8 May 2007 - 09:49
  • News Code: 104053

An expected boom in nuclear power generation worldwide has motivated a bullish uranium market.

When the New York Mercantile Exchange launched a first-of-its-kind uranium futures contracts on May 6, it set a new stage in the growing uranium market. But the project, a venture with Ux Consulting, is likely not to settle the rocky road uranium prices have ridden lately.

Uranium futures products traded on and off the exchange will be introduced on the CME Globex and NYMEX ClearPort platforms, ready for trade Monday.

According to UPI, utilities buy fuel for their reactors in contracts that guarantee supply but not a fixed price. The price floor is set at market price on contract-signing day, but they pay market price on the day of delivery.

The NYMEX/UXC project is intended to change that, said Jeff Combs, president of Ux Consulting. He said it will add transparency to the global uranium contract market and “development of a forward price curve.“

“In other words, this contract runs out 36 months on a monthly basis so there will be price points, bids and offers out in the future indicating what people think is going to happen to the market and what position they’re willing to take in either buying or selling depending on what they think the price is going to be,“ Combs said.

“The only way you can get fixed prices in the future is to buy uranium on the spot market and hold it, but that’s not too practical if you’re going out further in the future, and especially since spot supplies are tighter now than they are likely to be in the future. And that’s the other purpose of futures markets is it provides the hedging function.“

Historically, government development drove the uranium market. Military buildup of nuclear weapons prompted purchases.

“With the advent of commercial nuclear power, the US government dictated uranium demand by virtue of its enrichment-contracting policies,“ Combs said. This built up inventories, which the nuclear power industry over the past 20 plus years has largely relied on, depressing the price of uranium. Contracts stalled and investment in exploration and production waned.

“Consequently you have this real tight supply situation right now,“ Combs said.

Uranium sold for around $10 per pound through the 1980s and 1990s, but an expected boom in nuclear power generation worldwide--including possibly the United States, which hasn’t licensed a new plant in 30 years--has motivated a bullish uranium market.

Last fall uranium sold for $56 per pound. It has steadied at $113 per pound since April 9.

“Right now, in this market, a lot of suppliers are just offering what’s called market price contracts, where they just want to peg their (selling) price ... to the future price in the market, even if they’re only going out two or three months because they think prices are going to go up a lot.“

“But this type of selling results in reduced price transparency with few fixed-price offers on which to base market prices,“ Combs said. “Not a good situation. A futures market should result in fewer market price offers and more fixed-price offers, improving transparency in the cash market as well as generating a forward price curve in the futures market. “

With the price of uranium expected to go up before it settles back down, Combs said the UXC/NYMEX product “would have been real useful earlier on, because people ... if they saw the price was going to go higher and they’re willing to take that risk then that might have stimulated production sooner and (the) price wouldn’t have gone up as high. However, this product can be of considerable benefit in the current market as it provides important hedging and price discovery functions in a market that clearly is crying out for these functions.“

The future of the market after the NYMEX contracts begin is not known. Speculators and miners-- those affecting and setting the price now--are likely to benefit.

“Everybody’s on a wait and see--except for the speculators,“ Finch told UPI. “Utilities see this as an opportunity to fix a price which has right now gone completely out of control.“

Uranium data that market consultant TradeTech provided to StockInterview.com show spot transactions are at the lowest year-to-date level in a decade, dropping 65 percent in April.

Plus, Finch notes, there’s a $28 spread between long-term and spot prices. And industry insiders tell him they’re looking for “real sentiment“ on prices, not the NYMEX price.

And one big factor remains: The uranium sector isn’t at a point to link the NYMEX futures contract to the physical material. This highlights the difference between trading a material used to make both electricity and bombs and, say, corn or soybeans, since a federal agency--the US Nuclear Regulatory Commission--has to license a facility merely to store uranium.

“One thing everybody agrees is there will be volatility,“ Finch said.

 

 

PIN/ STOCKINTERVIEW.COM

News Code 104053

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