A global realignment

The Russian invasion of Ukraine “sent a shiver down the spine of nuclear fuel buyers around the world,” said Tom Gitsel, chief executive of Canadian uranium miner Cameco, talking through the company’s first half results in June. He pointed out that “the global nuclear industry relies on Russia for approximately 14% of uranium concentrates, 7% of conversion supply and 39% of enrichment capacity”.

Phillipe Knoche, chief executive of state-backed French nuclear front-end company Orano, in his company’s half-year presentation on 29 July, was keen to stress that the nuclear industry was relatively immune to short-term shocks. Knoche said there was, “no strong disruption of the market,” noting that uranium and nuclear fuel buyers do not revisit their contracts every half year or year, instead relying on longer-term contracts, so they have some flexibility in when to return to the market.

The Russian invasion has shaken the market at a time when it was already changing. Even before that event there was “an unprecedented global realignment occurring in the global nuclear fuel cycle,” Gitsel said. He said that in his markets, “durability” – the visibility of a robust future pipeline of orders – was better than he had ever seen it. He put that down to three continuing factors: Net Zero targets (which he said now cover 90% of the global population); the ongoing need to lift a third of the world’s population out of ‘energy poverty’; and the need to grow power grids and provide users with consistent, baseload power. Nuclear is at the “centre of that triangle,” he said.

But Russia’s invasion of Ukraine has fundamentally changed even those major drivers of nuclear development. Many countries now have to manage those requirements and move beyond the current energy crises: “pivoting away from Russian energy without jeopardising those NZ commitments”. Gitsel described it as a wake-up call for some countries which had been too focused on one part of the triangle: “Net Zero made them forget about providing baseload and power security. They have been left relying on Russian energy supplies.”

Uranium supplies

Gitsel was confident about growth in the long- and medium-term future of nuclear, but he was cautious about whether the conditions were in place for more uranium extraction. Instead, it is likely to be slow to respond to rising demand.

“For some time now we have said that the uranium market is as vulnerable to a supply shock as it has ever been, due to persistently low prices,” Gitsel explained.

He referred to supply curtailments in existing productive capacity, along with a lack of new developments, at a time when deepening geopolitical and origin risk – due to concentration of supply and regionalisation – are affecting the availability of critical minerals. What is more, the industry no longer has a stock of secondary supplies that it could rely on to fill the gaps in the past.

All these internal factors suggest pressure for expansion from uranium suppliers, now potentially boosted by some countries’ wish to move away from Russian supply. But Gitsel for one said Cameco would “maintain discipline” in any expansion of capacity, not taking major investment steps until the company has long-term contracts signed with customers. The industry is also facing external pressures such as covid and inflation, which are interrupting flow of goods and services in the uranium market and increasing costs.

Kazatomprom similarly noted that expanding the supply side was a process that takes a year or more, but in a market statement at the end of June, it highlighted one source of extra capacity. It described plans approved by Boss Energy to restart development at the Honeymoon project in South Australia as “a notable supply-side highlight”. Boss raised A$125m (US$87m) earlier this year to fund the restart. It expects Honeymoon to resume production late next year and ramp up to steady-state production of some 2.45 million pounds of U3O8 per year within three years.

The pressure on uranium supplies has also attracted the interest of commodities traders who are purchasing significant volumes of uranium and sequestering it. Two have been active in the spot market: Yellowcake PLC was set up in 2018 “to provide investors with exposure to the uranium commodity at a time when the supply/demand fundamentals strongly suggested a resurgence in uranium prices”. It holds physical uranium oxide in storage accounts at Cameco’s Port Hope/Blind River facility in Ontario, Canada, and in Orano Cycle’s Malve´si/Tricastin storage facility in France. Meanwhile, precious metal and real asset investment company Sprott also launched a trust in 2021 to buy and hold physical uranium oxide, alongside its other trusts focusing on precious metals. Both Sprott and Yellowcake have been acquiring uranium on the assumption that its value will increase.

These new players have helped create volatility in uranium spot prices and so has Russia’s action: Kazatomprom said market participants’ concerns about security of supply in light of the Russia-Ukraine conflict drove up the spot price initially.

Prices drifted downwards until June, when concerns about delays in a Russian delivery from St. Petersburg pushed the average spot price back up.

The companies say little of that volatility will pass through to contracts. Both Orano and Cameco stressed that they have little exposure to spot prices, as instead they are focusing on long-term contracts. Kazatomprom said its contract portfolio pricing “correlates closely to uranium spot prices” but time lags between contract and delivery, as well as elements of long-term pricing in the contracts, meant it achieved prices below current spot market levels. Orano’s Knoche also noted that “some clients have several years of fissile material stored.“

Two organisations

Uranium companies are more concerned about the delivery of uranium than about volumes of supply.

Kazatomprom said, “transportation challenges were highlighted throughout the first half of 2022 due to many nations’ and companies’ efforts to reduce transactions with and decrease reliance on Russia, in light of Russia’s actions in Ukraine.” It noted that Canada’s revision to its Special Economic Measures on Russia resulted in shipping delays for a Russian enriched uranium product (EUP) delivery that was destined for the United States. The modified Canadian rules “could be interpreted to mean the Canadian company CIS Navigation and its carrier, Atlantic Ro-Ro Carriers, would be unable to transport Russian EUP from the port of St Petersburg to three American utilities aboard its Canadian-owned vessel.” That shipment won temporary exemption from the new rules and Kazatomprom believes the exemption will be in place for a year.

The new Canadian rules would not affect Kazatomprom’s deliveries of uranium oxide, the company said. But it added that “a significant proportion of the company’s products are exported on a well-established primary route through Russia to the Port of St. Petersburg, which presents a specific set of risks associated with transit through the territory of Russia, shipping insurance, and the delivery of cargo by sea vessels.” The company said it shipped its second quarter volumes via St Petersburg without any disruptions or logistical/insurance-related issues but it is monitoring the growing list of sanctions on Russia and their potential impact.

Kazatomprom highlighted a Trans-Caspian route, “which has been successfully used as an alternative route since 2018,” to mitigate the risk of the primary route being unavailable. It is reinforcing transit agreements with authorities along that alternate route. It said it already has received approval to ship 3500 tonnes of uranium and has applied for an increase in order to accommodate more. Kazatomprom stressed that its product “remains of Kazakh origin through to its arrival at a western conversion facility”.

Gitsel also highlighted the risk of Russia imposing export constraints and said there was uncertainty over potential shipments of uranium through Black Sea ports, which could affect shipments from central Asia. He said that “while it is still technically possible to ship through Russia, due to insurance and other issues we have decided to delay a shipment from Inkai in Kazakhstan and work with our partner to establish an alternate shipping route. This could take a long time, but we will mitigate with inventory, purchase commitments and loans.” Comeco is a joint venture partner at Inkai mine with a 40% stake.

In response to the invasion, Comeco said it is “already seeing companies pivot their procurement strategies to more carefully weigh the origin risk” and in the long term that was likely to remain a concern for companies which were under scrutiny over ESG governance.

Switching fuel deliveries

Gitsel noted that in response to Russia’s invasion many countries have imposed strict economic sanctions on Russia. Energy imports that have been subject to sanctions include oil, natural gas and coal – but, so far, that has not applied to nuclear fuel. Nevertheless, he said there was uncertainty over relying on nuclear fuel coming from Russia, “whether because of sanctions or a conflict with company values”. He said that some utilities will voluntarily pivot away from Russian fuel supplies because they recognise the incongruity with their values and key principles.

“From our perspective it is not a matter of whether western countries will turn their backs on Russian fuel supplies, but when and how quickly,” he said.

Russian fuel supplier TVEL claims 17% of the world fuel market, with fuel customers in 11 countries as well as in Russia. TVEL lists customers in Finland (two units), the Czech Republic (six units), Hungary (four units), Slovakia (four units), Bulgaria (two units), Armenia (one unit), Ukraine (nine units), Belarus (one unit), China (two units), India (two units) and what it calls ‘Western Europe’ (three units).

Russia continues to make fuel deliveries – this year it sent batches to Kudankulam – but some customers are leaking away. At the time of the invasion six units in Ukraine – South Ukraine 2 and 3 and Zaporizhzhia 1, 3, 4 and 5 – were already testing Westinghouse-supplied VVER1000 fuel. Sweden has also cancelled Russian uranium supply contracts. Slovakia took a delivery of fresh fuel from Russia shortly after the February invasion, at the start of March, and said it has enough nuclear fuel for its two power stations for the entire year and some of next year. Russia’s TVEL has been the country’s sole supplier but Westinghouse was in competition to supply fuel for Mochovce in a procurement exercise in 2018. TVEL was said to have won the contract on cost.

Czech state-controlled utility C?EZ said it has fuel assemblies for approximately two years of operation at Temeli´n while the stock at the Dukovany plant is even higher. “We decided to increase the stockpile volume at both nuclear power plants in 2016. Thanks to this, we have enough assemblies at Dukovany for approximately three years of operation of all the units. Of course, we continue to think about the diversification of suppliers,” said Bohdan Zronek, a member of the Board of Directors and Director of the Nuclear Power Division.

In June C?EZ confirmed it has signed agreements with US- based Westinghouse Electric and France’s Framatome for the supply of fuel assemblies for the Temeli´n nuclear power station under a new 15-year contract.

According to C?EZ, the new fuel deliveries will begin to fully replace TVEL as fuel supplier in 2024. During the supplier transition Westinghouse said it will supply modified Robust Westinghouse Fuel Assemblies (RWFA), a new design that is compatible with non-Westinghouse fuel.

Westinghouse-made lead fuel assemblies have been in operation in the reactor core of Temeli´n 1 since 2019. Tarik Choho, President of EMEA Operating Plant Services at Westinghouse said the company, “has developed and supplied for many years our own VVER fuel designs for both the VVER 1000 and the VVER 440 types of reactors. We are extremely happy that our successful experience in supplying VVER fuel is going to benefit C?EZ”.

Where are we going?

What is the overall message from this mix of factors affecting the front end of nuclear’s fuel-cycle? A year ago the issues seemed clear, even if there were several potential outcomes. The urgent need to reduce carbon emissions and electrify new sectors of the economy presented a great opportunity for the nuclear industry. New-build had more urgency in some western countries and was under debate in some where it had been off the table for decades. What is more, interest in countries that had not previously had nuclear was building, with an institutional framework being set up or strengthened and in some cases site investigations. Some projects that had been in discussion for decades, such as Akkuyu in Turkey, were actually becoming a reality.

Front end companies were ready to respond to that changing landscape. They were making initial investments to allow them to expand their facilities and activities – albeit that they were waiting for long-term contracts from customers before stepping up that investment.

All that remains the case. But the ground has been shifted by Russia’s aggression in Ukraine. It is a world- changing event that will have effects in the short, medium and far term.

The global nature of the fuel supply chain, and nuclear operators’ extremely cautious approach to securing fuel supplies, have so far meant the system has absorbed the shock in the short term.

The medium term may see a shift towards western suppliers. Nuclear fuel will remain an important industry for Russia, but western competitors may well see an opportunity for a market share grab by stepping in.

The long-term future of Russia’s fuel supply business is closely linked to its reactor supply and build business. Both are important industries nationally. How much of that new- build business will remain, will depend on Russia’s ability to continue to provide funding alongside hardware for emerging nuclear industries, and that is a geopolitical and financial issue that will emerge as the end game in Ukraine is played out. The long-term implications are unlikely to be clear this year – or even next.

Author: Janet Wood, Expert author on energy issues