FREE ARTICLE PREVIEW: You are enjoying a free sample of exclusive
subscriber content. There is a limit of three free articles per week.

DAILY NEWS Feb 19, 2013 3:59 PM - 0 comments

Japan, Russia breathe new life into uranium

TEXT SIZE bigger text smaller text
2013-02-19

VANCOUVER - After a rough couple of years, uranium seems primed for a comeback.

Analysts across the board are forecasting rising prices in 2013, underpinned by China's drive to build a fleet of new nuclear reactors. That effort is already well underway, with 29 units already under construction, but China is not the only country with big nuclear plans. Russia, India, and South Korea are jointly building another 21 reactors, which will all need to be fed, as will any of the 165 proposed reactors around the world. In addition, the world's biggest uranium consumer – the United States – is about to see half of its nuclear fuel supplies evaporate, when a 20-year deal with Russia to turn old nuclear warheads into reactor fuel ends later this year.

In short, demand is primed to climb. This outlook is nothing new: uranium watchers have long emphasized that global demand will outstrip planned supply within the next decade. In fact, global demand for yellowcake is actually higher today than it was before Japan's nuclear disaster.

In the wake of the Fukushima Daiichi disaster, however, those predictions were obscured behind a cloud of global nuclear doubt. Now two fresh breezes – one from Japan, the other from Russia – are clearing away that cloud and breathing new life into the sector.

Japan's Return to Nuclear

The first breeze is coming from Japan, where a new government is publicly acknowledging that Japan needs nuclear. Shutting down its 50 reactors after the Fukushima accident left Japan with rolling blackouts, electricity rates that have risen as much as five-fold, and such a reliance on liquefied natural gas (LNG) that import prices almost doubled.

From an international perspective, when Japan suspended its nuclear sector in mid-2011 the market lost 20 million lbs. of demand and a vociferous supporter overnight. In addition, Japanese utilities dumped their inventories into the spot market, injecting 15 million lbs. of supply into a tanking market.

To be sure, the Fukushima accident and Japan's reaction to it were a sucker punch to the uranium market. Prices rapidly fell from US$65 per lb. to US$50, and have continued to slide since. The whole world reconsidered whether nuclear power was necessary, or even safe.

Now, two years later, Japan's about-face on the issue is just as important.

New safety guidelines for Japan's reactor operators are being established, paving the way for restarts. Details from Japan are limited but Cameco, the world's third-largest uranium miner, expects six to eight Japanese reactors to come back online in 2013.

Moreover, new Japanese Prime Minister Shinzo Abe says he is willing to build new nuclear reactors, in a dramatic shift from the previous government's pledge to phase out nuclear power completely by 2040.

Japan's return to nuclear is contributing to uranium's resurgence in two ways, the first – and arguably more important – of which is emotional. If Japan had abandoned nuclear power, it would have erased less than 10% of current global uranium demand. That's a relatively small number, and one set to decline markedly as China's nuclear building boom progresses. In addition to the 29 reactors under construction, China has another 51 planned and 120 proposed.

So the disappearance of Japanese demand would not have dimmed future uranium demand much. But in the wake of the Fukushima tragedy, statistics meant little compared to the emotional impact of a global power and nuclear energy leader abandoning the sector. Two years later, Japan's slow return to the uranium fold might mean little in terms of long-term global uranium needs, but it adds great credence to a sector in need of a confidence boost.

Japan's return to uranium is also set to stabilize the markets – and improve uranium prices – in the short term.

Once Japan actually starts rebooting its 50 nuclear reactors, its plant operators will stop deferring delivery of contracted uranium. That will slowly remove the millions of pounds of Japanese-contracted uranium that have been clogging up the spot market, enabling prices to recover. If real supply-demand developments can kick-start a price recovery, speculators will likely jump aboard and maintain the momentum.

The Fukushima disaster was terrible. Of the 160,000 people evacuated when three reactor cores melted down, some 60,000 people are still living in shelters, unable to return to their homes because radiation levels remains too high. But now the very country that shouldered this burden is returning to nuclear power because, in places where renewables such as hydro and wind are not an option, nuclear remains arguably the cleanest and safest method to generate significant amounts of electricity.

Russia's Uranium Ambitions

Japan's return to nuclear may be kick-starting uranium's resurgence, but Russia is revving the throttle.

In mid-January Russian state-owned uranium company ARMZ offered $1.3 billion to buy the 48.6% of Uranium One (UUU-T) that it doesn't already own. Analysts continue to debate whether the offer should have been higher, but they generally agree on one thing: ARMZ made its move because it believes uranium is at a bottom.

When the acquisition closes ARMZ will become the world's fourth-largest uranium producer, but more importantly Russia's hold over the uranium market will have tightened again. It will be another step forward for a country that has been entwining its fingers around various aspects of the nuclear fuel sector for years, in an effort that many see as Russia positioning for control over a key future fuel.

The Uranium One acquisition will add significant production capacity to a country that already controls key uranium processing abilities. In 2011 Russia was responsible for just 5.5% of world output, but it operates 40% of the world's uranium enrichment capacity, those complex facilities that turn yellowcake into reactor-ready fuel.

In addition, Russia's state nuclear utility, Rosatom, is a giant in the global nuclear sector. Rosatom builds more nuclear power plants than anyone else and the company always tags a lifetime fuel supply contract onto its build deals, which positions Russia as the one and only supplier for all those racotrs. For example, uranium to feed the 21 plants Rosatom currently has underway in China, Vietnam, India, Iran, and Turkey has to come from Russia.

By the end of this year another event will strengthen Russia's grip further: the Megatons to Megawatts agreement, which for the last 20 years has seen Russia downblend old warheads to create nuclear fuel to feed US nuclear reactors, is coming to an end.

Downblended warheads contribute 24 million lbs. of uranium to world supply every year. The end of Megatons will see this supply essentially evaporate, because there is only one small downblending facility in the United States. The rest are all in Russia, which is not expected to renew the deal because it is tired of getting the below-market pricing stipulated in Megatons for its downblended nuclear fuel.

But the US is reliant on Megatons fuel: fully half of the uranium that feeds America's nuclear reactors comes from downblended Soviet warheads, which means 10% of US electricity depends on a deal that will soon be over. The impending end of Megatons will leave the US needing a new nuclear fuel supplier, just as China, India, and a raft of other countries developing considerable new nuclear capacity are also shopping for nuclear fuel.

Russia, meanwhile, will be holding all the cards.

A Market in Deficit

According to the World Nuclear Association, the world consumed 176.7 million lbs. of uranium in 2011 while only producing 135 million lbs. from primary sources – in other world, from mines. The rest came from that Megatons deal and from stockpiles.

Now Megatons is ending and global demand is set to increase 13% by 2020, pushing annual demand to 200 million lbs. That is a conservative estimate, as it only accounts for the 65 reactors currently under construction and ignores the hundreds of others that are planned or proposed.

To feed a global hunger for 200 million lbs. of uranium a year, primary production would have to rise by 30% this decade.

That will not happen unless prices climb notably. Average production costs today are in the US$85-per-lb. range, compared to a spot price of roughly US$42 per lb. No one is going to build a mine on those numbers.

It is this set of basic numbers that explain why uranium analysts are a bullish bunch. Haywood Securities is predicting an average spot price of US$60 per lb. U3O8 in 2013; over the longer term the firm expects a spot price of US$70 per lb. and a contract price of US$75 per lb. Adam Schatzker of RBC Capital Markets believes the spot price will regain US$70 per lb. by 2016. Bloomberg says the eight analysts it queried predicted an average spot price of US$58.20 per lb. this year, US$63.75 per lb. next year, and US$69.17 in 2015.

There are risks, of course. Another disaster like Fukushima could derail the sector again. Other energy supplies, like natural gas or geothermal power, might prove cheaper or more adaptable than expected. And uranium prices could take longer to recover than analysts expect. It takes a long time to build a nuclear power plant, so the biggest rises in nuclear generation – and therefore uranium demand – aren't expected until after 2020.

But the basics are in place: rising demand, insufficient supply, and production costs that are almost double the spot price, all being propelled ahead by a United States quietly desperate for a major new nuclear fuel supplier and a Russia keen to revel in its uranium positioning. 



© 1915 - 2014 The Northern Miner. All Rights Reserved.


Photos

Historic load-out area from past uranium mining operations at Ucore Rare Metals' Bokan Mountain project on Alaska's Prince of Wales Island. Photo by Steve Stakiw.
Historic load-out area from past uranium mining operati...



Horizontal ruler
Horizontal Ruler

Post A Comment

Disclaimer
Note: By submitting your comments you acknowledge that Northern Miner has the right to reproduce, broadcast and publicize those comments or any part thereof in any manner whatsoever. Please note that due to the volume of e-mails we receive, not all comments will be published and those that are published will not be edited. However, all will be carefully read, considered and appreciated.

Your Name (this will appear with your post) *

Email Address (will not be published) *

Comments *



* mandatory fields