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INSIGHT BRIEFING: Uranium enters futures market

Tuesday, 8 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.

What are futures?

Futures aregenerally commitments to buy or sell a set amount of a commodity at aspecific future date, at a price agreed at the time the contract ismade.

However the Nymex uranium futures market is purelyfinancial and will not involve the ownership of any uranium. Instead,buyers will sell the contract, or sellers buy back the contract, in aprocess known as offsetting. Profits - or losses - are made from thedifference between the original purchase or sale price and that of theoffsetting 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

Hedgingis a means of offsetting the risk of fluctuating prices. Buyers orsellers of a commodity can use futures contracts to protect themselvesfrom price fluctuations – an electricity utility operating nuclearpower plants, for example, could buy futures to protect themselves froma possible increase in the uranium price. From the uranium seller’spoint of view, a futures contract could protect it from a fall inprices. If the price goes in the opposite direction to that anticipatedby the hedger, the cost advantage gained from buying or selling thecommodity on the open market offsets the losses made on the futurescontract.

Hedgers have a real need to sell or obtain thephysical commodity and use the futures market to protect themselves andto attempt to stabilize their revenue or costs. Their aim is not to tryto make vast profits from the market - they leave that to thespeculators.

Speculators, unlike hedgers, try to profit from themarket by buying low and selling high. They will take a position in thefutures market and hope that the price will move in the direction theywant - if the gamble pays off, they make a profit. Speculators have nointerest in obtaining the physical commodity. Speculators are importantto the market because they add liquidity - after all, it takes two tomake a deal, so someone is needed to take up both sides of a bid oroffer on the market.

Options

Options contracts arerelated to futures contracts. The buyer of an options contract for acommodity has a right, but not an obligation, to buy or sell a futurescontract of the same commodity. If the market moves against them theycan choose to let the options expire. If the market moves in theirfavour, they can choose to buy or sell the futures contract. Optionsare like one-way bets - the most the buyer of an option stands to looseis the amount that was paid for it, but the potential profits are bigif 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?

Uraniumis bought and sold to make fuel for nuclear power stations. Up untilthe introduction of uranium futures on Nymex on 7 May 2007, uranium hadnot been traded on an organized commodity exchange. Most uranium istraded under long term contracts (typically three to seven years oreven longer) during which several deliveries will take place. They arenegotiated directly between sellers (the uranium producers) and buyers(nuclear power utilities).

The structure of these contracts canvary enormously. Pricing can be as simple as a single fixed price, butit is more usual to specify a base price that escalates over timeaccording to pre-agreed formula. As the contract is arranged privatelybetween the buyer and seller, the details and the prices involved arenot usually made public.

Around 15-20% of the world's uraniumis not traded under long term contracts but on the spot market. A spotmarket transaction usually consists of just one delivery of uranium.Spot market prices are published by market information services such asUxC or Tradetech based on their knowledge of the their assessment ofstock market transactions.

What is Nymex?

Nymex is theNew York Mercantile Exchange. It is the world's largest physicalcommodity exchange. It conducts trade in futures and options for energyand metals contracts.

Uranium futures will be traded on theCME Globex and Nymex Clearport electronic platforms around the clockon working days, except for a 45-minute break each day when settlements are made.

What is Ux Consulting's role?

TheUx Consulting (UxC) has signed a ten-year agreement with Nymex to workto provide education and marketing for the uranium contracts. Nymexwill use the month-end spot market uranium price determined by UxC tosettle contracts at the end of each month.