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Quarterly Trends Report

Q1 2022: uranium supply fear; aluminium critically low

  • Multi Asset
  • Materials
  • Europe

The COVID-19 pandemic, the energy transition and geopolitical tensions are having a profound impact on demand for and supply of metals, with fear dominating sentiment for uranium and “critically” low inventory characterising global aluminium.

Uranium is becoming an integral piece of the energy conversation as many countries return to nuclear energy to help them achieve their net-zero goals. The Russia-Ukraine conflict is also amplifying the need for energy security, with fears of potential sanctions and disruption to normal market operations creating uneasiness in the uranium market. 

Long-term prices have been below or on par with spot market prices, suggesting the price is running on supply fears rather than fundamentals, a consultant at CRU International Ltd told Third Bridge Forum. “To a certain extent, it shows the backwardation in the market and the supply fears rather than the long-term concern, but, of course, with the situation developing, nothing is off the table.” 

Against the backdrop of a global energy crisis, countries including France, the UK and Belgium are ramping up their nuclear production capabilities, of which uranium plays a key role as fuel for the required reactors. “France having this huge amount of nuclear energy has shown politically that they’ve been insulated to a certain extent from gas politics, I would say,” the specialist said. Poland is another example of a shifting energy landscape, they added, as it relies heavily on coal and its population regards nuclear favourably. New capacities are underway for 2030 with potentially more in the future. The UK is expected to be the fastest mover, however, with up to eight more nuclear reactors in the pipeline.1https://www.bbc.co.uk/news/business-61010605

In terms of supply, we were told Russia exports around 2,500 tonnes of uranium to Europe a year in a 60,000-tonne market. With few uranium mines, additional supply to Russia comes from Kazakhstan. “I would say that the Russian import to Europe of 2,500, that’s really the Kazakh material coming through Russia, rather than Russia’s being exported to Europe,” the expert said. The bigger impact stems from the fact that Russia’s enrichment capacity (43%) has represented the majority of the market’s surplus, although Europe has “more than enough capacity”, we were told. “It’s definitely the US that will build enrichment capacities if sanctions impact capacity.”

There are also “substantial inventories” in regions including Japan and China. The US has around 48,000 tonnes, with 43,000 in the EU, and 108,000-140,000 in China. Japan has “huge amounts”, the Interview revealed, though it does not tend to provide exact numbers. The expert estimated it could hold approximately 60,000 tonnes, which they described as “huge” given that the country only consumes 1,500 tonnes a year. We were also told there are several mines that could come online if supply-demand balances shift.

But with demand for uranium set to rise, the expert noted that building reactor capacity takes time and that “there are always delays”. Continued market uncertainty is likely to keep prices at elevated levels, according to the expert. “More than USD 45 per pound, definitely, but USD 57 is a bit of a push, more of the supply fear right now.” The unusual trend of long-term prices being on par with or below spot contract prices shows that in the current environment “supply fear is the king”, they said.

Turning to aluminium, supply is at “critical” levels, we were told. With soaring demand and inflation, the commodity has been highly volatile over the past year. And since the start of the Russia-Ukraine conflict, its price has rocketed from approximately USD 3,000 a metric tonne on the London Metal Exchange to a high of over USD 4,000 a metric tonne, a former director at United Co Rusal IPJSC told Forum. “The price of aluminium has recently been rising dramatically. From the last quarter until this quarter, the price is up more than 25%, which is a phenomenal price increase.”

The lion’s share of demand comes from the transport sector, with aluminium vehicles having exploded in popularity but supply unable to keep pace. There is also critically low inventory – of less than four weeks – for items such as aluminium sheets and plates. “This is very important because we recently had the disruption of the alumina supply coming from Ukraine, which feeds 25% of Russia’s aluminium production,” the expert said. Russia represents 6% of global supply and while there have not yet been sanctions on imports of Russian aluminium, if this changes, the specialist has heard that “there is no alternate supply”. They said carmakers looking to switch from steel to aluminium this year would have a hard time doing so, citing Tesla as an example that has increased the cost of its vehicles due to the spiralling cost of materials. 

With the supply-demand gap expected to worsen before it improves, the supply chain is in crisis, we were told, with smelters operating at 98% or more of their capacity. The specialist added that it takes a long time – at least two years – to build a smelter and that the cost of energy is extremely high, representing 35-45% of the total cost. In addition, the US has been cutting production and there are now only three aluminium companies operating in the country. Conversely, the Middle East, Saudi Arabia, Bahrain, Dubai and Qatar have increased production, as they use their own natural gas to generate the electricity required. 

Russia’s 4 million metric tonne production over the past year (in a 67 million metric tonne market) is likely to be cut by about 25% because alumina comes from Rusal’s wholly owned operation in Ukraine. This would undoubtedly hit exports, of which 55% typically goes to Europe, 25% to Japan and South Korea, and 15% to the US. Supply disruption is causing “significantly higher prices” for consumers and we heard that any sanctions would be a “serious blow” to the aluminium industry.

While it is an “extremely profitable time” for aluminium producers, the opposite is true for those that are short on the raw material. “Certainly, if this war doesn’t end soon, I foresee prices climbing at least another 20% or 25% in the short term, meaning under 90 days.” The expert named Alcoa, RTZ, Hydro and BHP Billiton as among those that should be well positioned in the current environment, as they control their own production, mining and smelting. The companies that typically buy alumina will pay higher prices, and those that transport it, we heard, will “really suffer”.

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The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.

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