Nuclear fuel: some positive changes?

19 December 2007

The sharp rise in the uranium price has been much analysed and discussed, along with the arrival of hundreds of new junior uranium companies, a much enhanced exploration effort and the prospect of a significantly greater level of uranium production by 2010. The significant investments in new centrifuge enrichment capacity have also been heavily covered in market commentaries. There are, however, some other aspects very worthy of note.

Outsiders, such as financial analysts and consulting companies, always find extremely curious the way in which nuclear fuel buyers buy uranium, then have the fuel converted, enriched and fabricated by separate service companies before being loaded into a reactor. “Why don’t they just buy the fabricated fuel?” they all ask. This is, of course, a good question. The answer is a mixture of history, the bad experience of the famous Westinghouse case of the late 1970s (when the company was contracted to sell fabricated fuel at prices below costs inflated by unforeseen rapid uranium price inflation), some inertia or conservatism in utility fuel managers (some cynics would see it as enlightened self interest in order to preserve their jobs) or, more positively, a view that the present arrangements guarantee the best prices for the buyers (which they indeed may). Finally, the fuel fabrication part of the fuel cycle is different to the uranium, conversion, and enrichment sections – it is not a fungible product or service but a high technology specialised operation, with products specific to particular reactor designs (or even particular buyer requirements).

The usual procedure may, however, be under renewed attack. Some of this has possibly been prompted by the extent to which many fuel buyers have been burned by the uranium price increases. For some US utilities, which back in 2003 had little inventory and low contract coverage for the 2005-2010 period, the pain has been considerable. Why not take up a decent offer for the supply of a total fuel package at a predictable (and hopefully currently competitive) price? The problem up to now has been the lack of willing sellers.

Buying enriched uranium product (EUP), ie uranium in its enriched form, is a halfway house and enrichment companies have been happy to oblige. They are effectively in the uranium and conversion business themselves, with their ability to under- or overfeed their plants and re-enrich depleted uranium. But now we are seeing vertical integration in the front end fuel cycle, with other companies hoping to copy Areva in its ability to offer all four components in a package. So far this has been only for first cores and limited refuelling for new reactors, but may eventually go much further. The Russians have, of course, provided for many years a full fuel service for the reactors they have sold overseas (including taking back the used fuel), but now Kazatomprom, the rapidly-growing uranium producer from Kazakhstan, has shown by taking a 10% stake in Westinghouse (now majority owned by Toshiba) its eventual intention to offer a compete fuel service, also by signing a cooperation deal on a conversion facility with Cameco. Kazatomprom already has a large fuel pellet producing plant and seems set on extending its fuel fabrication activities much further – it wants to add further value to its significant natural uranium endowment. Other fuel cycle participants are likely to follow this trend.

Indeed, offering a full fuel service also fits in with latest international moves to provide assurance of fuel supply to new countries building nuclear power plants, renouncing their right to build domestic enrichment and reprocessing facilities. This could still involve them buying each component separately, but does seem to lead itself to them buying not only a reactor, but many years of assured total fuel supply at the same time.

Another interesting trend has been some signs that nuclear utilities are prepared to invest directly in fuel cycle facilities to secure future supplies, as well as to stimulate infrastructure renewal and spur competition. This was initially seen with the investments in Urenco’s LES New Mexico enrichment facility by US utilities. These have been more reluctant, however, to invest in new uranium mines, in contrast to the position in the past when many took stakes in uranium companies. This often ended in tears, however, with many years of poor uranium prices, and there is clearly a reluctance today to risk getting burned once again in businesses very different to their own. It has mainly been the Japanese, Korean and Chinese utilities that have been investing in mines, particularly in Kazakhstan, but also in Africa and Russia. The tight short-term uranium supply situation has clearly motivated this, along with a desire to free themselves, at least to some extent, from the vicissitudes of the uranium market. With most near-term nuclear growth currently set to be concentrated in the Asian region, what is seen as the world uranium market today may increasingly become irrelevant. Companies may take their equity shares of production at cost prices, rather than based on references to quoted uranium prices. Unless there is substantial new nuclear build in North America and the European Union (EU), the uranium market of today may become merely a declining residual feature, with somewhat quaint and mysterious practices largely divorced from the worldwide industry trends.

Seeking ways to get as far away as possible from uranium market gyrations is clearly a popular theme. It is clear that the market, as it stands today, doesn’t work to anyone’s long-term interests. Having swung from a position for over 20 years when prices were too low to offer a workable financial incentive for badly-needed new production facilities, the opposite could now be happening. Fixing contract prices for a vital commodity in a very long-term business like nuclear power, based on short-term surpluses or shortages in an illiquid, opaque spot market is clearly ridiculous in any economic sense. This practice led to the situation of weak supply infrastructure today and the consequent need to ramp up production very rapidly. Yet the seeds of an unpleasant subsequent bust are already sown. Establishing new production facilities may take longer than generally expected but come online they undoubtedly will – the economic advantage of doing so, based on current spot prices and likely cost levels, is just too obvious. The risk, however, is that prices will fall too early and too far and fast, potentially choking off some of the expected production growth, as company share prices and their ability to raise money take a hit. Although nobody would begrudge today’s uranium companies enjoying the much higher prices after being financially hammered by buyers for so long, they must be careful not to ‘milk’ the situation as the buyers foolishly did (only to get caught out now). Far better to return, one would think, to signing long-term contracts with buyers that give the producer an adequate return on investment and the buyer some assurance about future price levels as well as on firm deliveries. Indexing future prices to spot prices at the time of delivery seems a distinctly odd practice, when a standardised but tradable long-term contract market would be a much superior option.

Finally, it now appears from recent announcements and US court rulings that we may be inching forward, at last, towards a complete world market in nuclear fuel. The main distortions at present are that Russia makes it difficult for its ‘captive’ customers (with Russian designed reactors) to take fuel supplies from elsewhere (mainly by offering very good prices), while the US market in enrichment has, in turn, been protected from Russian primary supply (although downblended Russian HEU provides around half of the US market). Areva and Urenco from Europe have also faced trade actions in the US enrichment market. All of these seem to be slowly withering away but a fully competitive world market is still a long way off. Ukraine seems set to load Western-origin fuel in some of its reactors, to follow the Czech Republic, which did so for a time. Russia will continue making hard-to-beat offers but Eastern European reactor operators will continue to look westwards after joining the EU. US utilities will gradually be able to sign contracts for Russian enrichment as their HEU deal expires in 2013 and it seems only a matter of time before the US market is opened up completely.

Restrictions imposed by Euratom in the EU seem gradually to be withering away too. Utilities should surely now be treated as ‘big boys’, quite capable of looking after their own interests in supply security and prices. Nuclear will hopefully gradually become treated as just another business rather than something requiring a lot of market interference.

In conclusion, a number of areas are showing very positive developments for nuclear fuel, such that it will be ready to play its important role in a future and prosperous nuclear industry. One cloud on the horizon, nevertheless, is the continued transportation difficulties the industry faces, which threaten to imperil the economic logic prompting sourcing material from the lowest cost locations, subject to security of supply considerations. These require maximum attention to get resolved or else all the additional options the buyers can now begin to consider may become meaningless. But overall, it is possible to foresee the fuel supply infrastructure getting renewed at long last, together with a heightened range of market alternatives put under offer.

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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