Uranium – what are the prospects post-Fukushima?

6 October 2011

It seems that the Fukushima Daiichi incident has been generally bad for the uranium market. The period prior to Fukushima was characterized by market prices well in excess of those of the long period of market depression in the 1980s and 1990s, with the possibility of developing new mines opening up once again. Annual world production has risen by 20,000 tonnes in the first decade of the new century, reaching 53,000 tonnes in 2010, the best level since the early 1980s. Most of the increase, however, has been concentrated in Kazakhstan, where production has risen by about 15,000 tonnes over the same relatively short time period (in nuclear terms) . The application of in situ leaching mining technology there has been very successful, leading to substantial production advances at low costs from relatively low-grade deposits. The remainder of the increase in world production has essentially been achieved by just one company, Paladin Energy, through its commissioning of two new mines in Namibia and Malawi.

Excluding the Fukushima accident, the outlook for the period to 2015 and beyond was for the continuation of steadily rising world uranium production, with the commissioning of new mines in several countries, particularly in Africa. It is now quite clear, however, that the accident is going to have a significant impact over the next few years, with some delays to previous production plans, particularly for mines not yet under active development. Beyond then, the general expectation is that the longer-term trends acting in favour of nuclear power will reassert themselves and substantial new mine investment will be required.

The spot market has reacted in a logical way to the realisation that demand will now be lower than previously expected, and to concerns over inventory sales from Japan and Germany overhanging the market for some time. The spot uranium price was in the high $60s per pound pre-Fukushima and settled in the low $50s by July.

The underlying problem is that eight German reactors have been shut down for good, while the other nine now have definite closure dates (disregarding another governmental U-turn there – which seems somewhat unlikely given the overall political situation). Although most previous scenarios had nuclear power in Germany eventually phasing out, the likelihood has now been enhanced. Six Japanese reactors are also shut down permanently (assuming none at Fukushima-Daiichi come back into operation), while most others there are not currently operating. More will be joining them as mandated outage times come up – all reactors in Japan have maximum 13-month gaps between refueling and inspection shutdowns. Although national regulatory approval may be granted to restart them, it will be hard to obtain local governmental support to do so in the current environment, and both of these are needed in Japan. At the very best, the other Japanese reactors may stay theoretically ‘in operation’ but their capacity factors for the next few years will likely be very low. Hence, less uranium will be required to fuel them than was previously expected. Some may also be permanently shut down when the stress tests are completed or because of perceived higher earthquake risk.

There has been some good news about future reactor plans from the UK, Poland and Saudi Arabia, but this is for startups in 2018 at the earliest. Underlying uranium demand for now and the immediate future has therefore fallen significantly and there is some threat of excess inventories from Germany and Japan hitting the market. At the very least, utilities there will likely minimize deliveries under any flexible contracts, essentially amounting to the same thing, that is, excess material could well be available. The other risk that is lingering in the background comes from US Department of Energy inventories; there are forces in the US wishing more of this to be placed on the market quickly to raise valuable funds for the depleted Federal coffers. The impact of releasing these supplies on the US market at present would be very adverse, particularly for prospective uranium producers there who have been battered by fluctuating market trends over many years.

The political action in Germany, shutting down the older units immediately, is a rather extreme (and indeed foolish) response, but is an indication of how politicians, the general public and regulators may begin to feel elsewhere. At the very least, it seems certain that some operating reactors around the world will face the need to spend some money on retrofits, to allow them to be licensed for longer. These costs will no doubt be absorbed by many reactors, as they operate in a very profitable way for their owners, but it is likely that some (probably older) units may have to shut down.

Turning to potential new reactors, where the anticipated demand has been important in pushing up the uranium price since 2003, the position has also become arguably more difficult. A highly politicised industry has become, rightly or wrongly, even more politicised, and nuclear plans in some countries may be scaled back, or at best delayed. The position of China in this is not surprisingly crucial, as it has almost half of the reactors under construction around the world. Its immediate reaction to stop the approval process for new units and look more closely at the safety of those already approved is a typical reaction. It will probably now be more difficult to gain approvals at some of the anticipated inland sites in China that have seismic issues. India has said that its expansive programme will go ahead as before, but there must now be increased doubt on its ability to gain political and public acceptance for reactors on some of the planned sites. Russia has cut back on its anticipated reactor sales to new nuclear countries, which seems reasonable, on the basis that plans in many of these look like being delayed. In particular, countries in South East Asia that have historically been vulnerable to tsunamis, such as Indonesia, Malaysia, the Philippines and Thailand, may rethink their plans for their first reactors in about 2020.

Given that the future level of uranium demand will now be lower than previously expected (although still anticipated to rise substantially in the longer term, with announced nuclear plans), the reaction of the producers will be interesting to observe. It is clear that several of the planned and prospective mines will now face greater problems in financing, notably those in Africa (where the ore grades are relatively low and the financing requirements heavy). More and more will depend on China, for the continuation of its strong nuclear build programme but also its willingness to finance new mines, for example, CGNPC’s interest in the Husab project in Namibia.

BHP Billiton has also announced that its review of the enormous potential expansion at Olympic Dam is still going ahead, so it seems that the best projects will still proceed, but those where costs are high and/or where the big buyers are unwilling to offer finance or long-term off-take contracts may fall by the wayside. So with demand lower than was expected before, the price outlook is also down in both the medium and long-term; in essence, it will no longer be necessary for buyers to offer the higher price levels that the more expensive projects require.

The only realistic way to forecast where the uranium price is going over the next five to ten years is to assess the cost levels at the mines. We know that world uranium production will have to rise from 53,000 tonnes in 2010 to perhaps 65,000 tonnes in 2015 and 80,000 by 2020. Mines will only go into production if the price is sufficient to cover both capital and operating costs, and provide a reasonable rate of return on the capital employed. Consultants try to assess what it would cost to produce the 65,000th tonne of uranium in 2015 and the 80,000th in 2020, but this is far from easy. Accurately estimating the so-called long-run marginal cost of production is the holy grail of metal and mineral price forecasting. It is particularly tough in uranium, where each mine tends to be very different. It is not just a question of the ore grade, as there are a huge range of factors in play. If one compares a very high-grade Cigar Lake mine in Canada with a very low-grade African mine, one may conclude that there is no contest on production costs. But the world is complicated, and the overall cost per pound of extraction of each mine may not be as different as the ore grades indicate.

“It is clear that some of the anticipated new mines, heavily promoted by financial backers, will be 'out of the money' - in other words, too expensive to develop in the new environment.”

It is clear that some of the anticipated new mines, heavily promoted by financial backers, will be ‘out of the money’—in other words, too expensive to develop in the new environment. Future uranium projects are very sensitive at prices in the $50 to $70 per pound level, and many may need more than $70 for viability. The general picture is that mines will be delayed; they will still eventually be needed to come into production, but it will not happen as early as previously expected.

Another observation is that it is also now somewhat doubtful that Kazakh uranium production will rise to 25,000 tonnes per annum as early as previously expected. Kazakh mines produced nearly 18,000 tonnes in 2010, but the immediate market may now limit their further expansion much above this level—unless they are prepared to accept lower prices. The Kazakhs are aware of their important role in the market and the potential impact on the uranium price of increasing their production too rapidly. They may now take a rather longer-term view of developing their uranium resources, perhaps preparing to leave uranium in the ground for later use, rather than push the spot price down now.

One way of avoiding the market altogether is for buyers to take equity stakes in new mines. The price they pay for these will, however, inevitably be based on spot prices at the time of the transaction (hence Chinese buyers have apparently been deterred by the recent quoted price of prospective mines). Taking an equity stake gives more security of supply, while deliveries may be based on the cost of production or some other agreed formula (if higher than cost, the equity owner will effectively get the money back through dividends on profits).

The foundation of the spot uranium market is essentially as a residual for when the main buyers get short or have too much. This is inevitable when long term contracting is the preferred method of both main buyers and sellers. Today the spot market quotations are better informed than in the past by occasional public auctions of material, daily broker quotations and the CME Group futures market (ex NYMEX). The financial sector has now taken an interest in uranium and attempts are being made to make it into a more ‘normal’ commodities market.

This will probably ultimately fail, although the additional products and price quotations available are useful, particularly for market participants who want to hedge risks. The majority of players, however, are very conservative in the practices. The big buyers at nuclear utilities work for institutions that have very well-established contractual formats. A lot of the financial sector’s interest in nuclear and uranium has been based on it becoming a dynamic growth market. But now the outlook is for rather slower growth, with similar delayed adaptation of new ways of doing business. There have been exchange-traded funds set up to allow investors a ‘play’ on the uranium price, without taking physical delivery of material. These are now holding uranium inventory, which could conceivably return to the market at some point. Until then, it may be lent to market participants.

Long-term visionaries may see uranium one day being traded on the likes of the London Metals Exchange, but having a terminal market of this nature is some way off. So market imperfections will remain, with a degree of illiquidity and lack of transparency. Despite improvements in volumes today compared with the past, the spot market is still very narrow compared with other commodities.

Yet the spot market will remain important, however, as many longer contracts have terms relating at least part of the price to the spot price at the time of delivery. This is in common with other commodities that have moved over to more spot-related pricing. The iron ore market has recently moved this way, prompted by BHP Billiton and Rio Tinto, also two of the big players in uranium.

This article was originally published in the September 2011 issue of Nuclear Engineering International

Author Info:

Steve Kidd is Deputy Director General of the World Nuclear Association, where he has worked since 1995 (when it was still the Uranium Institute). Any views expressed are not necessarily those of the World Nuclear Association and/or its members.

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