It was notable that uranium prices in 2015 did not fall as much as those of other commodities, such as oil, iron ore and the base metals. This led to some optimistic analysts predicting great things for the price during 2016. As is often the case, the market has done the complete opposite of what the gurus predicted. 

The number of nuclear reactors under construction around the world (62, according to the WNA website) is higher than at any time since the 1980s, before the Chernobyl accident truncated many national programmes. Nuclear power is essentially free of carbon emissions and is included as a major element of many energy scenarios for a clean energy future. Yet the price of uranium, the essential foundation of generating power with the atom, is in the doldrums once again. At below $30 per pound on the spot market, it stands well short of the level that is generally accepted as necessary to stimulate a substantial amount of additional uranium production. So what has happened?

Let’s eliminate a couple of myths about the falling uranium price. Firstly that it is all a consequence of the Fukushima accident five years ago. It’s certainly true that the expected level of demand has been cut, with reactors shutting down somewhat earlier than expected in Germany and delays to the restart of Japanese units. New reactor orders in Western Europe and North America are also now rather lower than was expected before the accident, but the overall demand level
for uranium is far from weak. China has been buying huge quantities of uranium each year (up to 15,000 tonnes ahead of their fuel loadings) while Russia’s domestic reactor programme has got back on track, with Rosatom claiming many firm export orders. Reactor closures in some countries are clearly an issue, but demand cannot be regarded as sickly.

Some market commentators hark back to the period from the late 1980s to 2003, when the uranium price was stuck at the $10-15 per pound level for 15 years. I call this “the Third Age of Uranium” (after the military-based era of the 1950s and 60s and then the period of rapid growth needed to supply the boom in civil nuclear power in the 1970s). At that time inventories of various types dominated the market. From 1988 onwards, commercial inventories accumulated following the slowdown of nuclear in the 1980s were responsible for depressing the price. This was extended by the arrival of Russian ex-military down-blended highly enriched uranium (HEU) from 1995 onwards. In addition the US Department of Energy granted its enrichment protégé USEC a free gift of 30,000 tonnes of uranium.

The second myth about today’s market is that we are seeing a repeat, and today’s uranium price weakness is fundamentally inventory-driven.

It is amazing that this myth gets repeated. The prospective overall demand outlook is rather better than during the Third Age, as outlined above. Yet the level of inventories is actually rising, rather than falling. Surely prices should also therefore be rising? 

Trade statistics make it obvious that China continues to accumulate inventory. The US and European Union utilities have also (on the basis of publicly available information) been inventory building in recent times. Japan has been building supplies over the past couple of years, albeit at a slower rate than immediately after Fukushima. And even the uranium producers have been getting in on the act. Cameco has built up a significant volume (representing over a year’s worth of sale), partly as a consequence of expanding output at Cigar Lake more rapidly than expected. Who would do this in an inventory-dominated market? Analysis of other major producers such as Uranium One and Kazatomprom suggests a similar picture.

The answer is that it is the level of uranium production which is the real issue. One further myth is that uranium is geologically scarce, difficult to mine, somehow special because of its magical powers and therefore likely to be very expensive. The reality is somewhat different. Uranium is relatively abundant and not awkward to separate from host minerals, so we should expect it to be comparatively cheap.

A host of negative issues and emotions have surrounded it. But one only has to look at the long-term price history to see why these should be put to one side. Apart from two price peaks in the mid-1970s and again between 2005-8, the remarkable feature of the uranium price has been its stability – at levels providing fairly low returns for the miners (with the exception of a few who struck it rich during the military era in the 1950s). This is in contrast to most commodity markets which have seen regular ups and downs over the past 70 years.

Supply and demand

Underlying demand for uranium in 2015, represented by calculated reactor requirements, was around 60,000 tonnes. Production in 2015 was close to this, but was almost double the level of the trough in 1999, when it was just over 32,000 tonnes.

The missing factor here is of course secondary supplies. With the end of the HEU deal between Russia and the West in 2013 the level is not as high as it was during the late 1990s to early 2000s. But it is not much lower, as the enrichment companies have become adept at “creating” uranium through underfeeding and re-enriching it. This is an important link with the enrichment market. Enrichment is no longer “special” as technology has usurped protectionism and emotion to bring much lower prices. Centrifuge technology, which has replaced the former gaseous diffusion plants, means there is competition from cheap separative work units (SWUs) to produce the necessary enriched uranium.

Secondary supplies in total are still contributing about 15,000 tonnes, meaning that total supply is now running at about 75,000 tonnes. With demand at 60,000 tonnes, inventories held by the producers and their customers must be rising by about 15,000 tonnes per year. This is confirmed by the Chinese import statistics, data from the EIA and ESA, plus analysis of the statements of the key producers. If uranium demand spikes strongly upwards, inventory rises could be viewed as being made purely in anticipation. Demand from the Chinese is indeed rising sharply, explaining much of their inventory building. It may have been excessive (and also expensive compared with current prices) thanks to the entry into production of the Husab mine in Namibia later this year and renewed doubts about the full magnitude of China’s reactor programme. Chinese uranium imports from outside Namibia are therefore likely to fall. There have been no approvals of new reactor projects so far in 2016 and forecasts of Chinese nuclear generating capacity in 2030 are now looking more like 100-125GW rather than 125-150GW.

Elsewhere the prospects for uranium are not as good as hoped. Japan has got used to surviving without nuclear power and the intervention of the courts into the reactor restart procedure is bad news. Nobody really knows how many Japanese reactors will restart, where and when. The same now also goes for reactors in the US. Previous forecasts that nearly all would run for up to 60 years were always pie-in-the-sky. Getting a licence to operate for 60 years is the (relatively) easy part. There are lots of different ways of making electricity and believing that ageing nuclear units could trump techno-economic developments in fossil fuels and renewable power up to the 2040s was a big stretch. Big uranium buyers such as Exelon and Entergy are uncertain about how many reactors they need to cater for in five to 10 years’ time. Some units currently set for closure may be reprieved but others are at risk.

So overall, uranium production has risen by half over the past 10 years at a time when underlying demand has stayed constant. Abundant secondary supplies are coming to the market so the level of uranium inventories has naturally risen sharply. The market has clearly been production-driven. The question now is what happens if some of today’s high inventory levels begin to hit the market? The only possible response is significantly lower production and possibly prices too.

The question of where uranium production cuts are likely to occur is reinforced by the ramp up of production at the major new operations of Cigar Lake and Husab. Cameco has put its Rabbit Lake mine in Saskatchewan on ‘care and maintenance’ and curtailed output at its US ‘in situ leeching’ (ISL) operations, but its overall production will be only slightly lower over the next few years. It makes sense, particularly in a poor market, to concentrate production at the lowest cost mines, in Cameco’s case at McArthur River and Cigar Lake in Canada and at Inkai in Kazakhstan.

Looking at the uranium production cost curve is a good place to start looking for other possible closures. This is complicated by exchange rate shifts in recent years, whereby most uranium producing countries have seen currency depreciations against the US dollar. This means that on a marginal cost basis, many mines can still beat uranium prices at around $30 per pound. Of those that cannot, some are protected by long-term contracts at higher prices while others are “national” producers, not necessarily subject to economic factors. Socioeconomic factors are clearly very important in many mine closure decisions.

Shutdowns are caused by a mixture of factors. The only obvious closure over the next few years is Ranger in Australia, which is running out of stockpiled ore and unable to develop the underground 3 Deeps deposit. There will be some other small closures, but the big question surrounds the level of output in Kazakhstan, easily the biggest producer with nearly 40% of the 2015 total. The sharp rise of production there over the past decade is the mirror image of Chinese inventory building, so this must now be under threat.

The ISL mines in Kazakhstan are on the lower end of the cost curve (particularly with last year’s substantial depreciation of the tenge against the dollar) but tough decisions are needed in an over-supplied market. If higher cost operations elsewhere manage to survive and buyers do not wish to depend on a single country, a crunch must surely come. Kazatomprom is sharpening up its marketing operation, but the recent discussion about starting a possible “uranium fund” will not help much. Keeping uranium off the market today will surely only weaken the market in a few years’ time. If Kazakhstan is to maintain production at current levels, it has to diversify sales from China. Is this now even affordable?  

Steve Kidd is an independent nuclear consultant and economist with East Cliff Consulting. The first half of his career was spent as an industrial economist within British industry, followed by nearly 18 years in senior positions at the World Nuclear Association and its predecessor organisation, the Uranium Institute.