The Nuclear Industry Today
The long-term outlook for the uranium industry continues to be very positive, despite the uncertainty that exists today. Against the backdrop of the world’s growing need for safe, clean, reliable and large-scale sources of energy, nuclear energy continues to play a significant role in the global energy mix. The challenge for the industry is the pathway and timing of the transition from today’s stagnant, over-supplied short-term market to the promise of nuclear growth and positive uranium market conditions in the long term.
Market conditions deteriorated in 2013, and we believe the uncertainty could continue depending on how events unfold. In particular, the slower than expected pace of Japanese reactor restarts, unexpected reactor shutdowns in the United States and temporary shutdowns in South Korea led to demand erosion. Compounding the issue, the supply side performed well: primary supply remained stable while secondary supply increased modestly, primarily due to enricher underfeeding. The impact of these conditions was the extension of the post-Fukushima inventory overhang and further downward price pressure.
This market dynamic also led to a reduction in market contracting activity. Utilities are well covered under long-term contracts for the time being and are not under pressure to buy. Similarly, existing suppliers appear reluctant to enter into meaningful contract volumes at current prices. The result was very low levels of long-term contracting in 2013—around 10% of current annual reactor consumption estimates, highlighting a cordial stalemate between buyers and sellers. How this stalemate is resolved between buyers and sellers will be a key factor influencing the pace of market recovery.
Looking beyond the current market challenges, there were several positive indications for the long term in 2013. In Japan, more clarity was gained around the process for reactor restarts: the Nuclear Regulatory Authority (NRA) implemented measures that improved regulatory stability; restart applications were submitted by seven utilities covering 16 reactors; and, there was observable confidence from Japanese utilities who are spending billions of dollars on plant upgrades in anticipation of a positive restart environment.
In other regions, China’s remarkable nuclear growth program remains on track. Three more reactors were brought online, and construction began on four more in 2013. The UK also garnered positive attention as a result of a government-backed revenue arrangement with Électricité de France, designed to support new build there. Overall, the anticipated increase in nuclear plants from 433 (representing 394 gigawatts) today to 526 (representing 514 gigawatts) by 2023 illustrates a promising growth picture.
And it is clear that this growth will require new sources of uranium supply at a time when secondary supplies are diminishing and current market conditions have resulted in deferrals and cancellations of several uranium projects. Current prices are insufficient to incent new production. The end of the Russian Highly Enriched Uranium (HEU) commercial agreement in 2013, removing 24 million pounds of annual supply from the market, highlights the need for increasing reliance on primary uranium supply in the future. The timing of this required supply may well be muted in the near term due to the extension of the over-supply situation, but it remains clear new supply will be required this decade. The development and execution of new uranium supply projects, as well as continued performance of existing supply, will also play a significant role in determining the timing and pace of market recovery.
In 2013, the spot price declined from $44 (US) per pound to a low of about $34 (US) per pound. Utilities continue to be well covered under existing contracts. Given the current uncertainties in the market, we expect utilities and other market participants will continue to be opportunistic in their buying. We expect contracting over the next 12 months to remain somewhat discretionary.
|Uranium ($US/lb U3O8)1|
|Average spot market price||38.17||48.40||(21)%|
|Average long-term price||54.13||60.13||(10)%|
|Fuel services ($US/kgU as UF6)1|
|Average spot market price|
|Average long-term price|
|Note: the industry does not publish UO2 prices.|
|Average Ontario electricity spot price||25||23||9%|
World consumption and production
We estimate global uranium consumption in 2013 was about 167 million pounds and production was 156 million pounds.
We expect global uranium consumption to increase to about 170 million pounds in 2014, and global production to be approximately 160 million pounds. Secondary supplies should continue to bridge the gap.
By 2023, we expect world uranium consumption to be about 240 million pounds per year, representing average annual growth of about 4%. These consumption estimates exclude strategic inventory building that we expect will occur in growth regions.
We expect existing primary production to decrease over the next decade, falling to 120 million pounds by 2023 and highlighting the need for new primary supply.
We expect world consumption for conversion services to increase similar to uranium consumption.
The Ux estimate for global spot market sales in 2013 is about 50 million pounds, similar to previous years. Utilities and traders were responsible for the majority of the purchases, taking advantage of the lower spot prices to make opportunistic purchases.
At the start of 2013, we estimated long-term contracting volumes for the year to be between 75 million and 100 million pounds, although they ended the year at about 20 million pounds, a historical low. Neither buyers nor suppliers are under significant pressure to contract, and suppliers are likely hesitant to lock in meaningful volumes at current price levels. Long-term contracting volumes in 2014 will depend on market conditions.