The uranium bull market is gathering steam

By Charles-Henry Monchau, CIO at Bank SYZ

Physical uranium prices are up 50% year-to-date while Uranium miners have nearly doubled. What is behind these explosive returns and what does the future for Uranium look like? How can investors get exposure?

2021 has been characterized by exceptional market returns due to the reopening and generous support by central banks and the government. On the less positive side, supply shortages and soaring energy prices are plaguing Europe and other parts of the world. Among the structural reasons behind this energy crisis is the fact that most developed countries have gradually reduced their dependence on fossil fuels and turned to renewable energies, but not quickly and sufficiently enough to meet the needs of consumers.

Natural gas and coal together provide more than 35% of total EU production. As coal, the most polluting fuel, is being phased out, many countries are turning to natural gas as a transitional resource to take over before the deployment of clean energies, such as wind turbines and solar panels. In addition, natural gas is also used for residential heating and cooking, which makes the price increase even more noticeable in the final expenditure of consumers.

Governments around the world will probably have no other choice than to drastically increase the spending in renewables if they want to reach ambitious climate agenda without facing similar types of energy shortages. However, renewables cannot replace fossil fuels within such a short time span. It seems more and more likely that governments will need to find alternatives to get there.

Another important energy reserve source, which has small emissions similar to that of renewable energy is nuclear, an industry that was suddenly phased out by many countries after the Fukushima disaster.

The post-Fukushima crash

Ten years ago, the great Tohoku earthquake hit Japan. Though 18,000 people were tragically killed by the tsunami, it is the nuclear meltdown at the Fukushima Daiichi Nuclear Power Plant that received the most attention outside Japan.

In the aftermath of the disaster, many countries established a moratorium on nuclear energy. Japan and Germany have started shutting down operating reactors, causing demand to drop by about 10%. The impact on uranium has been enormous because nuclear energy and uranium supply are very closely linked. Unlike many industries, uranium mining serves only one purpose: to power nuclear reactors. As a result, the collapse in demand for utilities has had dramatic consequences for prices.

The trough in Uranium prices was seen at the end of 2016 at $US 18 a pound, a 75% drawdown from the $US 71 per pound level pre-Fukushima. For Uranium miners, performance was worse and the bear market lasted even longer with a trough in March 2020 after a 93% decline for the Global X Uranium ETF (see chart below).

The Global X Uranium ETF (URA) roller coaster (source: Bloomberg)

A year ago, an investor could have (theoretically) bought all the shares in every listed uranium company in the world for under US$12 billion…

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