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Wednesday, April 18, 2007

uranium futures

NYMEX and UxC are going to create uranium futures, also covered in the Wall Street Journal ($$paid subscription required). Here's an introduction to futures from NYMEX.

This UxC article has a lot of info and background.
In June of 2003, we were alarmed (we said “fascinated” at the time) by the fact that uncovered requirements on the part of U.S. utilities were so large in 2006, just three years away at the time. There seemed to be an impasse or perhaps a disinterest in contracting, which translated into this large uncovered position. Because of the large amount of contracting yet to take place in an environment where production was not expanding, it appeared to us that there was no way the market could clear at anywhere near the then spot price of $10.90 when 2006 came around. Because of this, we wondered if the market had failed. (see “A Case of Market Failure?” The Ux Weekly, June 9, 2003, p. 1-2).
UxC then did a survey of market buyers and sellers what they would bid/offer for 250K pounds of U3O8 for July 2006 delivery. The bids were in the $12 range. The asks were a bit higher. But matching up bids and asks showed that a fluid market would have produced higher prices.
In hindsight, a futures market existing in 2003 would have served the market well, as it would have given more advanced notice of the tight future supply situation that existed. Prices would have been bid up sooner, prompting a quicker response in production and exploration. Utilities certainly would not have liked seeing higher prices, but if they had known what the alternative was (which is what actually happened), they would have been more accepting.
Of course, the longer the delay, the better for those producers who saw it early and started acting. Strathmore Minerals clearly saw it; that was their business plan going back before 2003.

And my guess is that a futures market now is going to expose a massive imbalance in the future with even higher prices. But we'll just have to wait for it all to play out.
...some futures trades have already taken place in uranium and Tullett Prebon has set up a nuclear fuel derivatives desk (see the Ux Weekly, April 2, 2007, p. 3).
To many, it may seem like the uranium market has changed more in the past two weeks than it has in the previous 40 years with price soaring to new heights and the introduction of a futures market, while they are still getting used to the presence of hedge and investment funds.
Yeah, things are happening fast.

The futures are both on and off exchange. Cash settled, meaning there's no taking delivery of actual uranium, it's just a bet on future prices. UxC will be determining the actual spot price over time as it's done for more than 20 years. The Financial Times has an article on this thing, too.

NYMEX Chairman Richard Schaeffer said, "We are excited to introduce uranium futures contracts and to provide the industry with a transparent price discovery mechanism. We expect to create a benchmark contract for this important and underserved global market. NYMEX is gratified to launch innovative products, and uranium is uniquely positioned to act as a complement to both our energy and metals product offerings. We are proud to partner with Ux Consulting, the recognized market leader."

UxC President Jeff Combs said "The experience this decade has clearly indicated that the uranium market would benefit from additional price transparency, especially in terms of forward prices, as market participants formulate budget and investment decisions in this critical period of a renaissance in nuclear power. We are pleased to partner with NYMEX, the global leader in commodities–based futures trading, in the introduction of uranium futures products, and applaud NYMEX for investing the time and resources necessary to make uranium futures a reality."

When the market is allowed to create a pricing structure for uranium way out into the future, we'll all get to see what it looks like. Real Wisdom of Crowds stuff.

The Wall Street Journal says
The futures contract would be designed to offer the operators of nuclear-power plants a vehicle to hedge against rising prices. It would also provide a forum to bet directly on gains and falls in the price of uranium, rather than speculating on the fortunes of companies that mine the metal.
I'd rather rely on my investment in Strathmore Minerals as I believe it is significantly undervalued relative to the current and expected future price of uranium. Perhaps I might bet against uranium in the futures market to partially hedge my Strathmore investment. Probably not.

"Anything that will add transparency to the uranium market is a good thing," Jim Malone, vice president of nuclear-fuel management at Exelon Corp., a Chicago-based nuclear operator, said in a statement. Mr. Malone didn't say whether Exelon would be interested in trading the new contract.

"The only people who it is going to get traction with are the investing players," said a uranium broker, adding that power producers are more likely to stick to the long-term contracts they use now.

My guess is that the market sees this as something which will siphon money away from mining companies. This would explain the price drop in uranium mining stocks. I believe that in the long run the market is much more efficient than that. If something is clearly worth more than it's selling for, the price will eventually go up to something close to its value.

You can get free access to Wall STreet Journal and those other subscription sites with a netpass from www.congoo.com

This was on CNBC last week.
Great info...Uranium is definitely on my hot list as of late. I like it long term projections being a macro thinker and its low supply but high demand will shoot its prices right up in the commodities market. Just take a look at this link of a report i found on it...

Uranium Investing Report
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