Uranium supply-how has Fukushima changed the market

28 September 2012

Interest in the world uranium market has undoubtedly subsided since the period in 2007 when prices spiralled rapidly upwards to over US$100 per pound. The price level soon fell back and spot prices have fluctuated around the $50 per pound level during 2012 to date. When the price rose above $50, demand rapidly disappeared; prices in the $40s attracted more buyers. Hence something like market equilibrium appears to have been achieved. The crazy period in 2007 had at least one good feature as the level of knowledge about uranium in the financial sector has undoubtedly increased. The fundamentals of the market are now much better understood, although another turbulent period cannot be ruled out. Although the market may still be somewhat imperfect, it is much less so than in the past.

This doesn’t, however, mean that uranium has become boring. The Fukushima accident has provided some new challenges to the steady supply of uranium that is crucial to the future of nuclear. Economically speaking, nuclear power’s biggest advantage over rival types of power generation is in the cost of fuel; everything else in nuclear power costs more. Producing huge quantities of heat from a small amount of uranium through nuclear fission should be economically attractive.

There are currently three important issues surrounding uranium supply: the adequacy of resources, the importance of China and Kazakhstan to the market and finally the future of nuclear power in Japan.

The recent publication of the latest biennial Red Book by the OECD Nuclear Energy Agency (NEA) and the International Atomic Energy Agency (IAEA) confirms that there is no potential shortage of uranium to hamper future nuclear growth. Total identified uranium resources have increased by over 12% since the last edition, although lower-cost resources have decreased significantly because of increased mining costs. Nevertheless, with total identified resources standing at more than seven million tonnes recoverable at costs of up to $260 per kg, identified resources are sufficient to supply the world’s nuclear fleet for more than 100 years. So-called undiscovered resources—those which are expected to exist based on existing geological knowledge but which require significant exploration to confirm and define them—currently stand at an additional 10 million tonnes.

The increase in the resource base is the result of concerted exploration and development efforts. This has been prompted by better uranium prices over the past 10 years, following the long period of low prices in the 1980s and 1990s. Some $2 billion was spent on uranium exploration and mine development in 2010, a 22% increase on 2008 figures, with a focus on areas with the potential for hosting in-situ leach (ISL) recovery operations.

Currently defined uranium resources are judged in the Red Book as ‘more than adequate’ to meet a high nuclear case demand to 2035, but not without ‘timely investments" in uranium production facilities, the report warns. “Significant investment and technical expertise will be required to bring these resources to the market and to identify additional resources. Sufficiently high uranium market prices will be needed to fund these activities, especially in light of the rising costs of production,” the report notes.

Secondary sources of uranium (stockpiles of natural and enriched uranium, down-blended weapons-grade uranium, reprocessed used fuel and the re-enrichment of depleted uranium tails) will still continue to be required, although their role is expected to decline after 2013 when arrangements for Russia to down-blend ex-military highly enriched uranium for use in nuclear fuel in the USA expire. Longer-term, though, it is conceivable that more countries will opt for reprocessing their used fuel and this could increase the use of recycled materials to substitute for fresh uranium. Both China and India seem set to go down this path and are the countries most likely to build large numbers of reactors. Such nuclear new-build will, however, not have a significant impact on uranium market until the 2020s, given the time scales involved.

So uranium in the ground is not a big issue, as the resource base is more than adequate to meet projected requirements for the foreseeable future. The challenge is to continue developing environmentally-sustainable mining operations to bring increasing quantities of uranium to the market in a timely fashion. This is more difficult and is where some of the current uncertainties lie. The producers argue, with some justification, that current prices are insufficient to attract the level of investment in new mines required to develop the identified resources. Buyers have to weigh up the risks and may increasingly decide to invest directly in the mines themselves to cover their uranium requirements. We are beginning to see this with Chinese buyers, but the trend may now spread more widely.

When future generations look back at the uranium market in the early years of the 21st century, the most notable features will clearly be the sharp rise in demand in China, balanced by the notable rise in supply from Kazakhstan. Other less significant developments include Paladin’s success at starting up two new mines, in Namibia (Langer Heinrich) and Malawi (Kayelekera), and the slow move to more active trading of uranium by alternative market platforms.

On the supply side, Kazakhstan’s uranium production rose by another 1500 tonnes in 2011 while most of the other major producers were, in total, at much the same level as 2010. Kazakhstan’s production is now rising rather more slowly than before but is still heading towards 25,000 tonnes per annum. There are signs that the quiet uranium spot market conditions post-Fukushima are now causing the Kazakhs to decelerate their production growth, for fear of pushing the spot market down further. They may therefore be performing a useful balancing service in the market. On the demand side, the Chinese still play the opposite role. They can be regarded as a likely buyer at any spot prices below $50 per pound, as this is regarded by them as substantially lower than the likely long-term price (or the cost to them of investing in uranium production assets). They also have the funds to hold inventory in anticipation of more reactors coming online. The next news to look out for is therefore the announcement of the end of the moratorium on new reactor approvals in China, which may come in the next month or so. Chinese uranium imports were at about 17,000 tonnes in both 2010 and 2011, figures that imply substantial inventory-building, as their current annual requirements are only 3000 to 4000 tonnes. The rate of import appears to have slowed during 2012, but some of this may be due to transportation problems.

One interesting feature which is clearly positive to the uranium market is the resumption of operation at the first two Japanese reactors, Ohi 3&4. While there has always been confidence that Japan cannot possibly survive as a major industrialised nation without nuclear power (the security-of-supply risks and economic costs of relying on fossil fuel imports are quite obvious), the political barriers to resuming operation at any reactors, with the Fukushima accident still very fresh in people’s minds, were beginning to appear formidable. It is interesting, however, that the push to resume operation has largely come from the national government in Tokyo, which is clearly concerned about the ability of the power generation system to meet demand over the potentially hot summer period. Despite strong local opposition, national need seems to have prevailed over the forces of local opposition.

Where Japanese nuclear generation goes next, beyond the initial two reactor restarts, remains uncertain. The impact on uranium demand of not operating the 50 remaining operable reactors (with Fukushima-Daiichi 1-6 never returning to service) is substantial; the uranium demand for reloads would be about 8,000 tonnes per annum, if all were in operation at 80% capacity factor. Hence that demand would consume a similar level as the annual production of McArthur River in Canada, the largest uranium mine in the world, and also the output expected to be achieved (eventually) at Cigar Lake (also in Canada) which will commence initial production in 2013.

As the deal to supply the USA with 8000 tonnes/year of low-enriched uranium (LEU) down-blended from Russian HEU ends in 2013 after 18 years, Cigar Lake could be seen (somewhat simplistically) as a replacement for that market loss. But given the situation in Japan, is the Cigar Lake output still needed?

The answer to this is undoubtedly yes. Despite Fukushima, the underlying level of uranium demand (outside of Japan and Germany) continues to rise, so the recent trend of rising world uranium supply is set to continue and (given the lack of other new mines) Cigar Lake will constitute a large component of this. The key question on the demand side continues to be how quickly further Japanese reactors will come back online. The general consensus view is that perhaps 10-15 of the 50 will never restart; no doubt those will be the older units or those which are in areas believed to be particularly subject to seismic risks. But it is also believed that it will take a long time (maybe five years or more) to get perhaps 35 Japanese reactors back in operation. The industry, government planners and regulators have lost a huge degree of public trust; regaining it will take a long time.

The problem in the longer run, however, is that if nuclear is regarded as a ‘last resort’ in an energy policy—one that is only taken up if there are no other reasonable alternatives—there is a threat that Japan will still slowly turn away from nuclear and gradually seek alternatives, even if they are costly (like more gas imports) or seemingly technically difficult (like renewable energy). The nuclear industry in Japan needs to achieve something better than a negative endorsement from the public; however, this is very challenging as things stand at present.

Fukushima has naturally forced everybody to reassess their expectations. Although it is a common view now that the accident may have little overall impact on the long-run development of nuclear power (as those countries strongly committed to it will not waver for long), the loss of uranium demand from Germany (immediately) and from Japan (as the operating reactors have shut down one-by-one) has had a major short-term impact on the market. And the gradual withdrawal of Germany from the nuclear fuels market (as the remaining reactors are gradually shut down by 2022) also has to be taken into account; barring unforeseen political change, this must now be regarded as a certainty.

Both Germany and Japan have no doubt cut back their uranium deliveries to the lowest levels specified in the flexible contract terms with their suppliers, but inventories must still be rising sharply. It is thought that fuel buyers in neither country have as yet tried to liquidate these inventories to raise finance; there is little incentive to do so with prices at current levels. With the German situation now more certain, the big issue is therefore how quickly the Japanese reactors will come back. We won’t know the answer to this for some time.

Author Info:

Steve Kidd is deputy director-general of 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. This article was published in the September 2012 issue of NEI magazine.

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