One thing I’m still trying to wrap my head around: you mentioned on a podcast this week that we probably won’t hit replacement rate contracting this year or next (or in the years after?) because there just isn’t enough supply available to contract. If coverage starts to lapse around 2028 and beyond, do you see utilities opting to pay up to shake loose more inventory, rather than signing contracts to bring new supply online?
I get that the answer is probably “both” to some degree, and that more supply will eventually show up — but have utilities kind of backed themselves into a corner by waiting this long? What, if anything, would stop a melt-up in the spot or mid-term market if utilities are basically signaling (by not locking in long-term contracts) that they’re willing to buy at any price from an increasingly illiquid and shrinking pool? How does this make any sense for fuel buyers?
I think replacement rates and re-stocking will happen, I just don't think it will happen in 2025 (and possibly 2026) as there isn't enough material to be offering at sub-$85/lb base-escalated or market-related at say, 70/130 floors/ceilings. For western utilities to hit replacement rate, we'll just need to see higher term prices where producers are willing to lay out that kind of volume.
Utilities tend to be price takers. I don't see western utilities 'paying up' as that's just not how they operate. Utilities will ultimately spur new production as their views shift- as Cameco gets enough contracts at the right price, they will expand McArthur River, we're seeing developers like Lotus get contracts to get the mine going, etc. Please note, there are some utilities who already recognize these dynamics and are buying in the market (taking advantage of spot in 60s/70s, carry). But, if only a handful of utilities are taking advantage, that's not enough demand on the margin to bump up against capacity which is why term prices haven't moved much lately. But, as they get more active in term, we'll see term prices start to rise again which I think we will see in the second-half of this year.
Personally, I think the industry has waited much too long and have too rosy a view on developers. Permitting, financing, construction and production is a lengthy process for any mine, let alone a mine or three that is capable of delivering 20M+ lbs per year. My suspicion is that in the next 12-24 months, the industry will have a much better sense of when some of these expansions/greenfield can come online. When there are more answers than questions, my view is utilities will have the information they need to make 5-10 year procurement plans and this is when we will see replacement rate (or re-stocking) occur.
Thanks for the response. To ask more directly: are utilities going to be forced to buy significant volumes in spot in the next 12-24 months because they've waited so long to contract?
If I'm understanding your inventory and S/D research, and assuming it takes 4+ years to bring new mines online after permitting, I'm not seeing how the utilities won't be forced to "pay up" (whether they like it or not) in spot to unlock inventories. Perhaps I'm being too binary about this (and I get it's a dynamic system and that eventually a term price will be discovered in the next few yrs that incentivizes new supply), but I don't see how the math works between 2028 to early 30's. What am I missing?
In a lot of ways, that's the one billion dollar question: how do utilities (as a whole) proceed? From an investor lens, I'm less concerned about how utilities go about it as that's really their problem vs. am I confident in the math (S/D, inventory, etc.) which will result in higher prices any way you dice it? We've already seen Tier 1 utilities take advantage of lower spot prices this year so to your question, yes, I think they will need to buy some in spot directly or look to layer in carry trades if offered, in addition to term demand. Remember that spot, carry, term dover different forward periods. If a utility buys spot, they need to carry it themselves and put it through the fuel cycle. Carry allows them for someone else to carry it until delivery and term is really supposed to be 3-10 years out for delivery from today.
I think all three procurement strategies will be in play from late 20s to early 30s as to your point, the math is the math. I think we will ultimately continue to see what has happened since the cycle lows- a wave of buying pushing up prices, utilities back away from the market and prices consolidate for a period of time, then a new wave of buying commences. This is basically what we've seen since 2020 and think this kind of activity continues moving forward. The last big buying wave peaked in Jan 2024 and we've seen utilities back away from the market and now I suspect, a new wave begins in the back-half of this year where the market sees a new leg higher. I hope this makes sense.
Thank you Tim, appreciate the work you do.
One thing I’m still trying to wrap my head around: you mentioned on a podcast this week that we probably won’t hit replacement rate contracting this year or next (or in the years after?) because there just isn’t enough supply available to contract. If coverage starts to lapse around 2028 and beyond, do you see utilities opting to pay up to shake loose more inventory, rather than signing contracts to bring new supply online?
I get that the answer is probably “both” to some degree, and that more supply will eventually show up — but have utilities kind of backed themselves into a corner by waiting this long? What, if anything, would stop a melt-up in the spot or mid-term market if utilities are basically signaling (by not locking in long-term contracts) that they’re willing to buy at any price from an increasingly illiquid and shrinking pool? How does this make any sense for fuel buyers?
I think replacement rates and re-stocking will happen, I just don't think it will happen in 2025 (and possibly 2026) as there isn't enough material to be offering at sub-$85/lb base-escalated or market-related at say, 70/130 floors/ceilings. For western utilities to hit replacement rate, we'll just need to see higher term prices where producers are willing to lay out that kind of volume.
Utilities tend to be price takers. I don't see western utilities 'paying up' as that's just not how they operate. Utilities will ultimately spur new production as their views shift- as Cameco gets enough contracts at the right price, they will expand McArthur River, we're seeing developers like Lotus get contracts to get the mine going, etc. Please note, there are some utilities who already recognize these dynamics and are buying in the market (taking advantage of spot in 60s/70s, carry). But, if only a handful of utilities are taking advantage, that's not enough demand on the margin to bump up against capacity which is why term prices haven't moved much lately. But, as they get more active in term, we'll see term prices start to rise again which I think we will see in the second-half of this year.
Personally, I think the industry has waited much too long and have too rosy a view on developers. Permitting, financing, construction and production is a lengthy process for any mine, let alone a mine or three that is capable of delivering 20M+ lbs per year. My suspicion is that in the next 12-24 months, the industry will have a much better sense of when some of these expansions/greenfield can come online. When there are more answers than questions, my view is utilities will have the information they need to make 5-10 year procurement plans and this is when we will see replacement rate (or re-stocking) occur.
Thanks for the response. To ask more directly: are utilities going to be forced to buy significant volumes in spot in the next 12-24 months because they've waited so long to contract?
If I'm understanding your inventory and S/D research, and assuming it takes 4+ years to bring new mines online after permitting, I'm not seeing how the utilities won't be forced to "pay up" (whether they like it or not) in spot to unlock inventories. Perhaps I'm being too binary about this (and I get it's a dynamic system and that eventually a term price will be discovered in the next few yrs that incentivizes new supply), but I don't see how the math works between 2028 to early 30's. What am I missing?
In a lot of ways, that's the one billion dollar question: how do utilities (as a whole) proceed? From an investor lens, I'm less concerned about how utilities go about it as that's really their problem vs. am I confident in the math (S/D, inventory, etc.) which will result in higher prices any way you dice it? We've already seen Tier 1 utilities take advantage of lower spot prices this year so to your question, yes, I think they will need to buy some in spot directly or look to layer in carry trades if offered, in addition to term demand. Remember that spot, carry, term dover different forward periods. If a utility buys spot, they need to carry it themselves and put it through the fuel cycle. Carry allows them for someone else to carry it until delivery and term is really supposed to be 3-10 years out for delivery from today.
I think all three procurement strategies will be in play from late 20s to early 30s as to your point, the math is the math. I think we will ultimately continue to see what has happened since the cycle lows- a wave of buying pushing up prices, utilities back away from the market and prices consolidate for a period of time, then a new wave of buying commences. This is basically what we've seen since 2020 and think this kind of activity continues moving forward. The last big buying wave peaked in Jan 2024 and we've seen utilities back away from the market and now I suspect, a new wave begins in the back-half of this year where the market sees a new leg higher. I hope this makes sense.