In 2004, I presented a Paper at the WNA Symposium with the rather long title, "Fueling the Future - Assuring Uranium Supplies in an Abnormal Market" <1>. The purpose behind this paper was multifold. First, it sought to provide some perspective for the then recent rise in uranium prices, and to debunk some "popular" theories being floated about that overlooked the fundamental changes that were taking place. Second, it took to task a rationale as to why the price increase would be reversed or mitigated by a greater substitution of enrichment for uranium. Third, it identified some of the challenges that the industry faced expanding fuel supplies at a time when fuel demand was growing.
To a large degree, the Paper was motivated by concern that fuel supply issues could derail the nuclear renaissance that was beginning to gain steam at that time. While that concern may have seemed misplaced since price then was much lower than it is today and the full potential of the renaissance was unknown, it is now being taken more seriously as utilities must arrange for supplies for new reactors, including the rather large demands associated with first cores, in an environment where prices are already under considerable upward pressure and supplies are often hard to come by. In our mind, it was important to recognize that, due to its peculiar evolution, the market was abnormal: low prices were not an indication of the absence of problems associated with uranium supply; rather the market was not reflecting future supply scarcity, and this failure could lead to problems in the future.
With this as background, the Paper will review what has happened over the past two years by focusing on some of the key developments in the market and industry and, where applicable, relating them to what was said earlier. The intent is to provide some context to what has happened in the market and what this means for the future, as we are entering a critical period that could impact the potential for nuclear power growth that appears to lie ahead.
Nuclear Power Growth Prospects
Implicit in the title of the Paper, "Fueling the Future", was the assumption that nuclear power will be a key source of electricity supply in the future. In this regard, the title is more relevant today than ever given the greater reliance that countries are placing on nuclear power to meet their future energy needs. This includes countries which are considering adding nuclear power to their electricity generation mix, as well as ones seeking to increase their currently installed nuclear power capacity.
This trend toward more nuclear power was captured to an extent by the increase in nuclear capacity forecast by the WNA between 2003 and 2005, as shown in Figure 1 <2>. Here, the WNA projected higher installed nuclear capacity in its upper and reference cases by 2025, although the growth was lower in many of the intervening years, especially in the upper case. The WNA also expanded its forecast horizon to 2030, and projected continued growth in the upper and reference cases for this time period. Thus, WNA saw strong potential for new nuclear capacity, although the growth was somewhat delayed from what was projected in 2003.
Since the WNA's last forecast in 2005, prospects for nuclear power have increased even more. Probably the most dramatic example of this is in Russia, where the government is looking to expand nuclear capacity from its current 16% share to up to 25% in 2030, a change that would necessitate building 40 additional reactors. Figure 2 compares the WNA reference and upper forecast for installed nuclear capacity in Russia through 2030 with point estimates from recently announced Russian expansions for 2020 and 2030 <3>. This comparison indicates that current Russian plans for those years are almost double what the WNA forecast in 2005. It is quite possible that these plans will not come to fruition, but it is worth noting that the Russian Government recently approved the expenditure of US$25 billion toward the construction of ten reactors. In addition to Russia, China and India have very ambitious nuclear programs which they are pursuing.
There is an important aspect to note with respect to the planned growth of nuclear power. Most of this growth is occurring outside of North America and Western Europe, where the bulk of current nuclear power capacity currently resides. While there has been much focus on what might happen in the United States and Great Britain with respect to new reactor builds, in reality, the bulk of the new capacity additions will occur in the Eastern part of the world, in countries such as Russia and China where governments have much greater say in the direction of capital expenditures than is the case in Western economics. This is illustrated in Figure 3, which compares WNA's total projected nuclear power growth with that portion coming from the "East", including east and southeast Europe. And, since this figure is based on WNA's 2005 projection, it does not reflect more recent expansion plans, such as those in Russia.
Of course, the most visible development since the paper was given has been the rapid rise of uranium prices. When I presented the paper, uranium prices had begun to increase, but spot prices were still under US$20, as shown in Figure 4. Importantly, long-term prices had begun to command a notable premium over the spot price, indicating concern that the supply/demand situation was even tighter in the future. However, a segment of the industry thought the price increase would only be temporary, and that price would again retreat, much as it did after the 1995/1996 price increase. Obviously, this did not happen. Since that time, the price increase has accelerated and this trend has persisted until today, raising questions of when the increase will stop.
In the earlier paper, I attributed much of then existing problems in the uranium market to its abnormal nature, and even talked about market "failure". Undue focus on inventory-driven spot prices by suppliers and utilities alike created an environment where supply and demand were getting far out of balance since utilities had large forward unfilled requirements and suppliers were not investing in new production. In a 2003 editorial dealing with market failure, we noted that U.S. utility unfilled requirements were "excessive" in 2006 and if uncommitted production was not sufficient, a situation could be created where price could "soar dramatically out of control" <4>.
Of course, we are now in 2006, and whether or not prices have soared out of control is largely a matter of perspective. Certainly, prices are much higher and are still increasing, so we don't know their ultimate altitude. In this regard, there are reports that some producers are "sold out", while utilities still have plans to do substantial long-term contracting, setting up a potentially explosive situation.
But uranium was not the only energy market to experience a dramatic increase in price, suggesting that other factors besides a market breakdown in uranium were at play. One of these was the dramatic increase in demand coming from new regions such as China and Russia that was largely unanticipated. The increase in demand from China and other developing regions of the world has certainly had an impact on the oil market, and this is a factor in the uranium market as well. While we wrote an editorial in 2001 noting that China and Russia would play radically different roles in the market during this decade than they did in the 1990s, even we have been surprised by the extent of the change <5>.
Still, the rate of price increase in uranium has outstripped that of oil, and uranium supplies have not been subject to the same types of uncertainties as oil, which have led to inventory building and represent a significant factor in the upward pressure on oil prices.
At the time of the Paper, there was a "perfect storm" theory floating about that sought to explain the price rise by a confluence of events or supply shocks. Chief among these was the Olympic Dam fire, the McArthur River flood, and Tenex taking back more HEU feed than previously planned. I believed this focus on specific events obscured the fundamental change that was taking place in the market at that time. Demand had been growing at a time that supply was stagnating, and the excess capacity and inventory situation in the 1990s which would have muted the price impact of these shocks had disappeared. Thus, the supply shocks revealed the fragile nature of supply, and the fact that price continued to increase after supplies recovered from these disruptions was proof that the market had fundamentally changed.
Another key development over the past two years has been the emergence of hedge and investment funds in the uranium market. To some market participants, the emergence of these funds has represented the primary reason why prices have increased, or they believe the funds have accounted for a large share of the price increase. In this sense, the funds have replaced the perfect storm argument as the argument de jour for the price rise. Again, this type of focus tends to take attention away from the dramatic change in underlying market fundamentals.
Here, we can make the following observations. While hedge and investment funds have certainly had an impact on the market, their buying has represented a fraction of overall spot buying, as shown in Figure 5, and a miniscule portion of overall buying, which includes long-term contracting, shown in Figure 6. This is because the funds have been absent as buyers in the long-term contract market, where the vast majority of uranium is purchased. The increase in long-term contract prices has led that of spot prices, in that the supply/demand situation has been tighter for future periods than the current period.
Indeed, instead of representing an alternative explanation to changing fundamentals for the price increase, speculators are reacting to the strong fundamentals of the uranium market, confident that prices will continue to increase. Of course, this type of behavior hastens and perhaps magnifies the nature of the price increase, but this is not necessarily all bad. For instance, to the extent that the hedge funds bid up the price sooner than it would have otherwise increased can be seen as positive for the market, as it should speed the recovery of uranium production. As noted above, back in 2003, we bemoaned the fact that the spot price did not reflect the true scarcity of supply in 2006, and it can be argued that if price had been higher then supply and demand would be in better balance today and price would not be as high as a result.
It is quite possible that fund speculation will make price overshoot its long-run equilibrium even more than it would in its absence by bidding up prices to even higher levels and over-stimulating production, and in this regard perpetuate the market's "abnormal" history. However, we do not believe that a return to market "abnormality" will necessarily result. If anything, the participation of the funds serves to make the uranium market more "normal". Speculation can be taken as a sign that the potential for the government to disrupt the market no longer represents such a large risk to deter speculators from taking positions, and by and large this is a good thing. From this perspective, perpetuation of the abnormal nature of the market depends more on the extent of future government involvement in the market than the presence of hedge and investment funds.
Enrichment Supply, Uranium Demand, and Prices
Another popular belief at that time was that the supply gap problem in uranium would be solved by a movement to lower enrichment tails assays which would correspondingly reduce the demand for uranium. This proved to be illusory at best. At the time of the Paper, we opined that "(i)n some ways it is just as appropriate to talk about the looming gap in enrichment supplies as it is for uranium supplies". This was because enrichment can only be substituted for uranium to the extent that there is sufficient enrichment capacity to do so.
Clearly, a movement to lower tails did not result in a decrease, or even an abatement in the rate of increase, in uranium prices, as Figure 4 showed. Utilities have not used a move toward lower tails to reduce their demand for uranium; rather, they have used it to increase inventory holding. Because enrichment capacity is limited and electricity costs are increasing, enrichers have responded to the increased demand for enrichment by raising the minimum tails assay allowed under new contracts, thus limiting the ability of utilities to substitute enrichment for uranium. And, as shown in Figure 7, they have also responded by raising enrichment prices.
The tightness in enrichment supply is manifest not only by the rise in enrichment prices and the limitations that enrichers have placed on the downward adjustment of tails assays by utility customers, but also by reports that some enrichers are indicating that they are "sold out" until the next decade - in one case well into the next decade. Whether enrichers are indeed completely sold out or not, by taking the posture that they are indicates that at a minimum they do not have much additional capacity available for sale in the specified timeframe.
Uranium production and expansion plans have responded positively to the increase in prices. During 2005, world uranium production increased by about 5.5 million pounds to a little over 108 million pounds. The impact of higher prices on expansion plans is illustrated in Figure 8, which compares production plans in 2002, 2005, 2006 against the spot price of uranium. This Figure shows that while there was only very marginal growth in production planned as of 2002, the situation had changed dramatically by 2005 in response to higher prices. Plans were further revised upward in 2006 to the extent that current plans have production reaching about 185 million pounds per year by 2015, doubling the actual rate of production that existed in 2002.
Figure 9 compares existing and planned production versus the WNA upper case requirements scenario. This comparison demonstrates that if these plans come to fruition, there would be more than enough production to meet future reactor needs, at least through 2015. However, several caveats are in order. First, everything does not go as planned when it comes to production expansion. A prime example of this is the flood that occurred at Cigar Lake, which set back the commencement of production there. There have also been delays in expansion related to licensing issues, as seen in the delay in expanding the capacity of the McArthur River mill. As shown in Table 1, a number of production centers have fallen short of their 2006 mid-year targets, with the combined shortfall exceeding 5 million pounds. As a result, production for 2006 is expected to be about the same level as in 2005.
Also, there can be developments on the demand side that can pose challenges to production expansion. As pointed out above, there have been more ambitious nuclear power expansion plans since the last time the WNA issued a requirements forecast, so even the upper case scenario may not capture overall uranium requirements. Further, these requirements are largely predicated on a 0.27w/o tails assay, which may not be realistic, and do not contain any requirements associated with inventory building. As we have seen, inventory building is not just limited to utilities, but can include producers and especially hedge and investment funds. Further, there could also be some inventory building on the part of governments as they seek to develop reliable fuel supplies to promote nonproliferation objectives.
An important dimension of uranium production expansion is that a large portion of it is occurring in the East, just like the expansion of nuclear power. Here, Kazakhstan has expanded production by about 3 million pounds last year, and has very ambitious plans to expand production to 39 million pounds U3O8 by 2010. Uzbekistan is expanding production as well, albeit at a much lesser rate. Russia is investing a considerable amount of money to expand its domestic production as well as that from joint ventures in Kazakhstan. This expansion on the part of former Soviet Republics, coupled with the projected expansion in Australia, which also represents an important source of supply for the Eastern market, represents the lionís share of planned growth in production.
|Table 1. Mid-Year 2006 Uranium Production Shortages (Million pounds U3O8)
|Initial 2006 production target was 113 million pounds.
Estimated 2006 production now revised to 109 million pounds.
In the two years since the original Paper there have been some developments that bode well for enrichment supply. The LES venture in the United States received its construction license, and groundbreaking on the plant is set for the end of August. Urenco continues to expand capacity in Europe. The transfer of centrifuge technology to the Enrichment Technology Company joint venture between AREVA and Urenco has been approved, paving the way for construction to begin on the Georges Besse-II plant in France. General Electric has entered into a joint venture with SILEX to commercialize that company's laser enrichment technology. And, despite the fact that it has delayed the start of its full lead cascade for its American Centrifuge Program (ACP) until mid-2007, USEC believes that it will have sufficient data to meet October 2006 ACP milestone and will be able to begin enrichment operations in 2009.
The progress in enrichment represents somewhat of a paradox for the market, however. On the one hand, a movement to centrifuge technology should result in lower-cost enrichment, but this might not translate into lower prices, at least not for a while. The modular nature of enrichment capacity allows enrichers to better match capacity with demand, avoiding an oversupply situation. In this respect, much of the new capacity is replacement capacity, not additional supply. Also, trade restrictions make availability of Russian commercial SWU to the market uncertain, especially after 2013 when the HEU deal is set to expire.
This situation is illustrated in Figure 10, which compares enrichment supply with demand. On inspection of this chart, it is clear that a very tight supply/demand situation is projected going forward. There is certainly some growth in enrichment production, but part of this is related to a build-up of inventory in advance of switching from gaseous diffusion to centrifuge technology in Europe and the United States. Thus, the drop in SWU supply after 2013 will not be as severe as shown, and it's certainly possible that capacity can be expanded more than shown here.
Figure 11 shows a somewhat different supply/demand comparison, allowing unfettered access of Russian enrichment to the market and comparing this against the WNA's upper requirements case. Here, we have added SWU demand associated with the commercial re-enrichment of tails, as some of the Russian SWU capacity is devoted to this. (Note that this figure assumes that the quantity of SWU committed to the enrichment of HEU blendstock is equal to the SWU contained in the down-blended product). Even on this basis, SWU supply and demand are very tight, and more expansion of SWU capacity is needed in the post-2013 period.
The growth of enrichment capacity is vitally important for the expansion of nuclear power. It reduces the stress on uranium production and adds more stability to nuclear fuel supply because of the ability to substitute enrichment (technology) for resources. The impact of lower tails assays on requirements is shown in Figure 12, which compares uranium requirements for the WNA reference case at 0.30w/o, 0.27w/o, and 0.20w/o tails assays. There is also a certain amount of uranium supply that is created via the enrichment of tails. In theory, this tails-based supply can also increase as enrichment capacity increases and operating tails decline, and the shrinking amount of uranium production required would be reflected not just by falling uranium requirements, but by the difference between the reduced uranium demand and the higher uranium supply from the enrichment tails.
Government Involvement in Nuclear Fuel Supply
Just like the case of building new nuclear reactors, Eastern governments can direct resources more readily to uranium production. This has certainly been the case in Kazakhstan, where the government is actively encouraging new investment in production. A prime example where parallel efforts are being made in both nuclear power expansion and uranium production expansion is found in Russia. Recently, when the Russian government announced that it was investing in new nuclear reactor builds, at the same time, it announced expenditures for new uranium production. Russia has also entered into joint production ventures in Kazakhstan, and has sought to reinvigorate ties with other former Soviet republics when it comes to securing fuel supplies.
In contrast to the degree of government involvement in Russia is the situation in the United States. While the U.S. government is offering loan guarantees to build new nuclear reactors, it is not directly allocating capital as in the case of Russia. Also, the U.S. is not directly investing in domestic nuclear fuel production, in contrast to Russia. And the U.S. Government is doing little to promote development of or access to uranium production in other countries, in contrast to the Russian and Chinese approach, instead letting the market take care of this need. However, the U.S. is investing in the back end of the fuel cycle, including the reprocessing of spent fuel, although this is motivated more by a desire to address waste disposal and nonproliferation issues than for fuel supply.
Government policy is extremely important with respect to future nuclear fuel output from Australia, one of the major uranium producing countries in the world. Australia, which currently has a ban against uranium mining in several key states, has a great potential to expand uranium production, and this supply is sought by China and Russia to meet their expanding uranium needs. Australia is currently in the middle of a debate on many things nuclear, including the possibility of building nuclear reactors in addition to expanding uranium production and building other fuel processing facilities, including enrichment. What happens in Australia will have an important impact on the geopolitical balance of fuel supplies in the future.
Another key area of government involvement in the market is trade restrictions, especially with respect to enrichment. Such restrictions are intended to promote supply diversity and to protect domestic industries, but can add uncertainty with respect to the supply for future reactors. This was seen earlier in Figure 10, which depicted a gap between supply and demand developing post-2013 depending on what happens with respect to the market availability of commercial Russian SWU supplies. This problem is particularly acute in the United States, as utilities there cannot necessarily count on being able to import Russian SWU after the HEU deals end, making fuel supply for new reactors, especially the first cores for those reactors, problematic.
A subject that is also attracting much interest today is the future rate of DOE uranium inventory sales. DOE is currently considering sales at an annual rate of 5 million pounds per year over the 2006-2015 period, and is inviting the industry to comment on the subject of inventory disposition. U.S. inventory disposition policies have had a significant impact on the market in the past, so it is prudent to examine what impact they may have in the future.
Finally, government initiatives with respect to promoting nonproliferation will have an impact on future enrichment and uranium supply. Russia is proceeding with an international enrichment center, and the United States has earmarked 17.4 MT of HEU to be blended down for its Reliable Fuel Supply program. In my earlier paper, I noted the irony that, given the dearth of excess supply capability, the government would likely have to resort to the use of HEU material to provide supply assurances to countries that agree to forgo enrichment and reprocessing. Thus, while in the past nonproliferation initiatives (i.e., the HEU deal) resulted in more supply to the market, more recently these initiatives are creating a new type of demand which is absorbing material that otherwise might have been made available to the market.
With respect to providing future supply assurance, it would seem prudent that any government supported enrichment complexes be optimized to operate at very low tails assays so as to economize on uranium use and possibly to strip tails, in case feed supplies remain under pressure. Also, it would seem wise for governments to invest in HEU conversion and down-blending infrastructure in case these supplies are needed to supplement other capability to support a strong nuclear power renaissance.
A Critical Juncture
The market and in some ways the future of nuclear power presently are at a critical juncture. Utilities are considering ordering new reactors with their requisite first cores at a time when nuclear fuel supplies are under pressure, as indicated by the rise in prices, especially in the uranium and enrichment markets. Whereas two years ago neither the demand to order reactors nor the concern about fuel supplies was very pressing, the events since then have put the reactor/fuel connection into a new light.
The critical nature of this situation is perhaps best seen in the uranium market. As shown earlier in Figure 6, in 2005 utilities worldwide entered into long-term contract commitments to purchase a quarter of a billion pounds. This year, they are on target to repeat this, although they have not completed much of this procurement. The question facing the market now is, with price under considerable upward pressure and producers unwilling or unable to enter into new commitments for delivery in certain years, what will happen when utilities seek to sign new contracts to meet their procurement goals. Will the uranium (and enrichment) be available, and at what price? If supplies are lacking or the terms unacceptable, will this cause utilities to defer or perhaps cancel their reactor orders?
During this crucial time for the market, governments will be making important decisions that will affect future supply as well as demand. The U.S. government will likely decide on an inventory sales strategy, and it will probably reach some accommodation about giving U.S. utilities access to Russian commercial SWU. The Australian government may expand its horizons to include consideration of other fuel cycle facilities and perhaps the construction of nuclear reactors. Other governments such as Russia, China, and India, will seek to assure themselves of adequate nuclear fuel supplies before they go forward with their nuclear power programs.
All of this leaves us wondering how the markets, market participants, and governments will react. One positive sign is that countries where most of the nuclear power growth is slated to occur are taking steps to ensure nuclear fuel supplies will be available. Also, the Australian federal government has taken the step to require the Northern Territory to allow new uranium mines. However, it will take time for some of these efforts to pay off. In the interim, we must depend on the market to stimulate the necessary supplies. Unlike the time when there were large inventories and excess supply capacity, today there is margin for error.
1. Jeff Combs, "Fuelling the Future - Assuring Uranium Supplies in an Uncertain Market", World Nuclear Association Annual Symposium 2004, London, September 2004.
2. World Nuclear Association, The Global Nuclear Fuel Market - Supply and Demand 2005-2030, 2005.
3. Report by A. G. Belova, First Deputy General Director of OAO Techsnabexport and Advisor to the Head of Rosatom, Fourth Annual All-Russia Energy Conference, Moscow, April 2006.
4. The Ux Weekly, June 9, 2003, p.1-2.
5. The Ux Weekly, December 3, 2001, p.1.