A piece of (yellow) cake*

Oppenheimer, the movie about the father of the atomic bomb, recently cleaned up at the Golden Globes. How fitting therefore, that uranium was one of the biggest winners amongst commodities last year, with an increase of 86%, closing 2023 at a 15-year high.

Despite accidents such as Chernobyl and Fukushima, nuclear energy is increasingly being accepted by governments as the only form of low-carbon baseload power, making it key to energy transition to net zero. For example, in France, plans to reduce the nuclear share of electricity generation to 50% have been abandoned. In the UK, the government has updated its nuclear plans with Hinkley C under construction and planning underway for Sizewell C. However, this is small beer compared with China which currently has 55 operating nuclear reactors with a further 24 under construction! Indeed, some 22 countries have recently committed to a trebling of nuclear capacity by 2050. Amongst the latest to evaluate the need for additional nuclear power is South Korea, in response to increasing electricity demand from the expansion of data centres as well as from the growing semiconductor and electric battery sectors.

While nuclear power generation capacity is set to expand significantly the same cannot be said for uranium production and supply remains constrained. Russia has historically been dominant in the uranium conversion and enrichment sector and so the war in Ukraine and western sanctions has forced buyers to seek alternative sources of supply. Sanctions have also impacted Kazakhstan which produces about 45% of the world’s uranium due to Russian ownership stakes in its producers. In addition, the coup in Niger which produces 5% of the world’s uranium and a production shortfall at uranium fuel producer Cameco has not helped.

As with many other commodities, investors have sought to participate in the rise in the uranium price by way of ETFs(exchange traded funds) which has further exacerbated the demand-supply imbalance. With no end in sight currently to the war in Ukraine and western sanctions, production challenges and ETF buying, do not be surprised if the price of uranium continues to glow in 2024.

What have we been watching?

The Middle East conflict continued to escalate as the US and UK carried out attacks on Houthi missile sites in Yemen, although oil prices remained stable. In the US, hopes of an early interest rate cut by the Federal reserve (Fed) took a slight knock as CPI inflation data came out slightly higher than expected but this was countered by slightly better PPI inflation data. The Fed is due to update markets on interest rate policy on January 31^st with the Bank of England and European Central Bank to follow suit a day later. Bond yields edged higher on the US inflation print.

Events in the Middle East continue to escalate. A senior Hezbollah commander Wissam Tawil was killed in an Israeli drone strike in Southern Lebanon. Iran-backed Houthi rebels carried out the largest attack yet on Red Sea shipping with US and UK naval forces shooting down 18 drones and three missiles. The US and UK then carried out attacks on Houthi missile positions in Yemen. There were also reports that Iran had seized a Marshall Islands-flagged oil tanker in the Gulf of Oman. These latest actions suggest global supply chains will continue to be affected. For example, the car industry works on very short lead times and Tesla has been forced to pause production at its German plant due to events in the Red Sea. Oil and LNG supplies have not been affected so far but this must be a risk.

Elsewhere, China has accused the US of sending a ‘gravely wrong signal’ to those pushing for Taiwan’s independence after the weekend’s election result that saw William Lai’s Democratic Progressive Party win with the new leader promising his term will be a continuation of the eight years of his predecessor. Beijing is likely to signal its discontent with an even bigger show of military force than it did after the visit to Taiwan of US House Speaker Nancy Pelosi.

Monthly GDP figures from the UK for November revealed that activity fully reversed its October fall in November, recording a 0.3% month-on-month increase in output, a touch stronger than expected. Even so, it remains touch-and-go whether the economy tipped into a technical recession in the second half of 2023. Looking ahead, lacklustre conditions are likely to continue into the first quarter of 2024. However, the boost to real incomes from lower inflation should come through as 2024 progresses with further tax cuts likely in the March Budget as PM Rishi Sunak battles to turn around the Conservatives poor polling ahead of calling a general election. The latest, most extensive poll in 5 years by the Telegraph predicts a landslide majority for Labour.

In the US, headline annual inflation CPI rose to 3.4% in December ahead of market expectations. This was driven by higher costs for housing, medical care, dining out and car insurance. Core inflation which strips out food and energy, dipped slightly to 3.9% but was also higher than expected. The Fed has signalled three interest rate cuts in 2024 but markets have been far more optimistic than this both in the scale and timing of cuts. This latest CPI data may force some to reconsider, but US interest rate futures are still pricing in a cut in March as the producer price inflation came in slightly below forecast at an annualised 1%.

In Japan, inflation eased to 2.4% in December suggesting that the Bank of Japan will maintain its negative rate policy at the coming meeting towards the end of the month. Japanese equities climbed to a fresh high.

The People’s Bank of China indicated that it may lower the reserve requirement to boost lending and support economic growth. This comes as China continues to experience deflation with December CPI of -0.3%.

Brent oil dipped slightly to $78 as Saudi Arabia cut its crude prices for all regions. The cut was greater than oil traders had expected, perhaps the clearest indication yet of a weaker physical market. This news was slightly countered by the US and UK attacks on Houthi missile positions in Yemen. There were also reports of Iran’s seizure of an oil tanker in the Gulf of Oman.

Finally, a momentous week for Bitcoin? The US regulator has approved Bitcoin exchange-traded funds (ETFs). However, the chair of the SEC said that investors should not mistake the new approval for an endorsement of the cryptocurrency. He said, ‘Bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and even terrorist financing.’ Which does beg the question, if so, then why did the SEC approve the new ETFs?

Read Last Week’s Alpha Bites – Taiwan, living in the Dragon’s mouth

* (Yellow cake is a type of uranium concentrate powder, a step in the processing of uranium before enrichment)

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A piece of (yellow) cake*

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