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INSIGHT BRIEFING:
Uranium enters futures market
08 May 2007
The first day of trading in uranium futures showed very thin volumes. However, settlement prices established for June 2007 and January 2008 show some observers are expecting uranium prices to increase and reach $150 per pound.
Uranium futures began trading for the first time on 7 May on the New York Mercantile Exchange (Nymex). Speculators can now purchase futures contracts to be settled against an 'actual' price for uranum determined each month by Ux Consulting (UxC), which has partnered with Nymex for the venture.
In a joint statement by the two parties, UxC President Jeff Combs said that the uranium market would benefit from additional price transparency, especially in terms of forward prices. Trading began just three days after Tradetech announced that the uranium price had reached an unprecedented $120 per pound.
Contracts in the new market are available for the 36 months ahead, the first currently being June 2007. The contracts are for U3O8 or 'yellowcake', the concentrated uranium oxide produced from uranium ore, and the contract size will be 250 pounds.
The first day's trading showed six individual contracts made for June 2007 spread between $132.05 per pound and $140.00 per pound, settling at $135.00. Meanwhile, another transaction for 20 contracts for January 2008 saw that month settle at $150.50 per pound.
At the time of writing on the second day, further trades have taken place for June 2007 at $148 per pound, and for December 2007 at $150 per pound, clearly indicating that those in the market expect the price of uranium to continue to climb.
The futures prices established by speculators should give buyers and sellers of actual uranium in the nuclear fuel market much more information on which to set their strategies. The uranium market has been noted to be 'lumpy': characterised by few sellers and few buyers - whom almost always engage in long-term contracts and seldom publish contract prices. UxC produces its own well-recognised U3O8 price, but this is based on only a few data points from the spot market. Once any speculator in the world may purchase cash-settled futures on U3O8, the uranium market will be open to a large influx of new money and new thinking.
Further information
Nymex
Nymex Uranium Futures
Ux Consulting
WNA's Uranium markets information paper
What are futures?
Futures are
generally commitments to buy or sell a set amount of a commodity at a
specific future date, at a price agreed at the time the contract is
made.
However the Nymex uranium futures market is purely
financial and will not involve the ownership of any uranium. Instead,
buyers will sell the contract, or sellers buy back the contract, in a
process known as offsetting. Profits - or losses - are made from the
difference between the original purchase or sale price and that of the
offsetting transaction.
Futures contracts are traded in open auctions and the price is clearly known - the price of the commodity is transparent.
For the NYMEX uranium futures market, the standardized product is yellowcake (U3O8) and the contract size is 250 pounds U3O8.
Hedging
Hedging
is a means of offsetting the risk of fluctuating prices. Buyers or
sellers of a commodity can use futures contracts to protect themselves
from price fluctuations – an electricity utility operating nuclear
power plants, for example, could buy futures to protect themselves from
a possible increase in the uranium price. From the uranium seller’s
point of view, a futures contract could protect it from a fall in
prices. If the price goes in the opposite direction to that anticipated
by the hedger, the cost advantage gained from buying or selling the
commodity on the open market offsets the losses made on the futures
contract.
Hedgers have a real need to sell or obtain the
physical commodity and use the futures market to protect themselves and
to attempt to stabilize their revenue or costs. Their aim is not to try
to make vast profits from the market - they leave that to the
speculators.
Speculators, unlike hedgers, try to profit from the
market by buying low and selling high. They will take a position in the
futures market and hope that the price will move in the direction they
want - if the gamble pays off, they make a profit. Speculators have no
interest in obtaining the physical commodity. Speculators are important
to the market because they add liquidity - after all, it takes two to
make a deal, so someone is needed to take up both sides of a bid or
offer on the market.
Options
Options contracts are
related to futures contracts. The buyer of an options contract for a
commodity has a right, but not an obligation, to buy or sell a futures
contract of the same commodity. If the market moves against them they
can choose to let the options expire. If the market moves in their
favour, they can choose to buy or sell the futures contract. Options
are like one-way bets - the most the buyer of an option stands to loose
is the amount that was paid for it, but the potential profits are big
if the price of the commodity rises.
Nymex has said it intends to add options on uranium futures at a later date.
How is uranium usually traded?
Uranium
is bought and sold to make fuel for nuclear power stations. Up until
the introduction of uranium futures on Nymex on 7 May 2007, uranium had
not been traded on an organized commodity exchange. Most uranium is
traded under long term contracts (typically three to seven years or
even longer) during which several deliveries will take place. They are
negotiated directly between sellers (the uranium producers) and buyers
(nuclear power utilities).
The structure of these contracts can
vary enormously. Pricing can be as simple as a single fixed price, but
it is more usual to specify a base price that escalates over time
according to pre-agreed formula. As the contract is arranged privately
between the buyer and seller, the details and the prices involved are
not usually made public.
Around 15-20% of the world's uranium
is not traded under long term contracts but on the spot market. A spot
market transaction usually consists of just one delivery of uranium.
Spot market prices are published by market information services such as
UxC or Tradetech based on their knowledge of the their assessment of
stock market transactions.
What is Nymex?
Nymex is the
New York Mercantile Exchange. It is the world's largest physical
commodity exchange. It conducts trade in futures and options for energy
and metals contracts.
Uranium futures will be traded on the
CME Globex and Nymex Clearport electronic platforms around the clock
on working days, except for a 45-minute break each day when settlements are made.
What is Ux Consulting's role?
The
Ux Consulting (UxC) has signed a ten-year agreement with Nymex to work
to provide education and marketing for the uranium contracts. Nymex
will use the month-end spot market uranium price determined by UxC to
settle contracts at the end of each month.
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