Supply and demand: who’s calling the shots?

19 December 2007

The new World Nuclear Association (WNA) market report, The Global Nuclear Fuel Market – Supply and Demand 2007-2030, continues the long tradition of biennial reports from WNA and its predecessor organisation, the Uranium Institute, from the time of the latter’s foundation in 1975. As such, the report very much represents the views of industry participants on the likely future of the nuclear fuel market, but without being perceived as a lobbying document on behalf of the industry.

Nuclear is now very much back on the agenda with talk of a ‘renaissance’ – the foundation being the much improved operating (and financial) performance of the existing 438 reactors around the world but with the expectation now for many new reactor orders, both in countries already having nuclear power but also in some new countries too. For a variety of reasons discussed in previous Comments (for example, January 2007) the spot uranium price has soared, peaking at $138 per pound in June 2007, after spending the entire 20 years prior to 2003 at around $10/lb. It has since fallen back sharply (to $105 in mid August 2007) and is increasingly giving the impression of an unpredictable roller coaster ride.

The nuclear generating capacity scenarios may surprise some readers as they are little changed from the previous report in 2005. Countries which are now higher (particularly Russia where the recently announced plans provide more grounds for optimism) are generally balanced by others which are lower (such as Germany, where the election of the avowedly pro-nuclear Christian Democrats has not, so far at least, allowed a revocation of the nuclear phaseout law, which could take Germany out of nuclear entirely by 2022). Indeed, the greater optimism surrounding nuclear in general was arguably completely incorporated in the previous report – all that has changed is the likelihood of the various scenarios becoming reality. The upper scenario, where world capacity doubles from 368GWe in 2006 to 730GWe in 2030, is now becoming increasingly likely, whereas the lower scenario, where capacity is almost flat until 2020 then falls away to 285GWe by 2030, is logically rather less so. The report stresses, however, that each of the scenarios is internally consistent across the various countries and is worthy of readers’ attention – anything regarded as totally unrealistic would be excluded. Given that there are three scenarios, it is perhaps natural that most attention tends to focus on the reference scenario, where nuclear generating capacity reaches 529GWe by 2030, a rate of growth of 1.5% per annum. Yet even this requires a break with the recent past – as well as operating life extensions for nearly all existing reactors, it requires new reactor start-ups in many countries, in particular beyond 2020, but in the UK and USA even before then.

The nuclear generating capacity scenarios become uranium, conversion and enrichment requirements scenarios, through incorporating parameters on how reactors are operating (such as capacity factors, fuel enrichment levels, fuel burnups and tails assays at the enrichment plant) in a Microsoft Excel based model. Much of the information here comes from a questionnaire sent out to fuel cycle participants, but supplemented by other data and the judgement of WNA members. As uranium has become relatively more expensive in recent times, it is clear that reactor operators have had a substantial incentive to economise on its use. Demand for uranium is clearly inelastic with respect to price, at least in the shorter term, but through lowering the tails assay (thus cutting uranium demand but boosting enrichment demand) and by changing reactor operating cycles (allowing lower enrichment levels) the operators can potentially save a lot of money. In the WNA’s evaluation, the result is that the demand for uranium will be essentially flat in the period to 2010 at around 65,000tU/y and only begin to pick up in the period thereafter in the reference and upper scenarios. However, by 2030, the upper scenario is at 149,000tU and the reference scenario 109,000tU, representing faster rates of growth than nuclear generating capacity itself. This is explained by the expectation that countries currently lagging on capacity factors will eventually improve substantially, while the general trend in enrichment levels continues to be upwards.

The uranium reactor requirements scenarios are overall rather lower than in the 2005 report, while the enrichment requirements tend to be higher. This is essentially because of the tails assay assumption made in the new report – as opposed to 2005’s universal 0.27% for western reactors to 2030, it is now anticipated to fall to 0.22% by 2010 and then rise again to a constant 0.25% in the period 2015-2030. This is a very important assumption but one that is strongly supported by the questionnaire responses and by other market intelligence.

Turning to the supply side, there is clearly now much more information available than two years ago about the likely future of primary uranium supply. Although the number of so-called ‘junior’ uranium companies has reached over 400 and their plans are still very uncertain, many mines which were formerly at the ‘prospective’ stage have now much firmer planning and regulatory work behind them. The relative stability of primary production over the past few years, despite the significant uranium price increase, can be explained by a number of special factors but also the lengthy time lags in getting new production established, after so many years of depression and low investment in the sector.

The report evaluates all anticipated future mines and produces three scenarios. Even the lowest of these sees primary production rising from 40,000tU today to 54,000tU in 2010 and 63,000tU in 2015. The upper scenario shows 65,000tU in 2010 and 82,000tU in 2015, with the reference scenario somewhere in between. The most important country is clearly Kazakhstan, which is set to become the world’s leading producer in around 2010, taking over from Canada. Over the longer term, beyond 2020, it becomes harder to identify which of the many prospective mines will actually operate but BHP Billion’s Olympic Dam mine in South Australia is clearly a key feature, with production likely to be increased from no more than 4000tU today to 12,000tU and upwards beyond d 2015.

Secondary supplies of uranium must also not be forgotten. Some commentators have tried to write these off as a thing of the past, but it’s clear that this is far from the general truth. There will likely still be considerable quantities of highly enriched uranium (HEU) for downblending to civil reactor fuel beyond 2013, when the current 500t deal between the USA and Russia expires. Most of this will be in Russia but the US Department of Energy itself has considerable stocks of surplus fissile material, notably some depleted uranium with relatively high tails assays, suitable for so-called re-enrichment to reactor assays at enrichment plants. So secondary supplies will remain an important part of the nuclear fuels market up to 2030, albeit at less relatively significant levels to the period from 1985 to date.

Bringing the demand and supply sides of the market together is accomplished firstly by examining the Western and Russian sides of the market in isolation (given that they still remain segmented to a great degree) and then combining them, to show the overall world picture. The conclusions are quite clear. The uranium market should be well-supplied in the period to 2015 and indeed, given the strong upward movement in primary production, there could be notable surpluses recorded in several years. In the period thereafter, when demand is beginning to rise more rapidly in the reference and upper demand scenarios, there is a need for more of the identified prospective mines to come into production in order to satisfy demand (although some of the surpluses built up prior to 2015 could then potentially be run down). There are clearly more than enough uranium reserves already identified to accomplish this, while the current enhanced level of exploration activity is likely to yield additional good deposits amenable to mining in this timeframe. In the uranium conversion, enrichment and fuel fabrication markets, provided that the anticipated level of investment in new facilities is forthcoming, supply and demand should also be much in balance. The overall conclusion, therefore, is that there should be, in reality, no likely constraint on the global nuclear growth shown in the upper demand scenario by any nuclear fuel supply shortages.

The analysis of the new WNA report should be sobering for those who have incorrectly analysed the market in recent years. Although there have been real issues concerned with the apparent shortages in the uranium market since 2003, they do not presage any longer-term difficulty. Uranium is geologically abundant and the only issue has been to expand production sufficiently after a long period of depressed prospects. The uranium market, as it stands, has failed abysmally to communicate the correct signals to market participants in a timely manner, so prices had to rise very sharply to encourage new production. Demand will likely never be as high as the price bulls have predicted, while production will be much more flexible upwards than they have envisaged. Some people never learn the rules of economics – if you put up the price of something by a factor of 13, you must have some influence on both demand and supply, even for a commodity where both are somewhat ‘sticky’. If the WNA report achieves anything, it may be to encourage people to look at reality rather than their own particular dreamland.

Author Info:

The Global Nuclear Fuel Market – Supply and Demand 2007-2030, published by the World Nuclear Association on 6 September 2007, is available to non-members at £375. Steve Kidd is Head of Strategy and 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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