Affordable and available

Though trade regulations in the USA continues to restrict import of uranium and enriched uranium from Russia, import constraints on uranium from Uzbekistan and Kazakhstan have been removed. While inventories in the form of excess highly enriched uranium (HEU) weapons material and both government and private sector stockpiles currently represent substantial sources of uranium supply, the private sector stockpiles are declining. With the exception of East Asia, the outlook is for world uranium demand to remain relatively flat throughout this decade and the next. Although overall supply may be sufficient to meet demand in this decade, there will be upward pressure on market prices in the future as commercial inventories diminish and new mine production must be developed. While some uncertainty hangs over the industry, the outlook is that existing supply sources should be able to meet demand.

The US Administration has concluded that nuclear energy should continue to play a critical role in the American economy. The National Energy Policy estimates that electric utilities must increase capacity by at least 50% to keep up with demand over the next two decades. This is in accord with the private sector's Vision 2020, unveiled in Spring 2001. The government believes that nuclear generation must increase proportionately if the USA is to maintain a balance between economic growth and protecting the environment from greenhouse gases. While this view is not universally held, for example, in some countries of the European Union (EU), though it is by the EU itself, there is an increasing realisation of the future importance of the nuclear option. As a consequence of the improved outlook for nuclear power there will be an increasing demand for nuclear fuel, and its primary ingredient, natural uranium.

The Market

In spite of optimism surrounding the nuclear option, and because of the long lead times required for new nuclear plant commitments, it will be some time before there is a significant increase in uranium demand. Overall world demand for uranium is forecast to remain relatively flat during most of the next 20 years at about 168 million pounds U3O8 per year. However, this assumes there will be plutonium and uranium recycle in some Western European countries and Japan. It is projected that there will be a 50% increase in East Asian annual requirements by 2020. Western European and Commonwealth of Independent States (CIS) and Eastern Europe requirements are projected to remain relatively flat in this decade and decline by at least 10% in the next decade.

The spot market price of uranium, which was at a high of $10.85 (Ux U3O8) in March-May 1999, declined to an all-time low of $7.10 by the end of 2000, then rose during 2001 to $9.90 by the end of February 2002, where it remained for the next five months. However, since there are few mines that could produce uranium at the low inventory-driven prices of the past several years, base prices in long-term contracts have mostly been above $9 and, generally at or above $10 per lb. In the third quarter of 2001, companies that reported market price indices stopped distinguishing between restricted and unrestricted market sectors, and began publishing a discount price for Russian supply. The market price Russian discount has typically ranged from 20 to 30 cents per pound since it was initiated in October 2001.

Spot market transactions amounted to almost 20 million pounds during 2001, 33% higher than in the previous year. Two-thirds of the volume was in the form of uranium concentrates, one-fifth as UF6, and the remainder as enriched uranium product (EUP). Volume during the first half of 2002 was about equal to last year's total volume. While about one-fifth by volume of 2001 transactions involved discretionary purchases, discretionary purchases amounted to about half of the volume in the first half of this year. About half of the 2001 and 2002 transactions were of the off-market type. Non-US buyers dominated the market in 2001 and the first half of this year.

Long-term contract volume in 2001 was robust at about 62 million pounds, slightly above the average of the past five years. However, over one-fifth of the US volume was the DoE sale to the Tennessee Valley Authority (TVA) of HEU-derived off-specification low enriched uranium (LEU). Long-term volume in each of the past three years has been at about the same level. Over 80% of the volume in 2001 was procurement by US nuclear power generators. There was a trend toward longer US procurement lead times and contract delivery periods. As in the case of the spot market, at least half of the transactions were off-market. Producers represented 40% of the selling side of the market in 2002 and several of these producers may now have very little uncommitted supply available during the next year or two. Enrichers committed about one-fifth of the supply in 2001, between 1.5 and 2.0 million pounds per year for the 2003-2008 time frame and about 1 million pounds for 2002. Approximately half of the sales volume in 2002 was in the form of EUP: by the DoE to TVA and by non-US enrichers to non-US nuclear power generators.

A cause for concern in recent years is increasing supplier corporate concentration. Collectively, Cameco, Cogema, Tenex, Olympic Dam, and Rio Tinto are projected to supply almost two-thirds of the Western world's (excludes the CIS, Eastern Europe and China) projected requirements through the end of this decade. Canada and Australia are together expected to meet about 45% of the Western world's requirements in the same period. These two countries and the CIS countries should meet approximately 60% of Western world needs.

Supply

World uranium supply capability to meet future requirements in this and the next decade will be from already-mined civilian and government uranium (and uranium equivalent) inventories, nuclear weapons fissile material stockpiles, and from uranium mine production. All of the civilian owned and some of the government uranium stockpiles constitute commercial inventories. Government owned uranium includes weapons uranium and other government programme materials. Although civilian inventories will be largely depleted in the second half of this decade, HEU blended down from nuclear weapons should continue to meet 14% of world requirements. Mine production's share will increase from its current level of about 55% to about 70% by 2010. The rest will be met from miscellaneous government inventories and enrichment tails upgrading.

A number of significant events have occurred to foster the perception of uranium supply adequacy, particularly in the light of projected flat demand. One such event was the 1998 privatisation of the United States Enrichment Corporation, as USEC Inc. (USEC), with a large endowment of uranium and uranium-equivalent (U3O8e) inventories. Another significant event was the 1999 conclusion of the weapons uranium feed-component commercial marketing agreement between the Russian Ministry of Atomic Energy (Minatom) and three Western nuclear fuel companies, and the marketing agreement's long-term firming up amendment in 2001. Supply enhancing events also included the removal of US restrictions on uranium imports from all CIS republics except Russia. However, the increase in uranium demand caused by improved reactor performance is projected to result in supply becoming tight by the middle of the decade.

Already-Mined Uranium

The Western nuclear power industry currently holds inventories equivalent to two years of its requirements, down from 2.5 years of requirements two years ago. While inventories are being reduced, a number of Western European and Japanese utilities continue to hold large inventories. At the start of 2002, US nuclear power generators held about 56 million pounds of uranium and uranium-equivalent material. Almost 40% was in the form of EUP, the remainder being about equally divided between natural uranium and UF6. Supply industry and nuclear power industry commercial inventories currently equate to about 3.4 years of world forward demand.

The dismantling of HEU warheads in the USA and Russia is providing the civilian nuclear industry with substantial quantities of uranium, conversion, and enrichment equivalent materials and services. Under the 1993 HEU agreement between Minatom and the USA, Russia has delivered 4287t of LEU derived from 141t of HEU resulting from the dismantling of 5852 nuclear warheads. USEC purchases the enrichment component of this LEU and returns the uranium feed component to Russia's uranium marketing agents. The HEU has resulted in about 117 million pounds U3O8e being made available to the market and will result in another 281 million pounds being made available between now and 2013, at 24 million pounds per year. While the USA is converting HEU to nuclear fuel materials and services, the currently committed annual quantities are relatively small, less than 3 million pounds per year until 2005.

In March 1999, Minatom concluded a marketing agent Commercial Agreement for the HEU uranium feed with two Western mining companies and one trading company, Cameco Corporation, Cogema Resources, and Nukem, respectively. On 26 November, 2001, it was announced that the agreement had been amended to provide for minimum purchase commitments by the three Western companies (see Figure). The amended agreement allows the Western companies to act as trading companies for the sale of at least 43% of the HEU uranium feed. The Russians may either sell the remainder in the West or take part or all of it back to Russia, less a small monitored working stockpile. The three Western companies and Minatom's trading company, Tenex, can sell their feed shares in the USA in accord with limits spelt out in the Privatisation Act of 1996. The US end-use limits began at two million pounds in 1998 and rise by two million pound per year until 2005, and then by one million pounds per year until 2009 after which the limit remains at 20 million pounds per year.

On its privatisation in July 1998, USEC was endowed by the DoE with an inventory of 75 million pounds of uranium in various forms. USEC has delivered about 40% to customers since mid 1998. About 17% of the remainder must be reserved as working inventory, and 33% was reported by USEC to be contaminated with technetium, leaving only about 10% of the original amount currently deliverable in the marketplace.

On 17 June, 2002, without any admission of liability, and subject to availability of appropriated funds and legislative authority, DoE entered into an Agreement with USEC to replace up to 9550tU of the technetium affected uranium. The arrangements for replacing as much as half of the affected uranium involve USEC processing at least 2800tU at Portsmouth gaseous diffusion plant shipping and transfer facility between the end of June 2002 and October 2003, and DoE replacing 3293tU at the end of March 2003 less the amount already processed at Portsmouth. The replacement amount that will actually get credited to DoE by October 2003 will depend on USEC's processing rate at Portsmouth. For example, if USEC can and does process 2800tU at the rate of, for example, 186.7tU per month over 15 months, then DoE would receive a credit of 3293tU minus 186.7tU for nine months plus 2800tU, for a total of 4413tU. The processing of 2800t over 15 months results in the rate of 186.7t per month used in the example. However, if USEC's processing rate results in a larger quantity being processed by October 2003, 3400tU, for example, then DoE would receive a credit of 4653tU by October 2003. While almost half of the affected inventory may be remedied by October 2003, there is at this time no certain date or procedure for remedying the other half, beyond the commitment that it will occur.

The US and Russian governments entered into "umbrella" agreements were associated with the HEU uranium feed Commercial Agreement between Minatom and the Western companies. Under one of the umbrella agreements, Russia and the US each agreed to maintain 58 million pound stockpiles of uranium for ten years. The Russians agreed to build up and "freeze" their US-monitored stockpile using unsold HEU feed returned from the USA. It is expected that the Russian stockpile will be built up early in 2003. The USA agreed to construct its stockpile using uranium equivalent material that it already possessed. At present, the US stockpile is composed of about 42 million pounds natural UF6 and 46tU of miscellaneous HEU that has not yet been blended down to reactor fuel grade LEU. Uranium in the US "moratorium" stockpile is not to be sold until after March 2009.

Mine production

Mines and already-mined uranium are expected to meet approximately 64% and 36%, respectively, of cumulative world requirements in this decade. Four countries will provide about 95% of Western world mine production: Canada, Australia, Namibia, and Niger. These four countries along with Russia, Kazakhstan, and Uzbekistan are projected to provide about 90% of world mine production through 2010.

Canada is the world's largest mine producer of uranium at 32 million pounds U3O8 per year, and is expected to maintain this dominant position. Production is projected to rise to 42 million pounds per year later this decade. In Saskatchewan, two existing centres, Key Lake and Cluff Lake, came to the end of their resource life this year. However, two new major production centers, McClean Lake and McArthur River, recently began production. In addition, two centres, Cigar Lake and Midwest Lake, are expected to go into production in the middle of this decade.

Australia is the world's second largest mine producer of uranium at 20 million pounds U3O8 per year. It has two large production centres, Ranger and Olympic Dam, and a single small solution mining centre, Beverly. The two existing centres are likely to be expanded to their license capacity by the middle of the decade, bringing the country's production level up to about 32 million pounds per year. There are indications that Olympic Dam could even double its output later in this decade. Another small mining operation, Honeymoon, is hoping to start production in the near future.

The Olympic Dam centre suffered two set backs in the past year. The first was a fire in the second half of last year in the uranium and copper solvent extraction section of the concentrator plant that was expected to reduce production for about one year. The second event was the decision to shorten the campaign life of the plant's copper smelter. The need to reline the copper furnace in mid 2003 instead of mid 2004 is expected to reduce the production of copper and uranium in 2002 and 2003. While uranium production in 2002 will be reduced to less than 6 million, production in 2003 could be back to between 7 and 8 million pounds.

African production is projected to be relatively constant during the decade at about 16 million pounds per year. Production in Namibia and Niger is expected to remain at about 6.5 and 7.5 million pounds per year. While economic difficulties and lower gold prices could keep South African production at relatively low levels for the foreseeable future, there are some indications that production could be approximately doubled from the current level of 2 million pounds per year by the second half of the decade. Poor market conditions have resulted in China limiting exports and production to the needs of its own national nuclear power programme. Production in France has essentially ended due to economic reserves being depleted.

Production in Russia has increased by almost 50% to more than 7 million pounds per year and Kazakhstan's production is expected to increase from about 5 million pounds per year to over 6 million pounds per year during the next few years. No significant increases in the output of Ukraine and Uzbekistan are expected.

Trade Constraints

In November 1991, the DoE uranium enrichment enterprise's labour union and a group of US uranium mining companies petitioned the US Department of Commerce (DoC) to undertake an investigation of alleged dumping by the former Soviet Union. A finding in 1992 that harm was being done to the mines and the enrichment enterprise resulted in import tariffs being proposed and then suspended as a result of Suspension Agreements with six of the CIS republics. With the exception of Russia, the restrictions against uranium imports from all of the republics have been terminated because they were generally either no longer advantageous or relevant. The import of a small Kazakh stockpile of EUP is continuing to be held up by the DoC pending resolution of whether or not the origin of the enrichment component is Russian.

Only Russia is currently highly limited in its uranium trade with the USA. Though Russian uranium and enrichment imports are still restricted, the fact that it was recently declared a market economy in the USA, as well as the EU, places continuance of its suspension agreement through 2004 in some doubt. If the agreement is terminated during the next year or two there appear to be many issues that may arise that the DoC is not yet prepared to deal with. For example, the DoC does not seem to have a good answer to the question of whether the 1992 import duties would apply or whether an entirely new investigation has to be conducted. A new investigation would be complicated by the fact that the original case in late 1991 was brought against the Soviet Union which no longer exists.