Are we approaching the end of the uranium glut?

The world uranium market has suddenly become interesting again, with prices (in US dollar terms at least) rising by 50% over the past year to over $17 per pound. We’ve been here before, there was a spurt up to $16 per pound in 1996 but this was quickly reversed and the market soon returned to the $8 to $10 level, the norm established since the mid-1980s. But this time, there are signs that the increase will be more permanent and could even go even further.

Talk of a uranium glut over the past 20 years looks distinctly odd when you consider the market fundamentals. For several years, I’ve been telling a story at energy conferences which I know many of my audience never fully believe. I say that the 440 power reactors around the world consume about 65,000t of uranium each year, yet world production is only around 35,000t. I produce pretty graphs to demonstrate this point and that, moreover, a similar situation has existed since 1985. I then explain that the gap has been filled by an inventory draw-down so huge that uranium prices have been depressed. Indeed, depressed to such a point that most of the mines have gone out of business, with only the lowest cost operators staying in production and able to make a small profit.

Cue looks of disbelief from the audience! People are familiar with markets being supplied by inventory from time to time but continuing for 20 years? With current production only 55-60% of demand, surely prices must be strong and rising to stimulate new production to fill the gap? Sorry dear audience, I’m afraid not. Well, at least not until now.

My story then progresses to explain the mysteries of the inventory draw-down – in other words, all of the so-called ‘secondary supplies’. These add to primary production to ensure that supply equals demand in each year – which it clearly must as all the reactors have fuel and are generally running very well. Things get complicated here and I always sense the audience think I’m doing this quite deliberately, in order to obscure matters. Or else they suspect that my basic figures are wrong, with demand overestimated and production understated.

Leaving this aside, I then break down the graphs into the slightly different historic patterns in the West and the former Soviet Union and its satellites. I talk about eras of uranium production for military applications, with some of the material mined up to 50 years ago now entering the civil market as a consequence of nuclear disarmament in the USA and Russia. Then of booming and declining civil reactor programmes, which led to significant inventory build-ups and run-downs, continuing through to the present day. Then I explain variable tails assays at enrichment plants and the possibility of sending stocks of depleted uranium back through the plants to create more reactor-assay fuel. And stocks of reprocessed uranium and plutonium from civil reprocessing plants, which can be recycled in various ways as fresh fuel. Finally, I’ll emphasise the importance of trade in nuclear fuel, particularly between the East and West. Russia and its former satellites have effectively covered, since the late 1980s, a substantial shortfall in European and North American markets.

The end of the story is always a plea for the impoverished uranium miners: surely things cannot continue this way forever. Eventually the secondary supplies must become progressively exhausted and we’ll then need lots of new primary production. Maybe not so much that the gap closes completely, as it will take a long time to recycle all the possible ex-military uranium and plutonium in the civil market , while MOX fuel and reprocessed uranium may continue to cover a small segment of demand.

Yet until now, not much has happened to bring forward the prospect of new mines. Indeed, quite the opposite. Primary production has become concentrated in fewer and fewer mines in a small number of countries, such as Canada and Australia, owned by robust companies who have pushed operating costs down to the absolute limit. For most of them, thoughts of major new mines have been put to one side as they have struggled to keep existing operations going in adverse market conditions.

On the fuel buying side, many of the companies operating nuclear plants appear to have been seduced into a false sense of security. Industry analysts have been presenting analyses similar to this for many years but could perhaps be accused of ‘crying wolf’. Estimates of when the secondary supplies will run out have been continuously proven wrong, so the era of relatively easy supplies at low prices has become prolonged. Perhaps to the point that buyers believed that things would never change – or at least not in their own working lifetimes.

It is, of course, possible that the recent price spike will turn out to be temporary, as in 1996. It’s true that there have been supply disruptions at some important mines over the past few years, such as Olympic Dam in Australia and McArthur River in Canada. These have undoubtedly contributed to the price increases, but I would argue that the shift in the market is much more fundamental than this.

The key factor is, I believe, a change in the way the Russians view their participation in nuclear fuel markets. Back in the late 1980s, when they first became a major force in the market, they owned significant excess inventories of uranium of various assays, from HEU right through to depleted uranium. In addition, they had surplus enrichment capacity in efficient centrifuge plants. Their main motivation has been to cash in on this, as they needed as much hard currency as possible. Nuclear fuel was one of the few areas where Russia had any competitive advantage over the West and the demand for supplies from Europe and North America was assured (although sometimes constrained by various trade restrictions). So the Russian inventories have been probably the biggest factor in bridging the supply gap, and while this has earned them significant revenue, their strategy has now changed.

Clearly their inventories are now significantly depleted, so they regard what is left rather differently – as scarce and strategically valuable. Looking back, they may now believe that they sold too much too cheaply to the West. By supplying so freely, all they succeeded in doing was depressing the price for everyone. In addition, the Russians have always regarded reactors they have built as their captive market. The numbers of these are increasing with VVER-1000 reactors currently under construction in China, India and Iran and even the Russian domestic reactor programme is showing signs of getting back on track. At the same time, the Russians have realised that their key strategic resource is their abundant oil and gas reserves. The West is developing an increasing dependence on these, like a drug addict seeking another fix. So it now seems better to hang on to the remaining nuclear fuel supplies and export the oil and gas. Their own uranium resources are limited and of poor quality, so it would also be better to focus their efforts on the production of other commodities.

The impact of this change will be felt throughout the uranium market over the next period. There will be a sudden realisation that the Western supply infrastructure is very fragile and that primary production must be increased – and as soon as possible too. Of course, producers have always said that it takes a significant time to get mines up and running but it is only partly a case of the right economic incentives as the regulatory burden today is very onerous.

We may therefore expect these interesting times in the uranium market to continue. It is a unique and fascinating market, with complications and peculiarities, but needs to be understood rather better by more people involved with nuclear power.

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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