Balancing the market

1 January 2007

Quoted uranium prices continue to move sharply upwards. After being stuck at around $10 per pound for many years, prices have been on the rise for over three years now, with no obvious signs of a stop. The spot market was being quoted at $65/lb in mid December. This has created a number of issues with the industry for anti-nuclear opponents, for example the claim that the price spike indicates that there won’t be enough uranium to satisfy future reactor requirements, particularly if there is an upsurge in new reactor building. There has also been a view expressed that such price rises may also begin, eventually, to have an impact on the economics of nuclear power relative to other electricity generating modes. Both of these concerns can both quite easily be shown to be misguided, but there is another issue surrounding the price rise that is worthy of some discussion. This concerns the mechanics and price reporting of the uranium market itself.

It can be argued that the long period of price depression followed by such a dramatic spike indicates that the uranium market is not functioning as it really should. The explanation for the way prices have behaved is ultimately quite simple. They were depressed for many years by abundant secondary supplies, which pushed them below the production costs of many mines, which then had to close. When it became clear that secondary supplies were beginning to become exhausted and there were signs of new reactor orders, an upsurge of market demand met supply which was effectively fixed in the short and medium term by years of low investment. Hence prices started to rise. Additional elements of demand were triggered by this, including a speculative element from financial companies, thus serving to push the price up further. An efficient market, however, should transmit information about supply and demand in a manner that results in prices moving smoothly and stimulates the required production in a timely manner, so that future demands can be comfortably satisfied. Yet we know commodity markets tend to be volatile, with prices tending to over-shoot at the top of the cycle and then remain depressed for rather longer than is fully justified by the future production needs. Uranium may just be an extreme case of this, but with a longer cycle length.

Nevertheless, the particular characteristics of the uranium business should ensure that it should arguably have much calmer market conditions. Electricity companies have to go through a prolonged planning and licensing period before a reactor goes into operation, then they aim to run it intensively for upwards of 40 years into the future. Uranium mining companies have a very similar time horizon – again it can take many years to bring a new discovery into production, but once this happens, the mine will run for many years. So with similar time horizons, the two sides, buyer and seller, ought to be able to do business easily together. In the past, arrangements such as buyers taking equity stakes in uranium mines or granting long-term supply contracts at favourable rates (thus providing mining companies with suitable collateral to borrow money for mine investment) were very practical solutions to address the common interest in secure and orderly supply at reasonable prices. The long period of depressed prices, however, left the buyers feeling that such arrangements were against their interests. As it was possible to buy as much uranium as they needed at very favourable prices, why take the risk of investing in mines or grant long-term contracts, where the prices could well be significantly in excess of the spot price?

Now the boot, formerly very much on the foot of the buyer, has dramatically switched to the seller. Again this is typical of all commodity markets, but it happens so swiftly that there is little time to consider whether the arrangements in the market are sensible or should be changed to the ultimate advantage of all. In the earlier period, the buyers didn’t want to change anything, but now it’s the sellers who are perfectly happy. There has been some movement back towards buyers taking equity stakes in producing mines (notably the East Asian utilities and their agents in Kazakhstan) but few signs that buyers are talking to mining companies about future production costs from their mines and negotiating long-tem contracts based on these. Indeed, any mention of cost of production in the current market environment tends to be laughed at. Both short- and long-term supply contracts are apparently being fixed on the basis of the spot price at the time of delivery (which effectively brings together the marginal quantities of material available for short-term delivery). This makes little sense for a commodity where both supply and demand have such a long-term focus. It makes it impossible for utilities to budget future fuel costs and means producers may once again eventually receive very low prices for material, if prices plummet and any floor provisions in their contracts run out of time. This may make producers wary of carrying out the high level of capital investment now required to bring supply and demand into good balance for the future.

Much of the problem relates to lack of market liquidity and transparency. Prices are published on a weekly and monthly basis by informed observers such as Ux Consulting and TradeTech and are based on information they glean from market participants. They would be the first to support receiving increased knowledge about many more transactions, but it doesn’t currently exist, as visible deals are few and far between. More recently, auctions of small quantities of available material have provided much of the information. There are then ‘transactions-derived’ price reporting systems, such as Uranium Price Information System and Uranium Online. Both of these suffer from significant weaknesses (in the case of the former, limited coverage and time lags, and in the latter, very few transactions to date). Further information can be gleaned from company announcements and accounts, where average selling prices may be quoted or can be calculated. Finally, there are historic price series from governmental bodies such as Energy Information Administration in the USA and Euratom in Europe, which give an authoritative rear view mirror but little else.


Rather like the somewhat dated infrastructure of much of the nuclear fuel supply business, the current uranium pricing system is a prisoner of its history

How can things change for the better? Rather like the somewhat dated infrastructure of much of the nuclear fuel supply business, the current uranium pricing system is a prisoner of its history. The infrastructure issue is slowly but surely getting addressed by the required new investment, but the uranium market is still in need of something new. The first requirement would seem to be a spot market of greater transparency and with much more volume. Of course, everyone supports more transparency, so long as it’s other people providing it, but market participants should gradually be willing to support it. The financial investors who have entered the uranium market are potentially important players here. It is unclear whether the market can become more akin to the other energy markets like oil, gas and coal, where there is a greater range of financial exchange trading rather than physical trading. The size of the market will always be considerably smaller in uranium but the interest expressed by many ‘outsiders’ suggests that it could potentially be sufficient to promote an active market. This will require standard contract sizes and delivery terms, online screen trading with small lot sizes and also plenty of free inventory to lubricate the market.

None of these requirements are much in evidence yet, but could surface over a period of 3-5 years. In particular, the uranium buyers need to be more proactive in their procurement decisions, buying smaller lots to give them a better balanced contract portfolio, rather than occasionally entering the market to buy large quantities. This will require big cultural changes within their companies, breaking with a lot of past practice. Then the producers need to start producing much more uranium to free up quantities available on the spot market. This will possibly be associated with a fall in the spot price from the peak (wherever this is established) but would be the ideal time to spur new market arrangements. The point where the interests of both buyers and sellers coincide may be a very short-lived one, but is the key to major change.

The question then remains about the longer-term market. To some extent, having a more transparent and liquid spot market will go some way towards addressing this. Assuming an improved spot market has a futures element, ideally with a forward price curve showing future bids and offers, there may be much less market volatility, with some of the peaks and troughs rounded off. It would then be more realistic to index prices for delivery in the 3 to 10-year timeframe to these prices, perhaps incorporating other indices, including general inflation. This is up for negotiation by individual buyers and sellers who, as always, will develop their own specific contract types. But there must still be some room in the market for standardised longer-term contracts, with fixed quantity and delivery obligations. Perhaps these can be considered as a very worthwhile stage two after the short-term market is reformed. A credible uranium market-maker may do this in the spot market, with the ability to take things further. One possible danger with long-term contracts is that either party may conceivably try to get out of the arrangements if the spot price moves too far from the contract price.

In conclusion, if nuclear is to take its rightful role as a major feature of the 21st century energy scene, it is important that there is as much clarity as possible about all aspects of its uranium raw material base. The uranium market still retains arrangements developed in the mists of time, but now is an appropriate time for something new to be developed. It will undoubtedly take some entrepreneurial leadership to induce this to happen, plus realisation that the current marketplace cannot be in the long-term interest of either buyers or sellers.

Author Info:

Steve Kidd is Head of Strategy and 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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