Are uranium prices in a spot of bother?

As discussed in my article in the April 2004 edition of NEI, the world uranium market has suddenly become much more interesting. Indeed, spot market prices have continued to rise, albeit more slowly, throughout 2004 and are now standing at over $18 per pound, compared with $11 per pound in the middle of 2003. In terms of the currencies of most producing nations, the increase has been less sharp, given the appreciation of their currencies against the US dollar, but the rise is notable and has been sustained. The supply disruptions noted during 2003, such as the flood at the McArthur River mine and the problems at the Metropolis conversion works, clearly had some impact but time has shown that more fundamental reasons lay behind the price increase, notably the revised, longer-term strategy the Russian sellers are now adopting.
Indeed, many market observers expected a similar pattern to the reversal of the $16 per pound price spike of 1996. But this hasn’t happened. Some fuel buyers have continued to sit on the sidelines expecting the price to eventually fall back, but are running the risk of being left out in a rush to secure adequate supplies for the next period. The market is thus at a very interesting and perhaps also potentially dangerous point. Decisions made today will therefore greatly affect future options: notably, procurement decisions will influence the amount of investment in new capacity to fuel future demand. The question now essentially is: “Does the price today adequately reflect the future scarcity of supply?” Each buyer and seller must have his own answer to this and act accordingly.
It is clear that the buyers have a responsibility to help shape the future, but there are a large number of them who cannot necessarily be expected to act collectively and in a perfect manner. Yet within the enrichment sector, some have taken matters into their own hands by supporting Urenco’s proposed enrichment plant in New Mexico. Within uranium supply, however, the situation today seems more concerning.
The reasons for the price rise were discussed in the April article, but is the market responding correctly to the price signal which has been provided? Everybody agrees that more uranium supply is needed, particularly for the period beyond 2008 when world utilities are not well-covered by current contracts. But buyers don’t have too many options for this period – or at least it appears that way from today’s perspective. Many producers have no doubt already committed a substantial part of their output over this timeframe while the Rössing mine in Namibia could possibly close by 2006, removing 3000 tonnes per year of supply from the market.
Supply and demand will of course adjust to price, but both are rather inelastic. Once reactors are up and running, they need to be fuelled and their operators must pay the going rate for supplies. Their suppliers are essentially competing to meet this fixed level of demand but cannot easily adjust volumes either. Hence there is always a risk of price volatility when mismatches suddenly become apparent.
There is plenty of uranium in the ground and contained in nuclear weapons to keep reactors running for many years and there is no underlying reason why prices for this should be much different from today’s. Yet it is difficult to get this uranium out of both the ground and nuclear weapons. There are a myriad of problems such as obtaining finance and regulatory approval, trade restrictions and other government problems, technical glitches at mines and transportation difficulties.
Some of the supply, indeed, is not at all sensitive to the uranium price. A substantial part (10-15%) of uranium supply is produced as a by-product of other minerals with the economics depending fundamentally on the position of the main product. Then there is the uranium originating in nuclear weapons, which is arriving on the market mainly for non-proliferation rather than economic reasons. Moreover, uranium supply which comes from re-enriched depleted uranium (‘tails’ material) will diminish in quantity at higher uranium prices, as customers will choose a lower tails assay at enrichment plants and there will also be less spare enrichment capacity available to then re-enrich the tails.
Given enough time, the market should work and, without foolish government intervention and trade restrictions, there is no reason why prices should rise much further. But the combination of demand inelasticity and temporary (at least) supply inelasticity could lead to prices rising much higher, at least in the short term. It is still rather early to judge whether the recent price increases are sufficient to bring on enhanced supply on a timely basis, but companies are now showing greater interest in getting involved in uranium production. Most are some way from the production stage, but the signs are that some will get into operation over the next few years. A greater volume of highly enriched uranium (HEU) may also be required to balance the market at some stage, particularly for the period beyond 2013 when the current 500 tonnes deal between Russia and the USA runs out.
From the standpoint of the major producers, the current price may be close to the optimal if it is fully reflected in the long-term contracts they now can sign. If the price rises much further, it could have the effect of bringing on some additional supply which could later damage the market under reduced prices.
The uranium market is certainly competitive, but the number of companies involved has been driven down sharply by the prevailing market conditions in recent years. The survivors are well aware of the nature of the competition but will probably not want to see a lot of new companies arriving on the scene, solely chasing the higher prices which will probably prove temporary. This happened, to some extent, following the 1996 price spike, when World Wide Minerals and Anaconda Uranium surfaced and tried to enter the sector, but failed to create any additional output once the market fell back. Securing long-term contracts at the higher spot market prices will tap much of the potential demand such companies would be targeting.
Larger producers such as Cameco and Cogema certainly have sufficient market power to exert some influence over the market. Both are involved in managing the introduction of secondary supplies into the market, such as the uranium component of the Russian HEU. They can also buy uranium on the spot market when the price is weak and sell when the price is strong to try to remove some of the market volatility. Yet they need sustained higher prices to make a reasonable profit from the new mines such as Cigar Lake, which may have remained on hold had prices not risen. They therefore have to play a delicate balancing act within the underlying market fundamentals, which they don’t have the power to affect fundamentally.
Indeed, the spot uranium market is diminishing in importance as the longer-term contract market reasserts itself because customers wish to secure their long-term positions. Most market participants will welcome this as the tail has been wagging the dog for too long with the market awash with secondary supplies which threatened to prevent the creation of necessary long-term price signals. Utilities could always rely on picking up supplies on the spot market at competitive prices without giving the suppliers the level of return needed for them to invest for the long term. This has fortunately now changed and there is a reasonable expectation that the uranium market may eventually become more like other commodity markets, with a good balance of longer-term and spot dealings.
Nuclear power is a long-term business, so one would naturally expect there to be a large number of long-term contracts for fuel supplies, which the producers can use as collateral in borrowing money to invest in new mines. Indeed, this is how things used to be 20-30 years ago, when many new mines were developed to fuel rapidly-growing nuclear power programmes. The period since then may eventually be seen as rather an aberration, caused by excessive secondary supplies, with sub-$10 prices a distant and (for the utilities) fond memory.

Steve Kidd is Head of Strategy & Research at the World Nuclear Association, where he has worked since 1995 (when it was the Uranium Institute). Any views expressed are not necessarily those of the World Nuclear Association and/or its members.

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