Uranium – is it set to fuel the nuclear renaissance?

Fuel is arguably the most important element in nuclear power. Achieving a steady supply at reasonable prices is crucial. Uranium’s importance lies in its cheapness; everything else about a nuclear power plant costs more than rival generating technologies. Fuel is small in mass yet allows the generation of huge quantities of power. Prices are kept competitive by strong international markets in each of the elements of the fuel cycle. While mining, conversion, enrichment and fuel fabrication have been subject to their ups and downs, fuel costs for the rector operator have remained essentially low and relatively stable. So sound nuclear economics depends on fuel. Essentially the question is whether the low fuel cost during many years of reactor operation is sufficient to compensate for the higher capital investment costs of a nuclear unit and the accumulated interest payments during the lengthy construction period.

Given that the demand for nuclear fuel is now steadily rising with the unveiling of the nuclear renaissance, there is always interest in how world uranium production is progressing as the starting point for the front end of the fuel cycle. One issue to note is that secondary supplies of uranium, which have been very important over the past 25 years, are not going suddenly to disappear, as some analysts seem to assume. They will remain an important element in nuclear fuel supply over the next 20 years. Although some categories, such as down-blended highly enriched uranium (HEU), will decline in significance, others, notably the use of mixed oxide (MOX) and reprocessed uranium (RepU) fuels, may increase significantly and displace natural uranium and also enrichment services. Yet this change depends crucially on how the current increase in the reprocessing of used fuel develops into additional plants.

The overall picture in the immediate term is therefore for significantly more fuel to be required from primary as opposed to secondary sources, and we can see that this is beginning to happen in the uranium sector, which by value constitutes between a third and a half of the front end fuel cost. World uranium production is now rising sharply after the depressed period in the 1990s and the early years of the new century. Production in 2009 exceeded 50,000 tU and is set to expand still further in the near future. Prices started rising in 2003 and have now stabilised at around $40 per pound in the spot (short-term) market, after peaking at $137 per pound during the summer of 2007. Although $40 represents a significant increase on where the price languished throughout the 20 years beforehand (where it averaged little above $10 per pound), there remain some questions about whether this will be sufficient to induce the additional supplies that will be necessary.

The big story in uranium has been the dramatic upsurge in production from Kazakhstan, which became the world’s leading producer in 2009, and it seems clear that production there is very profitable at current prices. Production from Africa has also been rising significantly, but some of the planned mines there may face economic difficulties unless prices are higher. The same may also go for projects in Canada and Australia, which have been, until recently, the top two producers. The lowest-cost mines are probably going to be economic, even at current prices, so long as sound long-term contracts can be achieved. But if Kazakh production continues to rise sharply, from 14,000 tU in 2009 towards 25,000 tU (which has been mentioned in their plans), buyers may fear becoming over-dependent on one particular suppler, in which the risk of political volatility must be a factor. They seek security of supply as well as low prices and usually prefer to allocate their contracts over a range of sound suppliers.

Both producers and consumers frequently complain about the uranium market, depending on which way prices are moving. All commodity markets have their special features; uranium is not alone in its dependence on long-run contracts rather than the spot market. Buyers don’t need to be involved in the market all the time since reactors are usually only refuelled once per year, and because fuel is relatively easy to store, inventories have always played a major role in the market. But in essence, buyers and sellers have common interests in that they are both involved in long-term businesses where regulatory approval takes time, so they ought to be able to do good business together.

Based on doubts about the accuracy of market data, attempts continue to be made to make the uranium market more liquid and transparent through offering more trading platforms, including electronic trading in smaller quantities. This clearly has a long way to go; the market still suffers from a number of odd features. For example, as the spot price has effectively stabilised in the low $40s per pound, the persistence of the gap with the quoted medium- and longer-term prices has attracted renewed comment. These stand, depending on the definitions and the broker, at anything up to $20 per pound above the spot price. The gap has now existed for several years. The existence of this gap raises a number of questions, the most pressing including ‘Are these prices realistic?’ and, if they are, ‘Why don’t buyers simply buy smaller amounts on the spot market, then store the uranium until it is needed?’. Given relatively low interest rates at present, the costs of this strategy have surely got to be lower than buying long-term.

It is not clear that the quoted prices accurately reflect market values. While the spot price is far from being liquid or transparent, various moves to improve both of these aspects in recent years have improved it as a market indicator. Auctions of material, quotations on NYMEX and daily broker price listings have all provided extra information, while volumes for near-term physical delivery have been generally increasing (with new buyers arriving such as the Chinese). Quoted longer-term prices are, however, undoubtedly rather slippery things. The vast volume of uranium continues to be delivered under highly confidential contracts signed between utilities and producers (and some brokers/traders) for periods of up to 20 years in the future. There are no standardised terms in these contracts, which vary considerably according to institutional practices, and terms can be very complex regarding base, ceiling and floor price levels, escalation clauses for inflation and the like. The only firm information we have on the prices in such contracts comes ex-post facto, when statistics are published by the Euratom Supply Agency (ESA) in Europe and the Energy Information Administration (EIA) in the United States. It is, however, possible to infer longer-term price levels from financial results and accompanying statements from uranium-producing companies and their utility buyers.

The medium- and longer-term prices quoted by market analysts attempt to indicate some base or starting level for discussions and eventual contracts covering uranium deliveries in the 1-20 year period ahead. But given the difficulties outlined above, it is arguable that the levels quoted don’t even provide a reasonable indicator of this. And, of course, nobody knows for sure what is happening in the entire market today, as participants only have sight of the limited number of contracts they are involved in, with firmer statistical information only appearing 12 to 24 months later. Indeed, obtaining a more liquid and transparent spot market, which arguably is now happening, doesn’t in itself help the issues of the longer-term market. Until market participants are more open with information (probably a forlorn hope) the difficulties are likely to remain.

There have been several proposals to reconcile spot and long-term prices. One could base more long-term contracts on the spot price at the time of delivery (moves in this direction are currently common in a number of commodity markets, notably in iron ore). Or uranium buyers could take equity stakes in mines, where the price they pay for material should be directly related to the mine costs. These two proposals offer rather different solutions to the problem. The former runs the risk (for both buyers and sellers) of some unforeseen circumstances pushing the spot market to very low or high levels at the delivery point. The latter depends (for the buyer) on overcoming certain institutional difficulties (apparent in many utilities) of making such long-term investments, and also identifying low-cost mines. We are likely to see the newer buyers in the market, such as the Chinese and Indians, try both approaches. But their complaint is that the spot market is still clearly very imperfect as a marker, while prices for the best mines have escalated sharply based on the general expectation that uranium prices will be higher in the future, and based on the very long-term prices that they are trying to avoid. So there remains a lot to be done to make all the market participants happy.

Ultimately, however, there is plenty of uranium in proven deposits to fuel any conceivable expansion of nuclear power. The issues are essentially how, when and where these deposits move into active production. The fuel market provides at least a few of the necessary signals to allow this to happen. And despite the fuel market’s imperfections, reactors are highly unlikely to go short of fuel, unless strict trade restrictions are imposed, as the Nuclear Suppliers Group did in India for many years owing to nuclear weapons proliferation concerns. The long-run price will essentially be that which is just sufficient to induce the marginal suppliers to come into the market. There remains plenty of uncertainty about where this lies today, given mine cost escalation and steeper regulatory requirements.

We may assume that there is now a rapid expansion in world reactor construction and that these units will be fuelled largely with uranium. India’s planned programme using thorium is likely to continue after the deal with the United States ended its isolation, but enthusiasm for thorium is unlikely to spread to other countries. The use of recycled material may increase, but it is unlikely to become a major feature in the current generation of reactors.

What will induce the end of the uranium era? It is highly unlikely that this will be anything to do with a shortage of uranium. Even if prices have to rise substantially to induce the required level of supply, nuclear economics can withstand the impact. But the uranium age is ultimately likely to go the way of the Stone Age, which certainly didn’t end owing to any shortage of stones. The nuclear sector will eventually move onto something better, and this will be the next generation of nuclear reactors, the so-called Generation IV, which will be fuelled very differently. Given the need to do something about the world’s inventory of used fuel, it is likely that new reactors will be fuelled by advanced reprocessing technologies. But the precondition is that there must be a boom in reactor construction today using existing technology – only then will the research funds come forward to bring on the newer designs. Without this, they will likely continue to languish in governmental research centres and remain 20-30 years away from commercial reality.

With a true nuclear renaissance, commercial nuclear power will become just like other commercial businesses, with rapid technical progress transforming things much quicker than many people expect. So for uranium mine developers today who may be questioning whether to go ahead now or wait for better prices in the future, the best strategy could be to simply go ahead while there is a strong market for their product—this may not be the case twenty or thirty years in the future.

Steve Kidd is director 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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