The announcement made by uranium giant Cameco a month ago that it’s suspending operations at its flagship McArthur River mine in northern Saskatchewan, Canada did little to move to languishing uranium price. Last week the nuclear fuel was pegged at $23 a pound, a level it has hovered around for long stretches of 2017.

This type of supply shock will spur strength in the spot U3O8 price as a significant amount of expected production for 2018-20 is removed

On Monday, the world largest producer of uranium, surprised the beleaguered market with a larger than expected cut to production of its own.

Kazakhstan’s state-owned Kazatomprom announced intentions to reduce its output of U3O8 by 20% or 11,000 tonnes (around 28.5m pounds) over the next three years beginning in January 2018. According to the company roughly 4,000 tonnes will be cut in 2018 alone “representing approximately 7.5% of global uranium production for 2018 as forecast by UxC.”

Rob Chang Managing Director and Head of Metals & Mining – Canada at Cantor Fitzgerald in a research note on Monday said Kazatomprom is assuming a greater leadership role in the market and the bigger than expected cut is “the type of supply shock that will spur strength in the spot U3O8 price as a significant amount of expected production for 2018-20 is removed.”

Chang said that combined with the halt at McArthur River an estimated 42.3M lbs of expected production has been removed from the market. Annual primary production is in the region of 140m pounds according to Cantor Fitzgerald modelling:

We expect this news to push spot uranium prices to the mid-high US$20/lb range and perhaps into US$30/lb. However, the degree of movement may be muted at first due to fact that there are a limited number of qualified purchasers of uranium – making it a less efficient market.

We estimate that less than 10% of total uranium demand for 2018 and 2019 are uncovered, as utilities have shored up what were once large shortages through spot purchases or short contracts. As such, there is less of an impetus for utilities to make purchases immediately.

Inventory levels are also a concern as we estimate that there are 800-1,200M lbs of total above ground inventory of which about 700-800M lbs are held by utilities. We do not believe that all of it is available for sale as significant portions are held for strategic purposes and necessary utility needs. It will be interesting to see how much of a dampening effect these inventories will have on this news.

At the beginning of the year Kazatomprom announced output cuts of 5.2 million pounds, equal to 3% of global production, while in May the US Department of Energy also curtailed the amount of uranium that it disperses into the market.

The price of U3O8 fell 41% in 2016 with the industry tracker UxC’s broker average price hitting 12-year lows below $18 per pound in November last year.

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