A reality check for the uranium industry

Nuclear Monitor Issue: 
#786
16/05/2014
Article

The uranium spot price fell to US$29 / pound U3O8 on May 5. Not since mid-2005 has the price been so low. The price is less than one-half of the pre-Fukushima price, and less than one-quarter of the price at the peak of the 2007 price bubble.

FN Arena provides this snapshot: "It is worth noting that prior to about 2005, the uranium spot market was a minor distraction, existing only for the purpose of producers to make up term contract shortfalls or reduce inventories, with traders standing in as intermediaries between producers and utilities. The real uranium market was in term delivery contracts. But then as the China super-cycle became apparent, speculators stampeded into the uranium spot market. The result was a subsequent bubble to 2007 and a spot price of nearly US$140/lb before a 2008 bust back down to US$50/lb. Utilities rested on their stockpiles during the madness. Speculators were severely burned but tried their luck again ahead the 2011 tsunami, before being burned again. The final throw of the dice was prompted late in 2013 when it appeared Japan was about to announce reactor restarts. But even that didn't work. The two big intermediary players – Goldman Sachs and Deutsche Bank – have left the market and the only speculators left still playing, it would seem, are those still caught long. Those speculators are joined by producers stuck with product in an oversupplied market. No one is buying, at least in any quantity. ... If you went on holiday in 2005 and just returned, you would assume nothing much has changed in sport uranium, price or market volume wise. And perhaps that's the way things are going to be."1

Uranium Investing News notes that "the phrase 'uranium renaissance' has been uttered so often that it has begun to feel like a bad joke." Energy metals analyst Chris Berry points to excess supply, the high cost and lead time of nuclear reactor construction, and unease about nuclear energy as contributing to the malaise in the market. One little-mentioned reason for the malaise is that the US government is selling some of its uranium stockpile. Berry says the US Department of Energy has the authority to sell excess supply into the US domestic market and that according to his calculations the Department has about 25 years of supply for US power reactors and can sell an amount each year up to 10% of domestic demand.2

An April 22 FN Arena analysis states: "On the supply side, the Russian HEU agreement ended last year, existing producers have been limiting or mothballing production, new production plans have been shelved, and there remains a risk sanctions will be imposed on exports of Russian enriched uranium. On the demand side, Japan is close to restarting its nuclear reactors and China is ramping up its reactor construction a-pace. After three years in the post Fukushima doldrums, everything has been pointing to a long awaited rebound in price and liquidity. But the opposite has been true. ... What doesn't make a lot of sense is why utilities are not in there buying at these bargain basement prices. The answer may lie in the fact utilities maintain sufficient stockpiles in case of future supply shocks and hence are not about to run out of fuel, and had already picked up excess Japanese supply, but at some point a restocking phase must begin. That liquidity in the spot market should wane is of no great surprise. Typically the "real" players – producers and utilities – only enter the spot market on occasion to top up short falls or let go some excess supply. ... Yet there's been little activity in the term market of late as well."3

As FN Arena notes, progress towards reactor restarts in Japan "has been glacial and anti-nuclear protest has been powerful".4 Japan's uranium inventories probably amount to around 100 million pounds (45,400 tonnes) according to David Sadowski, a Raymond James analyst. Sadowski added that many utilities around the world "are sitting on near-record piles" of uranium.5 In any plausible reactor restart scenario, it will be a decade or more before Japanese utilities exhaust existing inventories.

The uranium price would be weaker still if not for Chinese purchases and stockpiling. In 2013, China's total imports reached a record level of 18,968 tonnes of uranium − three times its requirements for operating reactors. Imports in January 2014 were 22% higher than the 2013 monthly average. Since 2006, China has amassed enough uranium to meet current annual consumption eight times over. FN Arena states: "So while there is presently no end in sight to China's voracious uranium demand, as January imports would attest, at some point China is going to decide it has enough. If this occurs before demand from other major consumers starts picking up, Macquarie warns (and presumably this is a nod to Japan), look out."6
David Talbot, senior mining analyst with Dundee Capital Markets, noted in February that further mergers and acquisitions can be expected: "We do expect further consolidation. Financing is more difficult than ever. Project timelines are lengthy and costly. With some companies unable to secure supplies to advance projects, we expect further delays and/or corporate insolvencies. What often happens is the predator comes in and takes out its prey at pennies on the dollar relative to its underlying net asset value."7

French state-controlled nuclear group Areva's first-quarter revenue from its uranium mining unit fell 63%.8 One of Areva's problems is stalled negotiations with the Nigerien government over uranium mining operations in the African country. As previously reported in Nuclear Monitor, the mining arm of Russia's Rosatom has frozen uranium expansion projects in Russia and elsewhere, and Cameco has abandoned its earlier uranium production growth targets. "The next 18 months we see as being a very difficult period for the market," said Cameco President and CEO Tim Gitzel in a May 9 interview. "We continue to look to the future, the future is bright for nuclear energy."9

A nuclear insider's view

Just about everyone in and around the uranium industry consoles themselves with the thought that uranium prices will have to rebound sooner or later to stimulate new production which will be required even if global nuclear power capacity continues to stagnate. A contrary view comes from Steve Kidd, an independent consultant and economist with 17 years of work at the World Nuclear Association and its predecessor, the Uranium Institute.10

Writing in the Nuclear Engineering International Magazine on May 6, Kidd states that "the case made by the uranium bulls is in reality full of holes" and he predicts "a long period of relatively low prices, in which uranium producers will find it hard to make a living."

Kidd argues that the replacement of inefficient gaseous diffusion enrichment plants with centrifuge enrichment plants is a "crucial" factor: "Enrichment is now expected to remain cheap and abundant as centrifuge plants are modular and capacity can be expanded relatively easily to meet demand, so this substitution of enrichment for uranium will continue to be important." Huge stockpiles of depleted uranium represent "an attractive resource while there is overcapacity in enrichment and cheaper prices".

Kidd notes that despite all the hype about nuclear growth plans, uranium demand did not rise from 2003−2010 as shutdowns of ageing reactors were balanced by the commissioning of new units (mostly in China). Yet uranium production increased by 50% (mostly in Kazakhstan). Hence the over-supply in the world uranium market, lower prices, and an upsurge in uranium inventory levels in the US, Europe and Japan.

Kidd states that most nuclear growth to 2030 will be concentrated in China and Russia. But "uranium demand will almost certainly fall in the key markets in Western Europe and North America", and in Japan it will take a "long time to unwind the inventory accumulation".

In short: "Those who believe in higher uranium prices take an over-optimistic demand scenario."

Kidd argues that we are entering a new era, where the uranium market is split into three:

* The Chinese will favour investing directly in mines to satisfy their requirements; they are not going to 'play ball' with the established uranium market.

* The Russians will continue to be significant nuclear fuel exporters but their own market will remain essentially closed to outsiders. They still have secondary supplies to tap into (plenty of surplus highly-enriched uranium remains to be down-blended) and they will follow the Chinese and invest directly in uranium assets if their own domestic production remains constrained.

* The established uranium producers will have the remainder of the market to satisfy and that will likely be declining in magnitude. In the US, the number of operating reactors will fall by 2030 and the overall European situation will be one of "gentle decline".

Kidd pulls the threads of his argument together: "This market segmentation and the way the Chinese and Russians will operate means that the two prime analytical devices utilised in the uranium market are both now useless. First, calculated annual world supply-demand balances (miraculously often showing a shortage after 3-5 years) are irrelevant in a segmented market, where key actors with expanding demand choose to go it alone. For a time in the early 2000s, it looked as if a globalised world nuclear fuel market could emerge, but this has not happened and it is arguably now going into reverse. Secondly, uranium supply curves (based on mine cost data), demonstrating the need for higher prices as demand expands, are also invalidated. China and Russia (and probably India too, if it eventually gets its nuclear act together) will develop uranium assets wherever it best suits them. They have the confidence to bypass the conventional market, which could increasingly become merely a sideshow."

Kidd concludes: "In this fifth age of uranium, prices will essentially be determined by the cash costs of production of operating mines (and not by the full costs of future mines). This means a reversion to the long period of low (but relatively stable) uranium prices of the late 1980s and 1990s (the third age), but at a higher level to reflect the greater level of production now, the escalation of mining costs and the movements in currency exchange rates. The shortages predicted by many analysts (leading to rapid price increases to provide good rates of return on their favourite projects) are purely a mirage. The outlook is therefore not favourable for either current or prospective uranium producers. Only those with low-cost operations will prosper. Others will struggle to stay in business and further mine closures ... are definitely on the horizon."

References:

1. www.fnarena.com/index2.cfm?type=dsp_newsitem&n=7A5B0419-AE5E-4F41-0EDC89...

2. http://uraniuminvestingnews.com/18201/uranium-renaissance-fact-or-fictio...

3. www.fnarena.com/index2.cfm?type=dsp_newsitem&n=47895F2D-B4C7-FC92-C45A8E...

4. www.fnarena.com/index2.cfm?type=dsp_newsitem&n=B20FE68F-03AB-D644-692B61...

5. http://theenergycollective.com/streetwiser/360291/conjuring-profits-uran...

6. www.fnarena.com/index2.cfm?type=dsp_newsitem&n=69ED7CA2-9778-0DB0-BE82C2...

7. www.wallstreetsectorselector.com/2014/02/uranium-supply-disruptions-spel...

8. www.reuters.com/article/2014/04/30/us-areva-results-idUSBREA3T11N20140430

9. www.bloomberg.com/news/2014-05-08/cameco-sees-tough-18-months-for-uraniu...

10. www.neimagazine.com/opinion/opinionthe-future-of-uranium-higher-prices-t...

(Written by Nuclear Monitor editor Jim Green.)

From WISE/NIRS Nuclear Monitor #786, 16 May 2014

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