Enrichment in a world of privatisation

27 August 1999

The last year has been dominated by the post-privatisation restructuring of USEC, including the termination of AVLIS, and the continuing debate on what to do with surplus weapons grade material. As in the nuclear industry in general, enrichment industry consolidation is likely in future.

In our 1998 article, we noted that all eyes would be on the US Enrichment Corporation (USEC) to determine how it fared as a privatised company and we questioned whether USEC would stick by its pre-privatisation business plans, including commitment to prompt deployment of Atomic Vapour Laser Isotopic Separation (AVLIS) technology. USEC answered these questions in part, announcing in May 1999 that, due to financial and market problems during its first nine months of privatised operations, it was undertaking a review of three business areas: gaseous diffusion plant (GDP) production costs, the Russian highly enriched uranium (HEU) contract and its advanced technology strategy. In June 1999, USEC announced that it would immediately terminate all AVLIS deployment activities.

Considering the ongoing USEC review of GDP operations and possible restructuring of the US-Russian HEU contract, the future competitive strategy of USEC will not be clear for perhaps another year.

In the US, industry restructuring continued with experienced operators including AmerGen and Entergy purchasing power plants at a fraction of book value. Also, some small US utilities plan to merge nuclear operations to improve performance and reduce costs. We believe that these consolidation trends will continue, with a few companies operating all US nuclear plants within ten years, and may spread to fuel cycle industries including uranium enrichment.

Several US utilities filed to extend their nuclear plant operating licences, and others expressed an intent to do so, indicating that most US nuclear power plants would not shut down before their end of life.

In Europe, the German movement to phase out nuclear power has had a negative effect on future enrichment services demand, and also resulted in German utilities concluding that they might sell their share of Urenco’s ownership. BNFL and others expressed interest in buying these shares, and further industry consolidation is likely. BNFL also said in July 1999 that it would pursue private ownership of some of its shares. In Asia, economic recovery may fuel energy growth, which should be positive for nuclear power sales and plant orders.

Over the last year, uranium enrichment marketing activity has remained dynamic, reflecting the dramatic changes wrought by increased HEU blending and the privatisation of USEC. Soon after its July 1998 privatisation, USEC began long-term sales of its natural uranium inventories and it is utilising these supplies to create enticing enriched uranium offers. USEC has gradually expanded sales to include spot uranium and EUP sales, occasionally utilising brokers. It has sought off-market agreements to preclude competitive bidding. As a result, USEC’s sales have not had a major impact on market prices.

In the US market, industry restructuring continued with deals closed to sell TMI 1 (one of the industry’s top performers) and Clinton, at substantial discounts from book value, to AmerGen Energy, and Pilgrim to Entergy. Other transactions pending include AmerGen’s purchase of Nine Mile Point and Maine Yankee, and Carolina Power & Light’s purchase of Florida Power’s Crystal River plant.

Supply and Demand

The market for enrichment services is expected to show little growth over the next two decades. Growth in Asia is likely to be offset by some US plant retirements, as well as MOX use and HEU down-blending.

In 1999, estimated separative work units (SWU) sales will total about 35 million SWU, up slightly from 1998. By 2005, Energy Resources International (ERI) estimates that sales will increase to about 36.6 million SWU, driven primarily by increased demand in Asia. By 2010, ERI projects SWU demand rising only slightly to about 36.9 million SWU, with a gradual decline to about 35.4 million SWU in 2020 as US plant retirements balance out growth in Asia, the FSU and Eastern Europe.

On the more pessimistic side, DOE’s Energy Information Administration projects that the world SWU demand in 2020 will be just 26.5 million SWU in the base case, or about 25% lower than in 1999, due to fewer new plants in Asia and more plant retirements in the US and Europe than are now projected. However, EIA’s high and low cases, predicting a range of 39.1-15.6 million SWU in 2020, demonstrate the significant uncertainties in the future market.

On the supply side, new customer orders increased again over the last year, with USEC becoming more aggressive and more successful in the market following its privatisation. ERI estimates sales of 32 million SWU during 1998 and early 1999. However, primary supplier backlog continues to decline, with deliveries of nearly 50 million SWU during the same period. Overall, 37% of world demand for SWU is uncommitted to a supplier in 2005.

Utility Contracting

Over the past year, utility enrichment bid requests have been met with very aggressive competition from primary enrichers seeking to build market share. Contract prices declined, with the most aggressive offers in the range of $82-84 / SWU, several dollars lower than in 1997, and lower in some cases than spot prices of about $85 / SWU.

Key contracting trends include the successful USEC renegotiation and extension of contracts with Asian customers, and the first purchase of Russian enriched uranium in a spot market transaction by Tokyo Electric Power. Future purchases of Russian SWU or enriched uranium could help the Japanese utilities lower enriched uranium costs, but would signal lower future sales for USEC and European suppliers. With USEC privatisation, European enrichers appear to have lost their previous reticence to compete aggressively in the US market. As a result, both Urenco and Eurodif have successfully secured new sales. Continued strengthening of the US dollar against European currencies gave European enrichment suppliers a distinct advantage in US markets.

In 1998 and early 1999 USEC captured about 41% of new long-term sales, up from 38% last year, thus bolstering its long-term backlog. Urenco had another very strong year, capturing about 31% of new commitments. Eurodif also did well, with 19% of new commitments.

  As compared to 1998, USEC’s market share declined again to about 35%. Tenex’s market share remained roughly constant at about 24%, with Eurodif declining slightly to about 21%. Urenco’s market share continued its gradual increase, reaching 12%.

Spot Market

Spot market prices, as reported by TradeTech, declined slightly over the past year from about $86 for restricted origin and $84 for unrestricted origin in June 1998, to $84 for restricted origin and $83 for unrestricted origin as of the end of June 1999.

Since earlier inventories of spot material have been absorbed, the spot market was very shallow over the last year with slightly more than 500 000 SWU sold in all 1998. However, spot market activity has been increasing in 1999: more than 500 000 SWU was sold by mid-year. Total volume for 1999 is still expected to be less than 1 million SWU. However, if the more than 2 million SWU contained in UO2 powder inventoried in Kazakhstan is brought to market, spot market activity could increase.

The majority of spot market contracting is based on the flexibility allowed under utility long-term agreements. A number of sales opportunities have been won by primary enrichment suppliers, but the spot market remains constrained by limited supplies.

Highly Enriched Uranium

In the US, a major transaction occurred over the past year with DOE transferring about 38 t of its HEU to Tennessee Valley Authority for purification and use in its power plants. The material contains about 3 million SWU. Also, blending of US HEU began at BWX Technologies on 50 t of material received from DOE at privatisation. This HEU contains about 3.4 million SWU. Blending of 13 million t of UF6 HEU at the Portsmouth GDP, which contained about 2 million SWU, was completed in 1998.

US plans to dispose of excess government-owned weapons grade plutonium were advanced with an environmental impact statement (EIS) issued for MOX fabrication. It remains to be seen if the US government will provide funds to keep the MOX mission on schedule, to which Russian plutonium disposition efforts are tied.

Russia is meeting its delivery commitments to USEC, after a hiatus in late 1998 caused by uncertainty as to how the natural uranium component would be sold. In 1999, USEC estimates that 5.6 million SWU from Russian HEU will be delivered to USEC and resold through existing contracts. This will have a significant economic impact on USEC, since its GDP per unit fixed costs will continue to increase as production decreases. In 1999, Russian HEU deliveries will represent about 55% of total US SWU consumption. Negotiations for future Russian HEU deliveries have begun as the existing agreement expires in 2001. USEC has stated, not surprisingly, that it hopes to reduce the price paid for blended Russian HEU to a fraction of its average sales price or the world market price during the period of the deliveries. This negotiation, with the US government watching to determine if it can or should intervene, will be critical to USEC’s future.

Primary Supplier Overview

As noted above, one of USEC’s major initiatives, announced in May 1999, was an effort to reduce GDP production costs. USEC acknowledged that in the past six years it has not been successful in this effort, despite actions taken over the past year, including; reducing the GDP workforce by more than 10%; ending Lockheed Martin’s contract to operate the plants effective May 1999; and obtaining an agreement for six months to transfer power between the GDPs, potentially saving up to $30 million per year.

USEC faces a number of challenges over the next few years as unit fixed costs of production from the GDPs increase, due to lower production, caused by increased deliveries of LEU from Russian HEU. Specifically, USEC GDP average production costs have increased, from about $75/SWU to over $90/SWU in 1999, as blended HEU deliveries have increased. Offsetting the good news on achieving fiscal year 1999 revenues of $1.5 b, with net income of $152.4 m and making manpower reductions, availability problems at the Portsmouth plant continued, with a fire in December 1998, and a regulatory fine issued to USEC by the Nuclear Regulatory Commission for its handling of the incident.

Industry observers agree that the most probable significant GDP cost reduction would be the closure of one of the two US plants, and expect that this announcement will be made by USEC within the next year. Closing one GDP would allow USEC to essentially halve its GDP non-power operating costs while also avoiding some expensive capital upgrades, including freon replacement at both plants. Efforts to upgrade the Paducah plant for standalone operations have been underway for several years, with completion due in 2001.

With the AVLIS programme terminated, and the SILEX concept yet unproven, USEC is in the midst of defining a new long-term strategic plan. This may involve strategic alliances with other primary suppliers, such as an expanded supply relationship with MINATOM. Such alliances, however, involve increased assurance of supply risks, and USEC faces the prospect of operating some GDP capacity well beyond 2005. This would involve challenging and costly maintenance and capital improvements, and renegotiation of power contracts.

Although USEC is privatised, the effects of continuing US government oversight on issues such as GDP closure, and the degree to which this oversight could affect USEC’s commercial plans, are still unknown. DOE and the National Security Council (NSC) launched reviews of USEC’s decision to terminate AVLIS deployment, and the NSC continues to monitor USEC’s management of the supply contract for Russian HEU. Overall, however, the US government appears to have few remedies that it iswilling and able to take against USEC’s actions.

One of the most contentious issues with respect to USEC privatisation was the planned pace of sales of natural and enriched uranium inventories. Despite the concerns of the uranium and conversion producers, USEC has continued sales of both natural and enriched uranium product without major market price disruptions. Inventory sales are a vital element of USEC’s ability to meet cash flow requirements for operations and to support USEC’s dividend policy. USEC now must make shareholder dividends a first priority or face a significant impact on its stock price.

During the past year, USEC has deployed a new marketing team, and set out to improve customer relations. Contracts with Asian customers have been extended and in some cases current deliveries have been renegotiated with more competitive pricing and terms. In the US, the positive results of the new team were offset somewhat by USEC’s aggressive legal opposition to nine large US utilities over the Kazakh imports. Given the termination of AVLIS and USEC’s negotiations with the Russians on pricing under the HEU agreement, utility customers are anxiously awaiting USEC’s long-term strategic plan.

Proving that good technology and persistence pay off, Urenco continued its gradual increase in market share, and expanded production capabiliy to meet demand. Urenco had 4 million SWU of capacity in mid 1999, with plans to increase to 4.8 million SWU by the end of 2000, and a conservative target of 5.5 million SWU by 2005.

Urenco’s expansion has allowed it to decrease gradually the unit cost of production. As a result of its cost advantage, Urenco reported total revenue of £280 million ($431 million) in 1998, and announced a long term business backlog of the order of £2 billion ($3.1 billion). Urenco now supplies enrichment services to utilities in 15 countries. As a result of the German government’s decision to phase out nuclear energy, utilities have reportedly discussed with BNFL the sale of their 50% interest in Uranit, the German entity involved in the Urenco joint venture.

Eurodif retained its strong presence in the enrichment market, with revenues of F 6.1 billion ($980 million) in 1998 and net income of FF 225 million ($36 million). On the supply side, the Georges Besse gaseous diffusion plant was cost-effective, using low-cost, spot-priced electricity when available. Eurodif’s strategy is to modernise and maintain its GDP, to operate reliably for at least another decade. With this in mind, Cogema might well be able to delay a firm commitment to SILVA deployment. However, with the USEC decision to terminate AVLIS, Cogema faces a more difficult decision on whether and when to deploy SILVA.

MINATOM continues to operate its centrifuge enrichment plants for three purposes: supply to commercial customers; enrichment of depleted tails for use as HEU down blending; and generation of feed from the recycling of tails for European enrichers. Tenex, the Russian executive agent, supplies USEC with low enriched uranium from its HEU blending operations. Tenex has competed aggressively in commercial nuclear fuel markets, both to sell the feed component of the blended HEU, and to provide uranium enrichment to utilities in all markets.

Tenex’s total enrichment capacity is approximately 20 million SWU per year, with about half of the total capacity at the Ural Electrochemical Integrated Plant. Tenex uses small centrifuges that have proven very economical in Russia. This means Russia can offer the international market low cost SWU well into the future. Russian access to commercial markets in the US and Europe is still restricted, but this situation may change with regard to the US market if the Russian suspension agreement is reopened or terminated under the upcoming ‘sunset review’.

Increased Russian access to the European market ultimately may result if imports of feed into the European Union from Russian HEU are exempt from Euratom import limits. Sale of the SWU component from Russian HEU may be increased as well.


The near-term attractiveness of sunk capital and existing technologies in an over-capacity market continues to be a driving force in determining the future role of uranium enrichment technologies.

AVLIS advocates were disappointed when USEC, due to its post privatisation financial constraints, terminated AVLIS deployment. Early 1999 AVLIS tests were positive, new tests were ready to run, and good progress was being made on licensing issues. Most surprising to many was that USEC decided to terminate AVLIS without having another proven advanced technology to turn to. Defining a path forward on advanced technology in the years ahead will be a major challenge for USEC.

In France, the SILVA programme progressed, although Cogema continues to evaluate the role of SILVA in light of the AVLIS programme termination. As in the past, the decision on whether to proceed with SILVA demonstration and deployment depends heavily on the French assessment of the availability of low cost power for its GDP, and on prospects for continued technical improvement in SILVA. Based on its corporate structure and its long-term commitment to nuclear fuel cycle businesses, Cogema’s decision may be based on different factors than those that influencedUSEC’s decision on AVLIS. Nevertheless, defining a market entry strategy for SILVA, while its GDP continues to operate, will be challenging. The allure is that if SILVA achieves its economic targets France could be in a position to dominate the world enrichment market.

Exploiting the advantage of having sunk capital early in advanced technology plants, Urenco continues its improvement programme, focusing on three key areas. Since deploying its technology in the late 1970s, Urenco has worked to increase the separative work output per machine. Second, it has focused on decreasing construction costs for its centrifuge plant. Third, and very importantly for the long run, it has gradually increased the reliability and lifetime of its production capacity, with most units operating well beyond their planned design life.

Urenco’s latest generation of centrifuge, TC21, is in production,due for installation in 1999. Although the rate of improvement in centrifuge performance is slowing, Urenco now appears to have the dominant advanced technology for the decades ahead.

Tenex began installing its seventh generation of centrifuge technology at the Ural Electrochemical Integrated Plant in 1997, and reports that these machines can generate twice the enrichment capacity for the same cost as the original centrifuges. Tenex continues the gradual improvement of its technology, and believes that additional improvements will keep it competitive in the world market well into the next century.

USEC continues financially to support the development of the Australian based SILEX concept. This claims the theoretical advantages of being simpler and less expensive than AVLIS. It is a UF6-based process and so would not involve a change from the existing fuel cycle. Initial SILEX experiments were conducted in 1999, but progress has been slowed due to delays in testing and in obtaining US government approvals for US– Australian co-operation on the venture.

However, proving that even nuclear-realted technology concepts are popular in financial markets, SILEX systems became one of Australia’s 150 largest companies and achieved a market capitalisation of $A 520 million ($333 million) in early 1999, roughly one third that of USEC. USEC plans to conduct future SILEX work both in Australia and in the US. However, the hope that USEC holds for SILEX runs counter to past attempts to develop and economically deploy MLIS-type technologies. In Japan, advanced centrifuge development continues at Japan Nuclear Fuel and progres continues to be made on the AVLIS-type technology, Laser J.


The past year has been an exciting time, as the market reacted to USEC privatisation and positioned for the future. Just as utility restructuring in the years ahead will change the demand sector, consolidation of the enrichment industry may also occur, as primary suppliers seek to avoid significant investments in new enrichment capacity.

Even if USEC closes a second GDP in the next few years, continued excess production capacity and a market that shows little growth in the foreseeable future will make the years ahead challenging for all primary suppliers. Competition, HEU blending, and large inventories of enriched uranium will all exert downward pressure on prices.

This year, the market will eagerly await an announcement from USEC regarding its plans for future competitiveness. This likely will involve attempting to make the SILEX concept commercially viable over the next decade, or striking a joint venture arrangement to use another advanced technology. A joint venture will be challenging, however, since all proven advanced technologies are controlled by USEC’s competitors. Nevertheless, this might provide the near-term opportunity for enrichment industry consolidation.

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