higher production threats. 

A cost-of-living crisis like the 1970s could be the high-demand scenario that brings more reactors online and more demand for this commodity.

James Cooper runs the commodities investment service Diggers and Drillers . You can also follow him on X (Twitter) @JCooperGeo