Spot uranium seen sliding, recovering in long term

Mon Mar 14, 2011 9:58am EDT

* Illiquid spot uranium market expected to tumble

* Speculators seen caught out by Japanese crisis

* Long term recovery seen on nuclear as carbon-free energy

By Eric Onstad and Pratima Desai

LONDON, March 14 (Reuters) - Spot uranium prices are expected to slide as speculators cash out and confidence in nuclear power is shaken in the wake of an earthquake in Japan that has left it struggling to avert a nuclear meltdown.

The longer-term outlook for uranium may be less negative, however, since many countries such as China are expected to press ahead with nuclear energy as a carbon-free alternative to meet commitments about global warming.

"Definitely the spot market is illiquid, and this kind of thing is going to be clearly bearish," said analyst Max Layton at Macquarie Equities in London. "Highly likely it's going to be substantially down."

Spot prices of uranium oxide UX-U3O8-SPT, the saleable form of uranium, had surged 76 percent over six months to a peak in early February of $73 per pound.

The last quotation was $66.50 a pound, but it was unclear how soon the impact of Japan's crisis would hit the spot market due to the limited number of participants. A substantial amount of uranium is sold on long-term contracts to utilities.

The negative reaction was evident in a slide in share prices of uranium miners. [ID:nL3E7EE00B] [ID:nL3E7EC0D6]

Top Canadian uranium miner Cameco (CCO.TO) skidded 15.3 percent in trading before the morning bell, and Energy Resources of Australia (ERA.AX), a unit of global miner Rio Tinto (RIO.L) (RIO.AX), shed 12.2 percent.

SPECULATORS MAY EXIT

Analysts say speculators had helped boost uranium prices recently by buying physical material, betting on big growth plans by China, India and others to expand nuclear generation.

"If any of them (speculators) look to exit their positions, it is an very illiquid market and they might struggle to get out of those positions smoothly," said analyst Edward Sterck at BMO Capital Markets in London.

The situation is comparable to the last major rally, when prices shot up to an all-time record of $136 a pound by June 2007.

The recent rally was not as strong as the one in 2006-07, so prices are not expected to tumble back to the low hit in the middle of last year of $40.75 a pound, Sterck added. "I couldn't say where we're going to end up, but I don't think we're going to go back to those lows again."

The physical impact on the uranium market of Japan's shutting down 11 of its 54 operating reactors depended on whether the country continues to take deliveries to build stockpiles. The uranium used by these plants is equal to about 2-3 percent of global demand, analysts said.

NUCLEAR KEY AS CARBON-FREE ENERGY

While the reputation of the nuclear industry will take a knock, in the longer term, uranium and the nuclear industry is likely to recover due to its importance as a carbon-free source of energy.

"There are really no alternatives to nuclear power -- wind turbines are not a viable substitute ... Countries such as China have no choice but to continue along the nuclear path," said a UK fund manager who specialises in uranium.

China's growth plans for its nuclear industry will require huge amounts of uranium to fuel plants.

China has 13 reactors currently in operation, with a total generating capacity of 10.8 gigawatts, but the government has approved an additional 32 units -- with a capacity of almost 35 gigawatts. Furthermore, many in the industry have been lobbying the government to double its target of 40 gigawatts of nuclear capacity by 2020.

The head of China's National Energy Administration, Liu Tienan, said on Sunday Chinese parties must carefully analyze the accident. The chairman of Shaw Group, which is building four reactors in China, said on Monday it did not see an impact on projects under construction in China. [ID:nTOE72D03B]

"The reaction of China to this crisis will have the greatest implications for future uranium demand", said Ian Hiscock, a consultant at CRU Group. "The long-run market fundamentals of the industry remain in place with security of supply and CO2 emissions key challenges for the energy market."

Another argument for an eventual rebound is that the new generation of nuclear plants are safer than those that are having problems in Japan.

Even Japan is likely to continue with its nuclear building programme with stricter safety guidelines, Layton said.

"I think consumption will go ahead from Japan. What they'll do is create bigger and strong tsunami walls and create even more reliable back-ups."

How soon the industry recovers depends on the severity of Japan's crisis. "To a degree it depends whether this thing melts down, then the impact on sentiment towards nuclear is even greater," Layton added.

Global demand for uranium is 180 million pounds a year, of which 140 million pounds comes from mine production. The rest is filled by stockpiles and downgraded weapons-grade uranium, according to Cameco.

(Editing by Jane Baird)

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