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Uranium Uses
The only significant commercial use for U3O8 is as a fuel for nuclear power plants for the generation of electricity. Through the process of nuclear fission, the uranium isotope U‑235 can undergo a nuclear reaction whereby its nucleus is split into smaller particles. Nuclear fission releases significant amounts of energy, and is the basis of power generation in the nuclear industry.
The first practical use of nuclear power occurred in 1951, when an experimental nuclear reactor at a United States ("U.S.") research centre in Idaho Falls lit four ordinary light bulbs. In the late 1950s, the first full-scale nuclear power plants went into service in the U.S., the United Kingdom, Russia and France. The nuclear industries of these countries and several others grew rapidly during the 1960s and 1970s. The first export orders for nuclear power reactors were awarded in 1958 and were followed by the spread of nuclear electricity generation to many other countries, including Canada, Germany, Switzerland, Spain, Belgium, Finland and Japan. Reactor technology was also exported by Russia to several Eastern European countries, including the former East Germany, the former Czechoslovakia, Bulgaria and Hungary. Many of these countries developed their own nuclear expertise, leading to the development of today’s international nuclear industry.
Uranium has other uses in the fields of medical diagnosis and other industries. Uranium is also used as a feedstock for over 200 private nuclear reactors, which are operated for research purposes and for the production of isotopes for medical and industrial end uses.
Uranium Production Process
The initial step in the process of preparing uranium ore for use in a nuclear reactor is the mining and upgrading of the ore in a uranium processing facility, or mill, to produce uranium concentrates containing 80-90% U3O8. Uranium concentrates are priced and sold based on the U3O8 content.
The second step in the preparation of uranium for use in a nuclear reactor takes place at licensed uranium conversion facilities where U3O8 is converted to UF6. Above 56 degrees Celsius, UF6 is a gas and is in a suitable form to be enriched to produce fuel for the majority of the types of reactors. Following the production of UF6, enrichment and fuel fabrication steps are required before the nuclear fuel is ready for loading into a nuclear reactor.
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Demand
The demand for uranium is directly linked to the level of electricity generated by nuclear power plants. The cost structure of nuclear power generation, which involves much higher capital costs and generally lower fuel costs compared to most other forms of power generation, dictates that nuclear plants are kept operational at high load factors to achieve optimal economics. As a result, the demand for uranium fuel is more predictable than most other commodities. Demand forecasts for uranium depend largely on installed and operable nuclear power generation capacity, regardless of economic fluctuations or the demand for other forms of power.
UxCo, in its uranium demand forecasts, has estimated that worldwide uranium demand will increase from approximately 180 million pounds of U3O8 in 2007 to nearly 212 million pounds by 2015 representing an annual compound growth rate of about 2%.
World net electricity consumption is expected to increase by 85% by 2030, according to the International Energy Outlook 2007 (the "IEO 2007") reference case forecast. Total demand for electricity is projected to increase on average by 2.3% per year from 16,424 billion kilowatt hours in 2004 to 30,364 billion kilowatt hours in 2030. The IEO 2007 forecast assumes strong economic growth in non-OECD countries with GDP growth of 5.3 percent annually compared with 2.5 percent for OECD countries. As a result of higher fossil fuel prices, energy security concerns, improved reactor designs and environmental concerns, new nuclear capacity is expected to be a significant part of meeting this growth in electricity demand.
According to the World Nuclear Association (“WNA”), as of March 2008, there were a total of 439 operable commercial nuclear power plants globally in 30 countries with an aggregate installed generating capacity of 372.0 gigawatts of electricity. These commercial nuclear plants are currently supplying approximately 16% of the world’s power requirements. Another 35 commercial nuclear power plants (representing 28.8 gigawatts of electricity) are under construction in 12 countries and another 91 reactors (99.1 gigawatt) are planned. New construction is presently centered in Asia, principally in China, South Korea and India.
The demand for uranium may also be increased by the trend toward improving plant load factors, but may be muted by the premature closing of some nuclear power plants. Factors increasing fuel demand are expected to continue to be offset in part by a trend in increased efficiency in nuclear power plants and reductions in tails assay during enrichment.
Supply
Uranium is supplied from primary mine production, and from secondary sources such as the drawdown of excess inventories, uranium made available from the decommissioning of nuclear weapons, re-enriched depleted uranium tails, and used reactor fuel that has been reprocessed. The Manager estimates that only approximately 64% of annual uranium consumption was sourced from primary mine production in 2007.
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Primary Production
The uranium production industry is characterized by a small number of companies operating in relatively few countries. UxCo reports that in 2007, mine supply was approximately 115.5 million pounds of U3O8. In 2007, approximately 89% of the estimated world production was provided by eight producers: Cameco Corporation, AREVA, Energy Resources of Australia Ltd., Rossing Uranium Limited and BHP Billiton in the western world, and KazAtomProm in Kazakhstan, NAVOI Mining Metallurgical Kombinat in Uzbekistan and TVEL in Russia.
Approximately 82% of estimated world production was sourced from seven countries (in order of production, from greatest to least): Canada, Australia, Kazakhstan, Russia, Niger, Namibia and Uzbekistan. The Canadian uranium industry has been the leading supplier of uranium in recent years with production of 24.6 million pounds of U3O8 in 2007, which represented approximately 23% of world production.
There is a growing requirement for increased uranium production to meet the forecast needs of reactors worldwide. However, a critical consideration in evaluating the potential for new supply is the ability, lead time and capital costs needed to permit and develop new uranium production. The lead time for most new production facilities from discovery to production has historically been approximately 10-20 years due to environmental challenges and the technical difficulties inherent in uranium mining.
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Secondary Sources
Every year since 1985, world primary uranium production has been less than uranium consumption. The resulting shortfall has been met from a number of secondary sources. The de-enrichment of nuclear weapons through blending with low enriched uranium from conventional production sources has contributed the largest proportion of this supply and is expected to meet about 6% of demand over the next ten years. Also, some utilities in Europe use reprocessed uranium and plutonium derived from used reactor fuel as a source of supply and depleted uranium tails from reactors can be re-enriched and added to the fuel mix, supplying 6% to 8% of world demand. Excess inventories held by utilities, producers, other fuel cycle participants and governments have also served as a source of supply, although this is a finite source.
Uranium from Nuclear Disarmament
The most significant secondary source of uranium is from de-enriching nuclear weapons. In February 1993, the U.S. and Russia entered into an agreement (the "Russian HEU Agreement") to manage the sale of highly enriched uranium ("HEU"). Under the Russian HEU Agreement, over a term of 20 years, 500 tonnes of HEU derived from dismantling nuclear weapons, are to be diluted in Russia and delivered to the U.S. as low enriched uranium ("Disarmament Uranium"), suitable for use in nuclear power plants.
In March 1999, Cameco Corporation, AREVA and NUKEM, Inc. (the "Western Companies") entered into an agreement whereby they would market a substantial portion of the Disarmament Uranium ("Western Agreement"). Cameco Corporation reports that as a result of various amendments to the Western Agreement, the Western Companies are now committed to the purchasing and selling of almost 163 million pounds of U3O8 from 2004 through to the end of 2013.
Russia, through its agent Techsnabexport ("Tenex"), had also been selling a portion of the Disarmament Uranium not purchased by the Western Companies. In November 2003, Tenex terminated its contract for sales to the U. S. (the "Tenex Termination") through Globe Nuclear Services and Supply. Russia currently consumes more than twice as much U3O8 as it produces and is proceeding with an ambitious nuclear power development program which will make this shortfall in U3O8 supply even more pronounced.
As a result of the Tenex Termination and the subsequent amendments to the Western Agreement, the amount of Disarmament Uranium that would have been available to the market in the western world has been reduced by about 74 million pounds of U3O8 in the period from 2004 to 2013. The Russian HEU Agreement terminates in 2013 and Russia has formally stated that the agreement will not be renewed, as had once been anticipated. Additionally, as a result of the dramatic rise in uranium and enrichment prices of the past two years, Russia has notified all of the parties to the HEU Agreement that the previously agreed pricing can no longer stand. Renegotiation of the component prices among the parties has begun and is expected to be completed in 2008.
The Uranium Market and Prices
Utilities secure a substantial percentage of their uranium requirements by entering into medium and long-term contracts with uranium producers. These contracts typically provide for deliveries to begin one to four years after signing and continue for several years thereafter.
There is currently no regulated commodity market underwritten by a market maker for the various components of nuclear fuel. As such, the market participants rely upon multiple published prices based on historical data and market sentiment.
Contracted uranium prices are established by a number of methods, including base price levels adjusted by inflation indices, reference prices (multiple published spot prices as well as long term reference prices) and annual price negotiations. Many contracts also contain floor prices, ceiling prices and other negotiated provisions, which affect the price ultimately paid. Prices under uranium supply contracts are usually confidential.
Utilities also acquire uranium by way of spot and near-term purchases from producers and traders. Spot market purchases are those that call for delivery within one year. Traders generally source their uranium from organizations holding excess inventory including utilities, producers and governments. Over the period from 1996 through 2004, annual spot market demand averaged just under 20 million pounds U3O8 or about 12% of the annual world consumption, but had jumped to about 35 million pounds in 2005 and 2006 as the rebuilding of utility inventories commenced, and investors and hedge funds entered the market as significant buyers. Spot market volume returned to its traditional level of approximately 20 million pounds in 2007.
Historically, spot prices have been more volatile than long-term contract prices. In December 2000, the spot price reached an all-time low of US$7.10 per pound. The uranium price increased at a moderate rate reaching US$14.50 per pound U3O8 by the end of 2003. The spot price increased steadily from that date reaching US$72.00 by the end of 2006. A further market impact in October 2006 was the announcement of the flooding and indefinite postponement of the start up of the Cigar Lake mine in northern Saskatchewan. The Cigar Lake mine was scheduled to ramp up to an annual production rate of 18.0 million pounds by 2008. Producers were also active in the spot market, purchasing material to fill contractual demand, which they could not supply due to production issues at their respective operations. During the first half of 2007, the spot price continued its rapid rise reaching a peak of US$136.00 in June 2007. At the end of June 2007, the spot price dropped US$3.00, the first decline in the spot price since May of 2003. In the last half of 2007, the spot price was very volatile dropping to US$75.00 in October, then rebounding to US$95.00 in December. Prices have continued to be volatile in 2008. As of October 24, 2008, the uranium spot price is US$44.00 per pound U3O8.
The long-term uranium price has undergone a similar increase over the past several years, but with significantly less volatility, rising from just under US$11.00 per pound U3O8, at the end of 2002, to US$95.00 per pound in May 2007. Since that time, the long-term price has remained at US$95.00 per pound U3O8 until declining to US$75.00 in October, 2008. The long-term price rose due to increased demand from utilities as they placed more of their requirements under contract.
UF6 is a separate commodity from U3O8, although its price will be principally affected by the price of the U3O8 because U3O8 is converted to produce UF6. Through conversion, 2.61285 pounds of U3O8 will produce 1 KgU as UF6. The value of UF6 (the "UF6 Value") is obtained by adding (i) the spot price of U3O8 multiplied by 2.61285 and (ii) the spot conversion price. The spot price of UF6 (the"UF6 Price") is published by UxCo and it may be higher or lower than the UF6 Value depending on the variation in demand for its components. As at September 30, 2008, the UF6 Price was US$1.48 above the UF6 Value.
At September 30, 2008 prices of U3O8 and conversion, U3O8 constitutes over 93.6% of the UF6 Value. Accordingly, any change in the UF6 Price willlargely be attributable to changes in the price of U3O8. UF6 as a commodity may trade at a discount or a premium to the value of U3O8 plus conversion, depending on a variety of factors including demand for each of U3O8 and conversion.
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Supply Deficit
Each year since 1985, the consumption of uranium has exceeded primary production by a substantial margin. To date, this large supply gap has been accommodated by sales from existing inventories, de-enrichment of HEU and recycling programs. The Manager believes that there is only a relatively small amount of uranium held in inventories that are in excess of strategic inventory levels and therefore available for sale.
The uranium market will face a growing supply deficit until new mine production can be implemented. The Manager believes that decreasing, available inventories, the recognition by Russia of its own internal need for uranium supply as a net importer and the construction of approximately 25-35 new commercial reactors over the next 10 to 15 years will exacerbate this shortfall. The Manager believes that the long-term fundamentals of the uranium market are positive.
Last Updated October 2008
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