Learning from the market

12 September 2014

Fundamental changes in the nature of uranium supply, demand and the market itself over the last ten years may have largely gone unrecognized, but the market of 2014 is in a better position to support nuclear energy growth than it was a decade ago according to Ux Consulting Company's Jeff Combs.

Ux Consulting president Jeff Combs addresses the WNA Symposium (Image: WNA)

In his presentation to the 2014 World Nuclear Association Annual Symosium, Combs referenced a presentation he made to the same event in 2004. At that point in time, the market had not been ready to support a large expansion of nuclear power. Past government involvement had distorted the market, prices did not adequately reflect future supply scarcity, and there was concern over future price reactions due to insufficient production to meet demand. The availability of uranium enrichment capacity was seen as a potential bottleneck. Uranium prices stood at around $20 per pound of U3O8 and were on an uphill journey.

Fast forward to 2013 and a market suffering from oversupply. Uranium prices, having spiked to nearly $140 per pound during 2007, were back to the $35 mark and looking likely to remain under downward pressure in the absence of production cutbacks or delays. So what happened?

Combs identified two principal factors: the after-effects of the Fukushima Daiichi accident, and more fundamental changes in the nature of supply, demand and the market itself.

Off-line Japanese reactors and changes to national nuclear policies - notably Germany - are reflected in decreased uranium requirements in the post-2011 forward projections of all the supply and demand reports. But the decade since 2004 has also seen the world's enrichment plants transition exclusively to centrifuge technology, with lower operating costs and a shift towards more continuous operation. The excess of SWU capacity makes underfeeding - operating at a lower operational tails assay so that less raw uranium feed is needed to gain the same amount of enriched output, making some of the natural uranium a resaleable surplus - attractive to enrichers.

Combs also singled out the effects of China's position as a dominant buyer, proactively building up large inventories of uranium in anticipation of its future needs, as well as entering into joint ventures with Kazakh and African uranium projects and working to greatly expand its own enrichment capacity.

Most of the increase in uranium production since 2004 has come from Kazakhstan and Africa, with those two countries now accounting for over half of world production. Much of the world's uranium supply is also price inelastic, Combs noted, with ample supplies remaining available despite falling prices. Uranium entering the market from commercial and government inventory, byproduct production and enrichment plant underfeeding is essentially immune to the prevailing uranium market price. Some primary uranium production - notably in Kazakhstan - can also be at least partially motivated by considerations other than price, such as reaching production targets and maintaining high employment levels, making this source too relatively inelastic.

Better informed

As all these changes have occurred in the supply and demand picture, Combs pointed out to developments in the ways the uranium market operates. With more forward price information, the market is much more clearly defined than it was in 2004 when the focus was firmly on the spot price. The forward market has also been reinforced by the growing role of financial players and traders on the uranium market.

In practical terms, then, the market for uranium production has shrunk more than the market for nuclear fuel in general. The greater substitution of enrichment for uranium seen today makes the uranium market more sensitive to developments in the enrichment market, while the price inelasticity of much uranium supply goes some way to explaining the downward pressure on prices seen since 2007. However, the market price today is more representative of future prospects than it used to be, with future prices more closely related to spot market prices and making the market better able to support higher nuclear growth than it was in 2004.

"The irony is while uranium is being valued more correctly today, this is not the case for nuclear-generated electricity, and that impacts the nuclear fuel market," Combs concluded.

Researched and written
by World Nuclear News