How is the uranium market affecting enrichment?

2 October 2006

The international uranium market has received a significant amount of renewed attention over the past few years. Prices have quadrupled, over 300 junior companies involved in exploration and property acquisition have suddenly appeared, and plans are now proceeding for the much-needed increase in primary production, as secondary supplies begin to dwindle in magnitude. There is also a lot happening in the enrichment sector as it undergoes a substantial technology change with much new investment. Some of the historic trading relationships in the market may also be set for change.

There is, of course, a link between uranium and enrichment supply to the extent that they are at least partial substitutes. In order to obtain supplies of enriched uranium, required for nearly all commercial nuclear reactors, fuel buyers can alter the quantities of uranium and enrichment services by varying the contractual tails assay at the enrichment plant. When uranium becomes relatively more expensive, there is an incentive to supply less of this and use more enrichment, thus ‘extracting’ more U-235 from each pound. When uranium prices were around $10 per pound, the optimum tails assay was about 0.35% but with the quadrupling of prices and only a minor upward movement of enrichment prices, the optimum is now below 0.25%. Assuming such price relativities are sustained into the long term, which is arguable, there could be a substantial (20% and above) increase in enrichment demand and a corresponding fall in the requirements for fresh uranium. The major limitation of this is the availability of surplus enrichment capacity – constraints on this have so far limited the possibility of buyers to take full advantage. Nevertheless, much higher uranium prices are undoubtedly a positive feature for future enrichment demand and may be taken into account in future major plant investment decisions.

On the enrichment supply side, the most obvious feature is the gradual replacement of the old gas diffusion facilities of Usec in the USA and Eurodif in France with more modern and economical centrifuge plants. Even with favourable supply contracts, the huge amount of power required by the diffusion process renders it uneconomic compared with centrifuges, as currently used by Urenco in Europe and by Russian plants. Eurodif will gradually replace its capacity with centrifuges derived from a technology-sharing agreement with Urenco, while Usec has decided to develop its American Centrifuge technology, based on US Department of Energy programmes in the 1970s and 1980s.

Assuming Usec can overcome the financing and technical issues surrounding its plans, the last gas diffusion capacity should disappear around 2015 and the entire enrichment market should then be using centrifuges. The only likely alternative is the Australian Silex laser enrichment technology, which recently gained the support of GE for its possible commercial development. This may yet turn out to be the technology of the future, as was thought ten years ago when Usec and others were investing significant amounts in laser technology, but its widespread commercialization, if it turns out to be technically and economically viable, may have to await the next generation of heavy investment in capacity, in the period after 2015. For the near future at least, centrifuges will be the technology of choice. Urenco has plans to continue increasing its capacity in Europe on a modular basis to 11 million separative work units (SWU) per year and beyond. It has also just achieved licensing approval for its National Enrichment Facility in New Mexico, which will eventually reach 3 million SWU per year – much of this capacity has already been tied up in long-term sales contracts with US utilities, indicating that they very much welcome the arrival of a new source of US-based supply on the market. The Russian centrifuge capacity is not known with any degree of accuracy, but is likely to be in the range 20-25 million SWU per year. This is believed to be continuously rising, as old centrifuges are replaced by new.

On the commercial side, the key anticipated developments are mostly in Russia. After a period of much speculation, the Russians have announced that there will be no ‘HEU-II’ deal with the West after the current one expires in 2013. This has been supplying roughly half of the US enrichment requirements since it began in the mid 1990s and has also substantially contributed to important non-proliferation goals. The commercial terms, however, are judged by the Russians to be non-favourable, as they are effectively supplying Usec at wholesale prices when they would much rather supply the US market on more normal commercial terms. Russia needed hard currency at the time the deal was signed but now has strong oil and gas export earnings – hence their new strategy of playing a longer-term game with their nuclear fuel assets.

Although there should still continue to be substantial quantities of surplus Russian HEU available for downblending in the period beyond 2013, it is now reasonable to expect that it will be mostly consumed by internal needs, to fuel Russian-origin reactors both at home and in export markets such as China and India. Some Russian enrichment capacity will therefore continue to be required to provide the blendstock for this, from re-enriching tails material. Yet it is clear that the Russians would like to use much more of their enrichment capacity to supply enrichment services to western buyers on a direct basis, rather than use it for re-enriching tails sourced either domestically or from Eurodif and Urenco. This desire is currently constrained by trade restrictions in both the USA and Europe, but Russia is now putting up a significant amount of pressure to have these at least loosened, if not completely overturned. In this they have the support of many western buyers, who see their interests as best served by more competition in the market. To some extent, they will get more choice from the substantial investments now being made in western centrifuge facilities, but access to the extensive Russian facilities should promote even more price competition in the market, at a time when they are paying more and more for their uranium.

There is also a connection here with the Russian desire to be a strong regional fuel cycle specialist in key areas such as enrichment and used fuel management, along the lines also proposed by ElBaradei, the director general of International Atomic Energy Agency, and by the USA under the Global Nuclear Energy Partnership programme. Although these are mainly aimed at securing non-proliferation goals, it may also make sound economic sense to have enrichment concentrated at a limited number of facilities worldwide. Certainly it makes good sense to use the available Russian capacity as fully as possible, provided it fits in with national and commercial security of supply objectives. Using it for re-enriching depleted uranium is very much a second-best alternative and would have dubious economics in the western world, as it eventually must encounter rapidly diminishing returns as the assays of the tails material gets lower and lower.

The Russians also want to increase the market share of their enrichment services in Asian markets. It is clear that they have been at least partially successful in this, as they have now secured contracts with several prominent Asian utilities for part of their business and also opened sales offices in this area. It is not clear how the increasing level of demand in China, from their notable new reactor building programme, will be satisfied. The existing enrichment facility at Lanzhou, which has both Russian origin gas diffusion and centrifuge capacity, could be increased in capacity but rising requirements may alternatively be sourced through imports from any overseas vendors. There has been a significant amount of news and comment about China’s rising uranium requirements but little on how they will source their future enrichment needs.

Another commercial issue in the enrichment market, the Usec antidumping case filed against both Eurodif and Urenco, is now of much less significance. The ruling that enrichment is a service rather than a product, meaning it can’t be subject to duties, remains contentious but the magnitude of the assessed duties has, in any case, diminished to the point that they are unlikely to have a significant impact on the market. With the enrichment price now having risen by about 50% from the lows of $80 per SWU at the time the case was first filed, the action has arguably succeeded to some extent, although the market shares of both Eurodif and Urenco in the USA market have continued to rise.

Finally, as a key sensitive area for the non-proliferation of nuclear weapons, the enrichment sector is likely to be a central point of the new international arrangements which must be developed to support a buoyant nuclear sector throughout this century.

Author Info:

Steve Kidd is Head of Strategy & 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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