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Guest Op-Ed: What’s Really Driving Uranium Prices

Guest Op-Ed: What’s Really Driving Uranium Prices

The price of uranium has risen more than 350% since 2016. Why? A recent article published by Yale Environment 360 claims “new interest in expanding nuclear power”, especially among climate policymakers and activists, has increased demand. A December 2023 Wall Street Journal article points instead to supply setbacks. Floods last week in Kazakhstan, the world’s leading uranium producer, are just the latest in a series of bottlenecks. So which is it? Is supply or demand (or both) to blame?

The financial press seems to favor the demand story, citing recent promises by developed nation politicians to triple nuclear capacity by 2050. But is that credible? After all, those now promising nuclear expansion are the same cast of characters committed to net zero carbon emissions by 2035. Forgive me if I sound skeptical.

To eliminate bad explanations and better understand recent price movements, we need to consider output, not just prices. If output fell as prices rose, then supply must have declined. If instead output climbed with prices, then demand must have increased. Either explanation of higher prices could be valid, but data is the test of a theory. International and domestic production data can be obtained from the World Nuclear Association, the World Bank, and the Energy Information Agency (EIA). Global commodity prices and various inflation-adjustment tools can be found in the Federal Reserve Bank of St. Louis’ FRED database. 

So has output of mined uranium fallen? Yes, by 22%! Figure 1 plots global output and nominal uranium prices (one year ahead), as well as a theoretical diagram depicting the most likely cause of the empirical pattern. Production peaked in 2016, just before prices bottomed. Higher prices and lower output together mean that insufficient supply is the culprit. Geopolitical troubles (e.g., covid, new tariffs, the war in Ukraine and subsequent sanctions on Russia, numerous coups in Africa, the 2022 riots in Kazakhstan related to the high cost of living there) must be constraining suppliers.

Figure 1. Global prices and annual output of uranium, with theoretical market diagram. Output data from the World Bank and World Nuclear Association. Price data from Federal Reserve Bank of St. Louis Fred database. Prices are annual averages in the following year. Panel A shows empirical data, while Panel B provides the best theoretical depiction for the empirical data: a shift leftward of supply. Correlation between output and price was not statistically significant.

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Those who favor the demand explanation also seem to be ignoring that uranium supply is probably more elastic than demand. Price elasticity is a measure of price-responsiveness. Elasticities are the essential statistics of supply and demand, governing how surpluses are divided between producers and consumers. If supply is inelastic, even large price increases do little to spur production. Elasticity of supply reflects the cost structure of an industry; the balance between unavoidable short run fixed costs, and variable costs that can be cut simply by reducing output today. Supply is more elastic in the long-run as firms have more time to adjust. Elasticity of demand, on the other hand, reflects the availability of substitutes. When demand is elastic, consumers have many other products to choose from. In the long run, as new innovations are introduced, demand tends to become more elastic. The more inelastic side of a market absorbs most of the costs of a shock. Understanding elasticities in the uranium market can help us further rule out bad explanations for high prices. 

Demand for nuclear energy from utility companies is probably fairly elastic because there are many good substitutes, e.g., fossil fuels or wind and solar. However, demand for the uranium used to generate nuclear energy is probably quite inelastic, because a plant built for that purpose isn’t capable of making energy by other means. The supply of nuclear energy is likewise inelastic. Nuclear plants usually run at or near capacity to generate the base load of energy supply, in part because turning a reactor on or off is technically complicated and costly. This rigidity means that nuclear is slow to respond to demand. To provide more nuclear energy, one must build an entirely new plant! That takes time. Nuclear energy companies must have confidence in future demand to undertake such large fixed, irreversible costs. What about mining? Like most miners, uranium supply tends to be elastic. Locating new deposits and building new mines is indeed expensive, but once set up, miners can flexibly choose to unearth a lot or a little depending on how high prices are (relative to marginal cost).

Given these relative elasticities, the rapidity with which prices have climbed is a clue that contraction in supply is the most likely cause of dramatic appreciation. Take a look at panel B figure 1 and convince yourself that because the slopes of these curves are what they are, a shift in supply will change price much more than a shift in demand. How surpluses are distributed is another clue. Are miners and nuclear plants splitting the costs of supply chain stress evenly, or is one party winning and the other losing? Because miners are elastic suppliers while plants are inelastic buyers, plants are probably bearing the expense. Stock price multiples seem mostly consistent with this conclusion (see figure 2). Those uranium miners who are able to weather the geopolitical storm and continue producing are outperforming nuclear plants. Other causes (e.g., monopoly power) could be contributing to that fact, but it nonetheless provides some supporting evidence of the supply-side story.

Figure 3. Price-to-book equity ratios for uranium mining companies and nuclear energy companies. Data from Compustat and CRSP.

In general, commodity prices tend to fall in the long run as productivity improves. That makes the current price spike all the more notable! Only a handful of highly-regulated commercial firms carry out uranium enrichment, but that research-intensive link in the supply chain has become much more efficient over the years. Recycled uranium from old weapons and partially used fuel is another boon. The savings from such productivity gains tend to lower demand for mined uranium because plants can get more from less. In-situ mining allowed miners to lower cleanup costs, too. Recent breakthroughs in nuclear fusion and reactor designs have captured the attention of forward-looking tech investors and nuclear promoters, in part because such innovations could make it easier and cheaper to turn reactors on or off, making nuclear energy supply more elastic.

Is there any merit to demand-driven explanations? Demand has not increased yet, but promoters of nuclear energy expect it to. The balance between new and retiring reactors kept roughly constant during the last 20 years, but that sideways trend may be at an inflection point, with 60 new reactors under construction and another 110 planned. By some estimates, demand will grow 28% over the next decade. However, those new plants won’t come online for several years. So far, the demand hype isn’t supported by enough evidence. There is always the possibility that increased purchases from militaries (buying in secret, perhaps), not power plants, could be what’s driving prices skyward. But if the marginal buyer is a governmental power, it is most likely a country trying to develop its first bomb, not a superpower developing its umpteenth. For military powers who already possess nuclear weapons, the marginal utility of accumulating more bombs diminishes rapidly; having a thousand is just as good as having a million (gulp!). Indeed, since the end of the Cold War, quantity reduction through arms control agreements was the norm. The tradeoff is different for the have-nots. Increasing the national stockpile from zero to one grants entrance into an elite international club, permitting freer exercise of power in foreign policy. If established nuclear powers are in fact buying, their aim may be to prevent others from doing so, yet the elastic nature of uranium supply means such efforts are probably futile.

Miners aren’t sitting on their hands through this bull market. Higher prices do incentivize new exploration and greater utilization. A mine in Wyoming is set to expand, while another in Africa is restarting operations. Some Australian lawmakers are considering repealing their ban on uranium mining, while the lifespan of existing mines in Namibia may soon be extended. These adjustments could eventually lead prices to fall, but the supply challenges originally responsible for high prices have yet to abate. Other risks to miners now loom a bit larger. High public debt and persistent inflation may encourage countries with weak property rights to nationalize property and resources, clawing miners’ profits into state coffers.

It seems the Invisible Hand of the market would like to extend its reach, summoning a greater supply of uranium to meet current and future demand. Yet, the institutional preconditions needed for that market process to unfold are today noticeably lacking. International trade is more expensive today, and in some regions impossible. Order in geopolitics is always elusive, and presently precarious. Until global tensions subside somewhat, uranium could remain scarce.

Matthew Kelly is a Finance PhD student at the University of Texas at Dallas, an Oskar Morgenstern Fellow with the Mercatus Center at George Mason University, and an economics course instructor at Campbell University.

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