We are always getting new people coming to the uranium sector and we sometimes forget that everyone has to start from somewhere. The supply and demand imbalance is the reason most of us have invested, but how much people know about the sector varies a lot. How well covered utilities are is of the highest importance.
Many have heard of two to three years of inventory, and concluded that utilities will run out of fuel in 24-36 months if they do not buy more in the spot market or contract now. Then, one year later at the year end reporting, we hear they still have the same amount of inventory. What gives?
Utilities have on average two to three years of inventory as their security stock. They still get supply from continuous deliveries from their contracts (long/mid/short-term suppliers, spot and carry traders) that they consume. (While many visualize that utilities just get everything in one big batch, and then draw it down over several years). The time that these contracts run off in the future is what is important, because that is the time when the clock starts ticking. How many are covered in 2025?
How long of a runway do they have?
We might have just simplified too much, but the bullish case and contracting will still improve going forward, and now utilities can not top off inventories with cheap spot or the carry trade. Spot market is now being occupied by financial players for the most part.
This graph from Yellow Cake PLCs October presentation uses very credible numbers on both US and EU contract coverage. (If the most credible people I know in the sector use the 2020 Uranium Marketing Annual Report from EIA as their reference, it is good enough for me).
Next year (2022), 16% of US utilities will not be covered and have to eat off their inventory. They do not want this inventory to get too low. We hear the average inventory has two to three years of supply, but I expect individual differences here. (There are always some who are better covered than others, and we always look to the extremes). Activity will pick up, and utilities who have contracts ending later in 2025-2026-2027-2028 will observe. They will see how much of supply will be made unavailable by the ones who contract first, and maybe contract earlier to avoid risk of being uncovered.
- 2021 98% covered (2% uncovered)
- 2022 84% covered (16% uncovered)
- 2023 72% covered (28% uncovered)
- 2024 61% covered (39% uncovered)
- 2025 55% covered (45% uncovered)
- 2026 42% covered (58% uncovered)
I do not know all the ins and outs of the market, but I know human psychology, and that has not changed much in the last 10 000 years. Just as most investors prefer to buy as part of a crowd, most other buyers in other sectors do the same. Grant Isaac, CFO of Cameco, talked a bit about that subject a couple of weeks ago and I made a post about it then. If the short term uncovered companies contract a lot of supply in the future, the companies that are covered in the 2026-2030 and onwards timeframe also have to start paying attention.
We know that three years is tomorrow in terms of getting production online. At least if you need supply from hard rock mining, and not from ISR. Kazatomprom has their 20% below subsoil agreement through 2023, so they are not filling that gap for a good time going forward. Kazatomprom CEO Galymzhan Pirmatov said
«Consistent with our market-centric strategy, we intend to continue exercising commercial discipline, which will result in 2023 production remaining 20% lower than previously planned subsoil use contracts levels, keeping production essentially flat in 2022 and 2023».
The market has spoken and Kazatomprom has acted according to this demand. They have to increase their CAPEX the next couple of years to get new mines online, when the older ones are depleted. They want higher prices in the future to supply the market with uranium. As the most reliable producer for the last five to ten years they can demand this from the market.
To end this post I will just remind people that if your inventory is well stocked or not depends entirely on the situation. Something people experienced with toilet paper in March 2020. If you had supply for two weeks, but the next supply of toilet paper could not be delivered before three weeks, you were screwed.
2 thoughts on “Contract Coverage”
Thanks for the article. The graph’s legend says “US EIA: Maximum anticipated uranium market requirements”
It seems to me like you ignored the *Maximum* qualification. How do you conclude the expected requirements are not much smaller?
I provided a link to to the 2020 Uranium Marketing Annual Report in the article so you can see the maximum and minimum numbers EIA use for yourself. (https://www.eia.gov/uranium/marketing/pdf/umar2020.pdf). There you can look at the tables they use. (Table 12 is the table used by Yellow Cake PLC). It uses the the assumption that utilities have the maximum range coverage, not minimum coverage. The unfilled requirements get higher if we use the minimum numbers for coverage.
Depending on how many plants close down (or not) in the US the next couple of years we will have uncertainty in the forecasts. The Byron and Dresden plants in Illinois being saved from closure in the 11th hour this year I do not know if was taken into account or not.