Uranium prices have been rising in response to a perception that secondary supplies are running out and primary production must increase, as discussed in my article in the September 2004 edition of NEI. The demand position is largely taken for granted, with the expectation that it will remain very robust and continue increasing slowly. The future of nuclear power, however, remains far from certain and it is useful to review the demand side of the nuclear fuel equation. In particular, there is the possibility that the rapid uranium price increases may reduce demand, if substitutes can be found.
First of all, it is important to note that the demand for nuclear fuel is really four separate demands. Reactor operators require enriched uranium fuel rods, but in order to get these they have traditionally bought natural uranium concentrates, then contracted with service providers to have this converted, enriched then fabricated into fuel. Most of the analysis of nuclear fuel demand, however, centres around discussion of uranium and enrichment, as they can be at least partial substitutes for each other.
It is also necessary to be careful about different definitions of what is meant by the demand for nuclear fuel. The World Nuclear Association (WNA) and other market analysts use a measure of demand called reactor requirements, which is the amount of fissile material and fuel cycle services that will be required to prepare the fuel that will be physically loaded into reactors. A reactor operator may choose to meet its reactor requirements in a number of ways. Most is normally supplied from annual procurements of fresh fuel, which constitutes an alternative measure of demand.
Procurements can be defined as the amount of uranium and fuel cycle services, which a reactor operator receives in a given year from any source, except that taken from its own inventories, including recycled material. Another term for this could be deliveries, with most coming from multi-annual contracts with suppliers. However, a significant part of the nuclear fuel market consists of other types of transactions, including spot purchases and borrowing of material.
Most reactor operators hold inventories of material in various forms, from natural uranium to fabricated fuel and these may represent several years of forward reactor requirements. This means that deliveries under its procurement contracts in any year may be substantially above or below its reactor requirements, as it builds up and draws down inventory. Procurements are therefore likely to be a more volatile measure of nuclear fuel demand than reactor requirements and should have a closer relationship with annual uranium production. In an era in which inventories have been drawn down, as over the last 20 years in the commercial nuclear fuel market, procurements will be significantly below reactor requirements.
The recycling of spent nuclear fuel provides a slight further complication. Those reactor operators with reprocessing contracts may use recycled uranium or plutonium to meet part of their reactor requirements. The WNA regards this in exactly the same way as inventory drawdown, in other words as an addition to supply rather than a reduction in demand. Some forecasters, however, deduct mixed oxide fuel and reprocessed uranium from their measure of reactor requirements, providing a net figure of recycling, so interpretation of figures has to be performed carefully.
Finally, there are some shorter-term measures of demand. These result from the fuel contracts and their flexibilities whereby a reactor operator can choose to vary deliveries from the nominal amount of the contract either upwards or downwards, depending on his and the market’s position at that point. In the short term (the next few years), most reactor requirements are covered by contract commitments, but going further ahead there are substantial quantities that are not. Even the upper flexibilities of contracts will not cover all the requirements during this period and this is something which drives the spot nuclear fuel markets, where the balance has to be made up by available supplies. Estimates of so-called ‘uncommitted’ and ‘uncovered’ demand are made by nuclear fuel brokers and traders and are a further useful source of information.
The key to forecasting fuel demand accurately is getting generating capacity forecasts correct
Given that the prime interest is in the longer-term development of nuclear fuel demand, how are reactor requirements calculated? The amount of uranium and fuel cycle services required to operate a reactor is not a simple function of the number of reactors in use and of their generating capacity. The operating characteristics of reactors are also important, including the load factors achieved, the fuel enrichment and burn-up levels and also the tails assay in the enrichment contracts. Load factors have been increasing steadily, pushing up nuclear fuel demand more quickly than nuclear generating capacity, but the other factors have largely cancelled each other out over time. Load factors will from now on not rise so much, as practical limits have been reached in many countries, so the key to forecasting fuel demand accurately is getting generating capacity forecasts correct.
The biennial WNA market reports include three demand scenarios, which are built up at a country level and based on consistent underlying base assumptions. In the 2003 edition, the reference scenario is largely a continuation of recent experience, with a small number of new reactors coming into operation in the period to 2025, but no substantial premature closure programmes for existing reactors. World nuclear generating capacity rises by almost 1% per year up to 2025, from 362GWe in 2004 to 438GWe in 2025. World uranium requirements rise from 66,500tU in 2004 to 82,000tU in 2025, a similar rate of growth. The upper scenario switches the openings/closures balance in favour of a substantial number of new reactor starts; closures are limited to those already announced, such as the Magnox reactors in UK, while the anticipated phase-out programmes in Germany and Sweden don’t take place. World nuclear generating capacity is anticipated to be 549GWe in 2025 and uranium requirements 102,000tU. The lower scenario goes the opposite way, with new reactor starts limited to those already firmly announced or under construction, while there are many premature closures of reactors, for either political or economic reasons. Nuclear generating capacity falls to 308GWe by 2025, with uranium requirements down to 58,000tU.
There is therefore a substantial spread between the upper and lower scenarios, amounting to 44,000tU by 2025. This seems to be an alarming amount, but is largely a consequence of the long time period adopted and very different views of nuclear’s future. There is naturally, however, a tendency to focus on the middle or reference scenario, but they are very carefully drawn up on the basis that each is entirely plausible and, as far as possible, equally likely given the frequent volatility of the energy world. Overall, however, there is more upside in the upper scenario than downside in the lower scenario. The decline in uranium demand in the lower scenario is not dramatic over a 20-year term and justified by the general expectation that most of the 435 reactors currently operating will have long and maybe extended lives.
There is a very interesting issue within nuclear fuel demand concerning the tails assay. Reactor operators require enriched fuel to supply to the fabricators and can choose a balance of uranium and enrichment services to achieve this. The decision on the contractual tails assay is motivated by the relative prices of uranium and enrichment services and for each price relationship there is an optimum rate. The WNA scenarios were all produced on the assumption that tails assays for western reactors will remain at 0.30% to 0.33% in the period to 2025, with Russian-origin reactors at 0.10% (owing to the surplus enrichment capacity available there). Now uranium prices have almost doubled and enrichment prices risen only slightly over the past year, there is a clear incentive for western reactor operators to reduce the contractual tails assays by around 0.05%, therefore supplying less uranium to the enrichment plant but using more SWUs.
This could reduce uranium reactor requirements for western reactors by up to 10%, but there is good reason to expect the effect to be rather lower than this in magnitude. It depends on there being sufficient enrichment capacity, which is uncertain in the West (while Russian plants are still subject to trade restrictions). With the heavy investments currently taking place in new centrifuge enrichment plants, the enrichment price is also very hard to assess. Centrifuge enrichment uses far less energy than the old diffusion technology, but investors will require a good financial return on the new plants that are replacing those where the investments were amortised years ago. Enrichment companies had also been accustomed to using a lower operating tails assay than that implied in contracts, a process known as ‘underfeeding’ which generates additional uranium supply for their own use. Finally, having lower tails assays may limit the economics of sending tails to Russia for re-enrichment, a practice that has been common in recent years, again creating more effective supply. So overall, the impact of the uranium price increase is unlikely to be more than 2000 or 3000tU per year, so less than 5% of total demand.
In conclusion, we may say that by comparison with the demand for most goods and services, nuclear fuel demand is indeed very robust and is likely to carry on rising, for a few years at least. Vendors need not fear wild swings in demand. After then, it all depends on which demand scenario is nearest the mark, but the downside seems quite limited. Within the overall demand picture, there may be some interesting shifts between uranium and enrichment requirements, but this is a complex matter and hard to judge. It may certainly also be quickly reversed if enrichment prices change substantially.
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.