Australia is one of the best countries in the world. Nice weather, beautiful beaches, and an educated population are all part of the mix down under. But recent events caught my attention in regard to – believe it or not – toilet paper.
With the possible impact of the coronavirus, many people decided to stockpile toilet paper, amongst other things, even though the virus does not give you diarrhea. A movement that started out of the blue gained countrywide proportions very quickly. Now supermarkets are running out of toilet paper and as soon as it is re-stocked and hit the shelves, people launch themselves to get it at any cost and even start fights for it.
People have enough toilet paper to last for weeks, but they feel like they need to buy some more. They went from a situation of not worrying about this at all, to worrying too much about it. It’s all about sentiment, to me. These swings in psychology can happen very fast and affects the behavior of many people, directly or indirectly.
This is happening in a developed country, famous for having one of the nicest and most polite people on earth, which has had no serious crises over the past 26 years. And it is happening in many other places, like Japan, the US and New Zealand too. And why’s that? My hunch is that consumer behavior and anxiety about something new plays an important role.
Toilet paper is obviously linked to hygiene, it’s non-perishable, there are not many substitutes and it is very cheap to stockpile. Besides, people feel like they have to react and do something in situations like this. Moreover, when everyone is doing something, we are tempted to follow suit, even though it might not be the best decision.
So, why am I saying this? Well, because there is a very similar situation developing in a special commodity that I follow: uranium. Going back to the last bull market in the commodity, which started over 15 years ago, there was no lack of uranium in the world. Actually, there was an overproduction. And yet, the prices went parabolic, from under US$10 to almost US$150 per pound.
Yes, I do have a long-bias towards uranium, but the association with what’s happening today in the “toilet paper market” is very telling. Uranium is also easy to stockpile (for utilities, of course), very cheap and has no substitutes.
Commodities tend to move through phases, and Mark Gordon named them – or at least he was the first person whom I’ve heard saying that – scarcity and abundance. If you find yourself in a “scarcity phase”, all news is bullish for the commodity and you will need to buy it at any cost. Price really does not matter, what matters is the security of supply. Conversely, if you are in a “abundance phase”, bullish news is downplayed and shrugged off, as you expect prices to remain low and lots of supply to be available. Recency bias at its best!
If we go back to 2006, when Cigar Lake was completely flooded, we have an excellent example of what I am saying. At the end of 2005, there was an overproduction of uranium in the world, even not taking into account Cigar Lake, which, by the way, is a huge mine and was supposed to be producing in the next year. On top of that, utilities had close to all-time-high inventories. Despite that, as we were in a “scarcity phase”, prices went up dramatically and utilities couldn’t buy uranium and sign long-term contracts fast enough.
Fast forward to today and the phase is completely different. Utilities played well the last downcycle, after being burnt in the previous bullish one, and they are infected with the recency bias I talked about. There have not been any mine disruptions over the past 10 years. Kazatomprom, the state-owned entity, ramped up its production radically from less than 10% of the market to circa 40%, with lower costs. New enrichment technology (centrifuges, instead of gaseous diffusion) helped increase underfeeding. Low interest rates provided traders with low carry costs. These past 10 years have been a miner’s perfect storm.
So, thanks to the recency bias, we are in an abundance phase –at the very moment that we should be looking at the other side. Utilities perceive uranium as plentiful and cheap and are taking no heed of the signals. Today utilities burn through 190m lbs of uranium every year, growing at just over 2% per annum, whilst the production is less than 140m lbs. Many mining projects have been mothballed or suspended. The biggest mine in the world, McArthur River, is in care and maintenance, due to the low prices. And so is pretty much 25% of the world’s production. SWU prices are going up, reducing the underfeeding incentives. Kazatomprom is now a listed company, focused on profitability, not production.
The fundamentals have changed dramatically, but the abundance phase is still on and buyers are not paying attention. Security of supply is really the name of the game here and once utilities realize that prices need to go up to incentivize new mines to come online, we will see the end of the abundance phase.
As few people follow the sector and the couple of information sources are getting up to speed, we might see a change here. Like the toilet paper situation, it might need a trigger to change the mentality of the participants. But when it does, the movement will be swift.