by Julian Steyn

If winter comes, can spring be far behind?

30 August 2000

The international natural uranium market has been in a depressed state since the end of the 1980s. It is time to ask: if winter comes, can spring be far behind?

The last decade of the twentieth century saw many changes in the nuclear fuel market, especially for uranium supply. The changes ranged from emergence of the republics of the former Soviet Union (FSU) as significant uranium sources, to realisation that there were large stockpiles of already-mined uranium which would provide one-third of world supply for many years. Perhaps the most significant event was Russia's agreement with the US to sell it civilian reactor fuel derived from nuclear weapons. The changes in the nuclear fuel market are being compounded by deregulation of the power industry in the US, Europe and Japan. With the exception of East Asia, there is no increase in forecast world uranium demand in this decade. Since supply should be sufficient to meet demand for some years, there will be no significant upward pressure on market prices. As a result, only large low cost producers can afford to remain in production in what has become a restructured and concentrated industry. While the outlook for consumers is that supply should continue to be adequate, they should remain alert for possible changes in market conditions.

The Market

World demand for uranium will remain flat at 160 million lb per year throughout this decade. Demand in Western Europe and the US will decline from 48 and 50 million lb in 2000, respectively, by about 10% by the end of the decade. The recent nuclear plant power upratings and capacity factor gains in the US that resulted in demand increases have plateaued and a slight decline can be anticipated. The reductions in Europe are a result of reactor shutdowns and programme cutbacks. Demand in East Asia, however, will increase from 34 million lb in 2000 to

40 million lb by 2010, an increase of 40%.

The spot market price of uranium was at $8.75 per lb U3O8 in December 1998, and climbed to $10.85 by March 1999, where it remained for two months. The spot market price has since declined to $8.15, a drop of 25% in 14 months. Even if base prices in long term contracts are $2.00 higher than today's spot market price, there are few mines that can remain viable at prices below $10 per lb.

Already-Mined Uranium

Inventories in the form of excess weapons material and government and private sector stockpiles represent substantial sources of already-mined uranium supply. While large inventories of already-mined uranium exist, they will depress primary production.

Several events occurred to reinforce the market's perception of supply adequacy. The first was the HEU-derived uranium marketing agreement between Minatom and three Western companies. The second was the privatisation of the United States Enrichment Corporation (USEC), and endowing it with 75 million lb of uranium and uranium-equivalent (U3O8e) inventories. The prospect of USEC augmenting its supply capability, through underfeeding its gaseous diffusion plants if economic, is also of concern to other uranium suppliers.

The use of the Russian HEU uranium feed component in the US is constrained by a quota in the USEC Privatisation Act of 1996. The Act allows US end-use to increase from two million lb per year in 1998 to 20 million lb by 2009, after which it remains constant.

In 1996, the US and Russia revised their 1993 HEU purchase agreement. The revisions provided that the US government's executive agent, USEC, would only buy the enrichment component of HEU-derived low enriched uranium (LEU). The revision also firmed up LEU delivery quantities and pricing. Minatom will make separate arrangements to market the uranium and conversion services. Minatom took until March 1999 to make such arrangements and conclude a Commercial Agreement with two mining companies and one trading company, Cameco, Cogema Resources, and Nukem, for sale of HEU feed. Between 1995 and July 2000, Minatom delivered 2,600t

of HEU-derived LEU to USEC containing the equivalent of 70

million lb U3O8. Supply of LEU to USEC was interrupted in May and June 2000 because of a Swiss company's attempt to claim

the LEU as collateral for an unrelated financial dispute with Russia, but

this issue was dismissed by a protective US Presidential Executive Order.

The agreement, which covers the sale of 360 million lb

of uranium between 1999 and 2013, allows the Western companies to act as trading companies for up to 73% of the total. The Russians may sell the remainder in

the West or take part or all of it back. The three Western companies and Minatom's trading company Tenex can sell their feed shares in the US in accord with the Privatisation Act quotas and Department of Commerce administrative procedures, and in accord with the Commercial Agreement outside the US. The Commercial Agreement binds the parties to many sales criteria, including a floor price higher than recent market prices.

The potential impact of USEC's future supply capability resulted in Russia maintaining that the US-Russia HEU purchase agreement would be jeopardised if USEC sales were not restrained. Also, the US

mining industry maintained the government gave USEC too much market power and asked for protection. The government established an oversight committee to ensure USEC would not enter uranium into the market in a way that would harm the market, though it is not clear this produced the intended result. Congress authorised funding of $325 million for DOE to

purchase the Russian HEU-derived LEU delivered in 1997 and 1998. DOE agreed

to make this uranium and other inventories it possessed, a total of 58 million lb, unavailable for ten years. Russia agreed

to build up and freeze a similar size stockpile. Government-to-government bilateral implementing agreements were concluded to provide for unsold HEU feed to be returned to Russia, and held there in a US-monitored stockpile until 58 million lb is accumulated. A provision was made to allow Russia to use returned uranium as HEU blendstock after a tails swap out.

The inventories USEC was endowed with have had a significant impact on the market. About 15 million lb of deliveries since privatisation reduced USEC's inventory to 60 million lb by June 2000. USEC has already committed over half of that remaining inventory. USEC also committed 12 million lb for delivery to utilities between 2000 and 2005. This and its January 2000 commitment to the Tennessee Valley Authority for 15 million lb over ten years represent a total forward commitment of 27 million lb. It has since made commitments of 10 million lb to other utilities in the US and East Asia. Its uncommitted inventory is 23 million lb.

In 1998, USEC stated that it would withhold 13 million lb for enrichment plant operations, equivalent to three months of inventory. Since using Russian and US HEU-derived enrichment results in the USEC enrichment plant operating level being halved, an inventory of 5 million lb U3O8e should be adequate. This means that USEC's uncommitted commercially disposable uranium inventory is reduced to 18 million lb, most of which may soon be committed. While uranium accumulated from underfeeding could increase these by two million lb per year, underfeeding will depend on an increase in the market price of uranium, tails disposal credits, and the price of electricity.

Mine Production

Mines, already-mined uranium in many forms, and recycle will meet about 60%, 35%, and 5% of the world's requirements in this decade. Canada, Australia, and Africa will provide 95% of Western world mine production and 75% of world production.

Canada is the world's largest producer of uranium. Production will rise from its current annual level of 28 million lb to 45 million lb in the second half of the decade. In Saskatchewan, where two centres, Key Lake and Cluff Lake, come to the end of their resource life this year, two new centres, McClean Lake and McArthur River, start production. Two new centres, Cigar Lake and Midwest Lake, will go into production in the middle of this decade. McClean Lake mill went into production in 1999. The McArthur River mine will use the Key Lake mill, Cigar Lake will use the McClean Lake mill and the existing Rabbit Lake mill, and Midwest Lake will use McClean Lake mill.

In Australia, two existing mines, Ranger and Olympic Dam, are being expanded, and a small in-situ leach centre, Beverly, has approval to go into production. Annual production will rise from 18 million lb to 29 million lb in the second half of the decade. The Ranger and Olympic Dam centres are unlikely to be expanded to their licence-approved capacities of 13.2 and 17 million lb per year, respectively, until at least the middle of the decade due to limited market demand. In the case of Ranger, it is not clear whether the Jabiluka mine currently under development will be brought into production with a new mill at the mine site or to process the ore at the existing mill 12 miles away.

In South Africa, economic difficulties and lower gold prices will keep production at 2 million lb per year. Poor market conditions means China will limit production to exports below one million lb per year and the needs of its own nuclear programme, which has been revised down. Chinese production will climb slowly from 1-2 million lb to 5 million lb per year by 2010. Production in Namibia and Niger will remain at 6 and 7 million lb per year. Production in Gabon ended in 1999 due to reserve depletion. Production in France is due to end this year as economic reserves are depleted. Annual production in the US will stay at 3 million lb.

Production in the CIS will continue at about 15 million lb. In 1990-1999 the FSU and the CIS exported over one-third of a

billion lb U3O8 to the West. The annual rate of exporting, which peaked in 1996 at almost 60 million lb, has fallen.

Supplier Concentration

A major cause for utility concern has been increasing supplier concentration in uranium mining. Collectively, Cameco, Cogema, and Tenex will be able to meet half of the West's needs through the end of the next decade. The addition of four other entities: Energy Resources of Australia, Olympic Dam, USEC, and Rossing (Rio Tinto controlled), would result in seven entities being able to supply 70% of the West's requirements through 2010. Canada and Australia together are expected to meet 42% of the West's requirements in the same period.

The recent bidding war between Rio Tinto and Anglo American for North Ltd is evidence of further concentration. North owns 68% of the large Ranger uranium mine in Australia, Rio Tinto owns 69% of the large Rossing uranium mine in Namibia and 47% of the Palabora mine in South Africa which produces a small amount of uranium as a by-product of copper, and Anglo American owns 100% of the Vaal Reefs gold-uranium mine in South Africa and 29% of the Palabora mine.

Utility Industry Restructuring

While the uranium industry is concentrating, utilities are going through dramatic changes. Utility changes are driven by deregulation in the US, Europe, and Japan, and privatisation in countries such as the UK. At present, 24 US states have deregulated, and three more are in the process of doing so. At least 16 of these states have operating nuclear power plants. In the US, regional, national, and state requirements for competition and unbundling of generation, transmission and distribution led some utilities to opt to become generating companies and others to become distributors. This has led to some utilities selling their nuclear capacity and others buying up that capacity.

One result of the restructuring is that there will be fewer but larger nuclear generators, each with economy of scale and competitive focus. In the US, the 40 utility nuclear generators that existed in the 1990s will fall to 8-12 by 2004. The remaining generators will include companies with 20 or more nuclear units and companies with as few as six units. Duke Power and Virginia Power are in the market to buy nuclear units. In addition, bids are currently being solicited for the sale of seven nuclear units.

The new companies will have strong purchasing power and will be desirable customers. They may practice supply diversity, demand price advantages, supply assurance, minimise inventory when supply assurance is high, consider partnerships, and seek vertically integrated fuel supply packaging. Generators should be able to maintain a buyers market, despite the small number of remaining vendors. The current tenuous position of some suppliers could result in supply cutbacks and shutdowns that could lead to upward pressure on price.

In 1999, US utilities held a 58 million lb uranium inventory, equivalent to 14 months requirements, about 8 million lb more than in the previous three years. This suggests that the industry had begun to reduce its inventory from the 16 months of forward requirements maintained in 1996-1998. A large company like Amergen with 20 GW of nuclear capacity may only hold an inventory of 3-4 million lb or 4-5 months of forward requirements. A company with 6GW may hold 8-9 months of forward requirements. The collective inventory will be reduced to six months of forward requirement or

25 million lb by 2004. There will be a drawdown of 33 million lb and a corresponding demand reduction.

Trade Constraints

Since 1992, the US has limited uranium imports from several republics of the FSU, in exchange for agreements suspending anti-dumping investigations. As at July 2000, only Uzbekistan and Russia were limited in uranium trade with the US, and Ukraine was subject to an import duty. In July 1999, the US International Trade Commission (ITC) ruled that uranium imports from the only other CIS uranium-producing republic, Kazakhstan, did not harm the US mining industry. In July 2000, the ITC also ruled that imports from Uzbekistan and Ukraine were not harming the US mining industry. Today, only Russia is faced with US uranium and enrichment import constraints. However, because of the US-Russia HEU agreement and the generous import quota limits in the Privatisation Act, there is a view in some US quarters that the US is importing ample nuclear fuel materials and services from Russia.

The EU ensures supply security by diversifying sources. While deliveries to EU utilities of CIS uranium have ranged between 32% and 43% of total supply utilities since 1994, imports have generally been less than the 25% policy for any one country since the EU considers Russia, Kazakhstan, Uzbekistan, and Ukraine separately.

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