1. Time shifting - matches supply today w/ demand tomorrow
2. Price formation - provides fixed forward prices in a market not always willing to provide them
3. Risk mitigation - decouples forward supply from mine operations
A coda to my tweets this week on #uranium contracting and the carry trade:
We care about how uranium has been bought and sold over the last decade - not just the sale price - because it informs us as to how a period of rapid price increase could develop over the next few years.
1. Time shifting - matches supply today w/ demand tomorrow
2. Price formation - provides fixed forward prices in a market not always willing to provide them
3. Risk mitigation - decouples forward supply from mine operations
At a constant financing rate, a spot price increase brings forward the time at which these two price curves intersect.
...in contango, with a forward curve driven by mining cost inflation (input costs, depletion).
...in backwardation, with a supply squeeze in the short term but competitive sellers offering cheaper prices in the forward market.
In other words, a production-driven market in gentle contango or backwardation will develop in ways dependent on how it got there.
1. Swapping physical inventory for forward supply increases risk, so there needs to be a big incentive.
2. We’re a ways off, price-wise, from the gentle contango or backwardation necessary to really motivate these transactions.
