Different Cost Structures, Different Goals
Earlier in 1997 I presented a paper entitled Production and Non-Production Uranium Supplies (Ref 1) That paper set forth an outlook for a potential uranium surplus building to over 20 000 tU per year by 2001, just four years from the present (Figure 1). This surplus results from a forecast of more or less stable uranium requirements and increasing primary and secondary supplies. These increasing supplies signal a period of intense competition between suppliers where the cost structure of the supply source will have a major impact on the ability of that source to compete successfully for new sales. We will also see that different goals may enhance or detract from that ability.
Primary Production
World primary production of uranium in 1997 will account for 58% of current estimated requirements. The remaining 42% will be made up from secondary supplies provided through the liquidation of civilian and military inventories, and the recycling or reprocessing of spent fuel (Figure 2).
Current and potential sources of primary uranium supplies may be grouped into the following classifications: operating, standby, or proposed. These classifications may be further subdivided into those where uranium is the sole product and those where uranium is a by- or co-product. Each classification has its own cost structure and goals as set forth below.
Operating
During
1997, 53 projects in 24 countries will produce 37 300 tU
(Figure
3).
Some of these operating production centres have recently expanded
production: Cluff Lake, Rabbit Lake and Rössing are making
greater utilisation of existing capacity, while Olympic Dam and
Ranger are adding to existing capacity. Current operating projects
have the capacity to produce up to 46 000 tU per year.
These uranium producers now in operation must reasonably expect to cover current costs in order to remain in operation. The ability to also amortise and depreciate past capital expenditures allows such producers continuing access to capital markets. Sometimes, these costs can be deferred for short periods. Certain producers, such as those utilising in situ leaching, have some latitude in accounting treatment of wellfield development costs; they can be either capitalised or expensed. One may assume that those producers now in operation are the successful competitors of the past.
Standby
Low prices for more than a decade and time itself have taken
their toll on former producers. Many uranium production centres
of the past have now been decommissioned, and the production
capability of the few still remaining on standby is surprisingly
small, about 4600 tU per year.
These standby producers are concerned with minimising current non-productive standby costs, yet maintaining the ability to resume production as soon as possible. Resumption, however, inevitably means some additional capital for deferred repairs and replacements as well as the need to acquire and train a new workforce. A short, but very real, learning curve can also be expected. Producers now on standby are those which were not successful competitors. A look at market conditions when these operations were suspended provides at least an indication of the conditions necessary for a restart.
Potential
A large number of potential uranium producers with well defined
plans for development and operation exist today. In total, I
count about 40 projects with a combined production capability
of 42 300 tU per year.
These
potential producers are poised to make a major contribution to
future uranium supply. Such a contribution, however, requires:
- a major commitment of capital;
- the ability to compete with existing operations;
- acquisition and training of a competent workforce;
- a potentially significant learning curve;
- the need to earn an acceptable return on invested capital;
- contracts for sales of sufficient future production to underwrite the invested capital;
- the ability to withstand repeated assaults by anti-nuclear, as well as anti-mining, forces.
When one assesses the ability of potential producers to compete with existing producers, clearly existing producers have a number of advantages.
By-
and Co-Product
Each of the above categories includes by- and co-product producers
of uranium. These producers have much greater flexibility than
others in that they are not strictly dependent on conditions
in the uranium market, but rather on a combination of conditions.
Great latitude is also available in the accounting treatment
of uranium production costs.
Consider certain gold producers in South Africa, where uranium recovery enhances subsequent gold recovery through a reverse leaching process. Gold credits can amount to as much as US$25/kgU. Thus, uranium production might actually occur at a loss, but that loss is more than balanced by gains on the gold side of the equation. An additional advantage of operating in South Africa is the ability to write off against revenue all capital costs in the year in which they are incurred.
Secondary Supply
Some 1.8 million t of uranium were produced during the period 1946-1996. Actual consumption for both civilian and military needs during the same period is estimated to have been about 1.0 million tU. Thus, approximately 800 000 tU have accumulated as inventory in one form or another (Figure 4). It is this accumulated inventory that provides the vast majority of secondary supply. Substantial uranium inventories are controlled by the US and Russian governments. Additional quantities are controlled by the private sector.
Military
Inventories
Military
requirements, for nuclear weapons and naval fuel, drove the first
phase of the uranium industry from 1942 through to the late 1960s.
While cost was not an overriding concern in the West, most military
production was obtained under more or less competitive conditions.
US government purchases of uranium during this period were 230 000 tU
at an average price of just over US$23/kgU (Figure
5).
About 60 000 tU of this have been consumed for weapons testing, plutonium production and naval fuel, leaving the US government with 170 000 tU in inventory in various forms. Some of that material is now entering the market and the flow is expected to increase in the future. Like most surplus government inventories, this uranium no longer has any specific cost associated with it, but rather it is valued only at what it might bring in the marketplace. Thus, it will make no difference if the market is at US$25/kgU or US$50/kgU, this surplus will be available at whatever price exists in the market at the time of the sale.
Soviet/Russian uranium inventories are more difficult to quantify because of the closed system within which they exist and because the military/civilian lines of control are not clearly drawn. Nevertheless, certain information is available upon which some general conclusions can be drawn. Total Eastern Bloc uranium production is estimated to have been 650 000 tU, most of which is reasonably well documented. Military consumption is similar to the West at about 40 000 tU and civilian consumption for nuclear power in Russia and central and eastern Europe has been 170 000 tU. Exports to the West have been about 60 000 tU. Present Russian inventories, in all forms, can therefore be seen to be 380 000 tU (Figure 6).
Much
of the total Russian inventory is in the form of high enriched
uranium (HEU), perhaps 290 000 tU. This leaves 90 000 tU
in a more commercial form. Commercial-grade material is being:
- utilised for Russia's domestic nuclear fuel needs;
- exported to central and eastern Europe under fuel fabrication agreements for Soviet designed reactors;
- exported to western Europe and the USA under quota systems implemented to protect Western producers from this low-cost supply.
It is a low cost supply because of inflation that has ravaged the Russian rouble. Even as late as 1991, uranium production costs in the former Soviet Union were in the range of 40 to 60 roubles per kgU, trivial in terms of the present exchange rate of over 5000 roubles per US dollar. This past production is being sold into today's market at today's prices.
HEU is being blended down into nuclear fuel and some of the feed material has already entered the marketplace. Increasing quantities are expected. Production costs for this HEU were long ago absorbed into the weapons systems and are no longer a part of the present cost structure. Production costs for the blending process were recently estimated by the US Department of Energy (DOE) to be as low as US$8/kgU. Thus, while the primary goal is to remove nuclear weapons from the world's arsenals, the profit potential is also very real. In addition, the savings over any other conceivable disposal option are enormous.
Civilian
Inventories
Civilian inventories have been a major factor in the uranium
marketplace for more than a decade. Traders and intermediaries
became more important during this period and through their efforts
created a much more efficient marketplace. To date, these efforts
have been focused on civilian inventories, those held by utilities
as well as those held by producers.
Strategic minimum inventories equivalent to between one and four years' requirements are held by most non-US utilities, and pipeline inventories of about 1.5 years' requirements for the conversion, enrichment and fabrication of nuclear fuel are held by all utilities. These strategic and pipeline inventories might amount to some 150 000 tU. Most US utilities carry very little strategic inventory and are attempting to minimise even pipeline quantities.
During the late 1970s and early 1980s, however, many nuclear utilities ended up with uranium in excess of their immediate needs. These excesses were caused by cancellations or delays in bringing new units on line, restrictive enrichment contracts implemented by the DOE, and perceptions of inadequate supplies. Drawdown of these excess inventories began, in the West, in 1988 and has continued through to the present to a point where almost 150 000 tU have been dissipated. Nevertheless, recent estimates indicate that almost 40 000 tU of excess inventory still remain in the hands of nuclear utilities.
Utilities have generally not sold their excess inventories outright. Instead, they have tended to use them as a buffer to avoid buying higher-priced new uranium, loaned them to others for a small fee, or utilised them as a means of providing security of supply. Increasing competition and increasingly sophisticated accounting systems have brought the cost of these holdings to light, and these factors can be expected to lead to continued reductions in nuclear fuel inventories. Most, if not all, remaining excess utility inventories are scheduled to be drawn down by 2005.
Uranium producers may also hold certain inventories. Some producers, such as Cameco, keep a strategic inventory of as much as one year's supply in order to ensure deliveries should a production interruption occur. Some producers also have excess inventories; such is the case with South Africa and China. South Africa, for example, built up an excess inventory when the USA, Canada, Japan and others enacted anti-apartheid embargoes in the late 1980s. Other inventories crop up from time to time in various forms such as fabricated fuel from a cancelled or shutdown reactor, and material which might have been tied up in litigation. These producer and other inventories have been entering the marketplace at a rate of about 1000 to 1500 tU per year.
From an economic/financial standpoint, most of the costs associated with the accumulation of these civilian inventories are sunk costs, incurred in the past and having little relation to present costs or prices. Accounting treatment of inventory varies somewhat, but in many cases inventories are valued at the lower of cost or net realisable value. This treatment, in itself, has devalued many inventories by severing them from their high-cost past and has made them available to the market on a much more competitive basis.
I recently saw an example in South Africa where a uranium inventory is valued at its "incremental" cost of production. In this case, fixed costs such as labour, repairs, maintenance, some power and water costs, and overhead and administrative costs were written off when uranium entered inventory and only the direct costs of production such as reagents, acid and most of the water and power costs were applied to the inventory value.
Reprocessing
Relatively small quantities of nuclear fuel have been reprocessed
to produce either metal fuel for British magnox reactors or mixed
oxide (MOX) fuel for light water reactors. A reduction in the
quantity of high level waste is the principal advantage of reprocessing.
Reprocessing is generally quite expensive when compared to utilising
natural uranium, but from an overall standpoint, including waste
disposal considerations, the difference is much less. This technology
also holds the potential to utilise military plutonium inventories.
At present, reprocessing accounts for only 2% of total nuclear fuel requirements, but growth is taking place and is expected to continue. By 2010 reprocessing is forecast to reduce the world's uranium needs by more than 5%, or more than 3000 tU per year. This is another source of supply that is not particularly cost sensitive, at least in the short term.
Competition
Increasing competition is the hallmark of today's uranium industry. When barriers between East and West evaporated, producers on both sides suddenly found themselves cast into a new era of competition. Western producers screamed "Foul!" and received certain relief in a system of quotas. Eastern Bloc uranium producers, who were in a special privileged class of strategic industries under the former communist regimes, have suddenly found themselves adrift and alone in a new world of international commerce that, for them, had not previously existed. Both sides are now in direct competition on a worldwide basis and both are feeling the impact.
Western producers have been competing with commercial inventories for 15 years or so, as large quantities of these inventories have made their way into the marketplace. The impact of these inventories is diminishing, but that of military inventories is increasing. It is ironic that some of our very long established producers, such as Rio Algom, find themselves now competing against the very same material they might have produced many years ago for the military. Today, however, that material is valued at much less than when it was originally produced.
Eastern Bloc producers are in much the same situation. The entry of Russian HEU into the market puts increasing pressure on those who provided the feed in the first place. And again, the price of this material is less today than its cost in the past.
In the early years of our industry, uranium producers were in direct competition with other uranium producers. The playing field was reasonably level and the goals were similar. That situation changed in the mid 1980s when redistribution of inventories by intermediaries and traders injected a wide array of new competitors into the market. Further change occurred in the early 1990s, as first Soviet and then CIS uranium began to flow in increasing quantities. It is changing again with the addition of US government surpluses, in various forms, to the market. Reprocessing and a shift toward the use of more HEU add to the competitive burden of primary producers.
Who will win the battle for future sales? In short, secondary supply, because of its market-related price structure, is going to displace primary supply. Higher-cost producers will be squeezed out and some potential new producers may not come on stream as scheduled because the outlook for high returns on large investments has become less favourable.
On this basis, I have revised Figure 1 to show secondary supply on the bottom of the graph, illustrative of its ability to compete (Figure 7). The excess shown above the requirements line illustrates the vulnerability of higher-cost current and proposed primary production. These types of primary production are not necessary, at this time, to bring supply and demand into balance.