Uranium's set to make waves in futures
April 27, 2007
SAN FRANCISCO (MarketWatch) -- It's hard to ignore any commodity that's seen
a more than 1,000% price climb over the course of five years, especially one
that's about to be traded on a futures exchange for the first time.
Weekly spot prices for uranium stood at $113 a pound on April 23 -- that's
an 11-fold increase from the $10 it cost in 2002, according to data from Ux
Consulting Co. See the Web site for the latest price.
It's no wonder that the uranium industry and potential investors are all
abuzz following an agreement between Ux Consulting and the New York
Mercantile Exchange, a unit of Nymex Holdings , announced last week to
introduce on- and off-exchange traded uranium futures products on May 6.
"The fact is, there's a need for a uranium futures market," said Sean
Brodrick, a contributing editor to MoneyandMarkets.com, who has often
written about the uranium rally. Read his related Internet blogs.
"The way things are now, most uranium is sold under long-term contract and
some is sold under short-term contract," he said. "But liquidity can just
dry up [and] it's hard for utilities to make plans if they don't know what
the real price of uranium is."
"It's about giving transparency to a very illiquid market," said Kevin
Bambrough, a market strategist at Sprott Asset Management.
And Nymex has "correctly identified that the nuclear power industry is
undergoing a renaissance with tremendous growth ahead, as the world
struggles to deal with strong emerging market and Asian growth, while facing
the reality of peak oil and an energy-constrained world," he said.
Sprott predicts that "the combination of high energy prices, pollution and
global warming will compel the world to attempt to build as many nuclear
reactors as possible going forward," said Bambrough.
"You can say what you want about nuclear power but you're if worried about
global warming, one of the ways to deal with that is nuclear power," said
Phil Flynn, a senior analyst at Alaron Trading.
"Since we are moving off the age of oil and into a nuclear era, it's about
time we had some liquidity in the uranium market and some visibility into
pricing in outer months," said Bambrough.
Limits to the trade
The lack of a public-trading platform for uranium as a commodity had been a
key complaint of prospective investors. Read a related archived story.
"Nymex uranium futures will now make speculating in uranium fast and
efficient," said Scott Wright, an analyst at financial-services company Zeal
LLC. And "the price of uranium could really jump from today's levels with
this new flow of capital."
The uranium futures products will be introduced next month on the CME Globex
and Nymex ClearPort electronic platforms, Nymex and Ux Consulting said in a
joint press release.
They will be financially-settled contracts and there are no restrictions
related to that, according to Randolf Warsager, vice president of marketing
Traders won't take possession of the commodity, but they can take title of
it and get some exposure to its price, he explained.
That separation from the physical market could end up being one of its
Gene Clark, chief executive at TradeTech, said the people who have the most
experience in uranium markets appear to be the most skeptical of the futures
"They generally don't see how such a market could take hold, given the lack
of the basic elements for such a market to evolve -- a liquid spot market
and the absence of a linkage to the physical market for the commodity," he
Linkage to the physical market is "nearly universally the case in other
futures markets," he said. And "with the Nymex futures market being purely a
financial instrument, it runs the danger of diverging significantly from the
As a commodity, it has been, in many ways, invisible to the public over the
years, said Clark. Uranium has traditionally been traded only between end
users, such as electric utility fuel managers and uranium producers, he
"Private ownership of uranium has been legal in the USA only for the past 40
years, and physically possessing it requires a license from the various
regulatory bodies," Clark said.
And there is "really only one use commercially for uranium: the generation
of electricity," he said. See TradeTech's uranium information site.
In a statement, Nymex Chairman Richard Schaeffer pointed out that uranium
itself is "uniquely positioned to act as a complement to both our energy and
metals product offerings."
"Strictly speaking, it's undeniably a metal, but Nymex views it as an energy
contract based on its primary use as fuel for nuclear reactors," said the
Nymex will initially offer futures contracts and when liquidity and open
interest support it, the exchange will launch options contracts at the
appropriate time, he said.
That could take time. "When uranium futures start trading in May, they will
probably be as liquid as granite -- much like natural-gas futures were when
they started out," said MoneyandMarkets.com's Brodrick.
"But once some volume picks up, we might be surprised who gets involved --
certainly utilities, hedge funds and professional traders," he said.
And with the Nymex doing this, "I wouldn't be surprised to see other
exchanges do the same thing, much as gold and silver [exchange-traded funds]
are now offered around the world," he said.
Benefits for a changing climate
At the moment, more than 500 companies claim to be exploring for uranium,
developing one or more uranium projects or producing uranium, according to
online news service StockInterview.com.
And the current offering of uranium-mining stocks presents investors with "a
large menu for their portfolios," said James Finch, a senior editor at
But as 2010 approaches, 90% of those companies will have changed their name
and/or moved into something new, so less than 25 uranium companies will
likely become new miners by 2011, according to Finch.
That could "hurt investors who are unfamiliar with the nuances of uranium
stocks and new to this sector," he said.
StockInterview.com conducted a uranium-investor survey of a small, random
portion of its subscribers.
The survey found that the company's subscribers expect the major
beneficiaries of the uranium-futures contracts to be the current uranium
miners and the near-term producers, said Finch.
"We expect very little futures trading from the retail investor. The strong
interest in futures will come from speculative funds, hedge funds, some
utilities and funds holding physical uranium," said Finch.
And "the climate will change with the arrival of many hedge funds," which
will likely employ multiple strategies using Nymex futures contracts, he
Because of the limited number of current and near-term producers, "we expect
more liquidity and volatility in producers such as Cameco , Denison ,
Uranium Resources and Uranium One , and in near-term producers such as
Energy Metals , Uranerz Energy and Strathmore Minerals ," he said.
Sink or swim?
So what's the reaction of the investment community?
Out of 364 responses to the StockInterview.com survey, more than 97% said
they were currently investing in uranium-mining stocks, but the majority
said they had no plans over the next 12 months to trade the new physical
Only 6.9% said they plan to trade the contracts in the next year, and almost
30% provided a "maybe" response.
Out of 359 responses, 83.8% said "yes" when asked if the futures contracts
will attract more interest in uranium, while 75% of 360 responses said the
contracts will add more volatility to the uranium price.
Even so, almost 67% believe the futures contracts will cause uranium prices
to go higher, the survey showed. See StockInterview.com's full survey
Whether the launch of futures contracts will be a disadvantage or advantage
to the uranium market depends on who you ask, said Sprott's Bambrough. "For
those of us that are invested in uranium producers, there is nothing more
we'd like to see than the prices to continue to trend higher or 'spike'
higher," he said.
Then again, "if you are a utility that hasn't secured your uranium
requirements, it could be a nightmare," he said.
"Uranium futures could create large price swings that will allow not only
for bigger up-legs, but sharper corrections," warned Zeal's Wright.
But, given that the "uranium market has been disjointed in the past, having
a contract is a viable price mechanism and would be a very positive thing,"
said Alaron's Flynn. It has the "potential to be very successful contract."
Indeed, Wright predicts the futures contracts will be a "good thing
overall -- allowing a more stable and liquid market for producers and
consumers to better manage their businesses and hedge risks, as well as
allow the participation of a wider spectrum of investors."
And as for uranium prices, there's "long-term support for $100+," Wright
said, and today's massive supply and demand imbalance "allows a sizeable
risk premium to be imbedded in the price until significantly more uranium is
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