Sunday, May 20, 2007

Volatile future predicted for Nymex uranium market

If you think the price of gasoline is high, take a look at uranium

The New York Mercantile Exchange (NYMEX) has launched trading in uranium futures. Trading got underway last week. The trading contracts are be designed to offer operators of nuclear plants a way to hedge against rising prices. Also, it would shift the basis for bets on the rise and fall of uranium prices from the financial winds of fortune of firms that mine the metal.

Just in case you are wondering if trading in uranium futures will make the price of the metal more volatile, you're right. Spot prices in uranium were listed in April at $113/lb up from a mere $23/lb in April 2005.

"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."

Here are some points to keep in mind about futures trading in metals commodities.
  • The prices at which the commodity futures are sold is not determined by the commodity exchanges. Prices are established on the demand and supply conditions. If the sellers are more than the buyers, the prices will decrease and vice versa. They are also determined by the buy and sell orders.
  • Futures markets are considered clearing houses for the current demand and supply information. Buyers and sellers of financial instruments, agricultural commodities, petroleum products and metals meet in these markets.
  • The primary purpose of a futures market is to provide an efficient method to manage the price risks.
A spokesman for Exelon Corp. was guardedly optimistic about the new exchange. Jim Malone, Nuclear Fuels VP, told the Wall Street Journal on April 16th, "anything that adds transparency to the uranium market is a good thing." However, he told Reuters, "We still need to learn more about the contract to determine whether it is a risk management tool we can use."

Firms like Exelon are expected to retain long-term contracts for supply of uranium to their reactors rather than participating directly in a spot market. Energy traders agree with that assessment according to a round-up of opinion published in MarketWatch. Here are some highlights from two analysts.
  • "It's about giving transparency to a very illiquid market," said Kevin Bambrough, a market strategist at Sprott Asset Management. "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."
  • 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," Bambrough said.
  • His firm 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."
  • "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.
MarketWatch also reports that uranium trades will be financially-settled contracts according to Randolf Warsager, vice president of marketing at Nymex. Traders won't take possession of the commodity, but they can take title of it.

That separation from the physical market could end up being one of its biggest flaws. Gene Clark, chief executive at TradeTech, told MarketWatch the people who have the most experience in uranium markets appear to be the most skeptical of the futures exchange. He says the market has to have a physical link to the commodity being traded. 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 physical market."

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 said. "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,"

The worldwide inventory of uranium accounts for about 67,000 metric tons a year according to the World Nuclear Association. About two-thirds of that amount comes from mining and the rest from extra supplies let to the open market by government nuclear programs. There is still a shortfalls which is the cause of the rapid run-up of prices. Canada and Australia lead the world in mining uranium account for 44% of production. Long-term odds are that uranium prices will stay north of $100/lb. The price premium will remain until more uranium is mined and becomes available on the open market.

Nuclear power plant operators who don't have long-term contracts could be facing a pricing nightmare. Worse, according to Scott Wright at Zeal LLC, as quoted in MarketWatch, uranium futures could potentially "create large price swings" and "sharper corrections." Both Wright and Flynn believe these radical shifts are less likely over time for several reasons including better information to hedge long-term risks and the participation of a wider spectrum of investors.

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