The quicker the rise, the faster the fall - nickel and uranium suffer
Big falls in the nickel price, and to a lesser extent in uranium, have seen shares in companies mining these, or exploring for them, fall dramatically, but have these falls been overdone?
Author: Lawrence Williams Posted: Sunday , 19 Aug 2007
LONDON -
Bring together huge and rapid price increases predicated on current, or projected, supply shortfalls in tight markets and you have the ingredients for almost equally rapid falls as soon as sentiment, or the market situation, changes. Add in huge general market nervousness and the ingredients for a stock price - or commodity price - meltdown are well in place.
But one thing one can learn about market sentiment is that, just as price rises can be overdone to the nth degree, so can price falls - particularly when fundamentals are in reality little changed.
We have seen in the past year huge price rises in most base metals with nickel the prime example when it was caught in a supply squeeze, with low inventories, supply interruption problems and huge continuing demand. Since its high point in May, the nickel price has more than halved and stocks are continuing to increase as buyers hold off. There has been substitution in stainless steel manufacture, but the utilisation of differing alloying materials gives different qualities to the stainless steel produced and it would seem likely, now that prices have fallen to the extent they have, that stainless steel manufacturers will start to restock and revert to higher demand levels.
It would thus seem possible that the rapid price decline has been overdone - as was the rapid price rise before it. As prices stabilise, and with the old supply and costs restraints which affect this sector, it would seem far from impossible for the nickel price to resume its upwards path - but almost certainly not at the pace seen at the beginning of this year and late last.
The constraints on nickel revolve around the general move from principal supplies coming from easier to process sulphide orebodies to expensive, and complex, laterite metallurgy. The laterite projects - and there are some huge ones in the pipeline - have often been beset by startup delays and cost overruns, so there could still be temporary supply shortages ahead of us.
Uranium, on the other hand, is in something of a different situation. Here it is not the uranium price itself which has been in meltdown, but the price of uranium shares. True the price quoted by the uranium traders has been cut by around 25 percent, it is generally recognised that tight supply conditions will continue and worsen. Here it is the uranium explorers where prices have really been decimated with some falling by up to 70 perecent.
There was a time, in the not too distant past, that virtually any company floated with ‘Uran' in its name, or with prospective uranium ground, could be assured of a positive reception by the stock markets. Uranium is not that uncommon a metal, and it is relatively easy to find in that radioactive anomalies are more simple to detect than, say, deep lying sulphide orebodies, although permissions to mine it may be more difficult to come by. But, growth in nuclear power is likely to keep demand forging ahead over the next few years as mine expansions and new mines wait to come on stream.
For existing major ‘old' producers, like Cameco and Areva, the recent fall in the spot price will probably have little impact on immediate revenues as most of their production is sold through long term contracts at far lower prices. Obviously spot levels will influence new price negotiations looking ahead, but these companies will still benefit as the general trend is upwards.
For the explorers though, we have the situation that prospects are less certain anyway and the big stock price runup was largely due to the market judgement that uranium prices would continue to increase. Now there has been a hiccup, investors have been bailing out fast.
In fact, the demand predictions for uranium may not have been too far out and there may well be a continuing shortfall up to around the end of the decade, with supplies remaining tight thereafter as more and more nuclear power plants are started up. But the heady prices for uranium exploration stocks may be behind us, except in exceptional cases where high grades are mixed with virtual certainty that mining will be allowed. Those companies with actual production, though, should still command good earnings, but the sector will probably henceforth be viewed in a more realistic light.
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