U3O8 PRICE (USD/lb)
At the time of Yellow Cake’s listing in July 2018, the supply-demand fundamentals implied a strong recovery in the market price of uranium over time. The impact of COVID-19 and other market developments in 2020 and 2021 confirmed the supply/demand imbalance and the U3O8 price adjusted accordingly. The longer-term trends, discussed below, suggest further upside as supply remains constrained while demand for nuclear energy is forecast to continue to grow.
The nuclear fuel value chain is complex and can take up to 18 months1 from uranium mine to nuclear reactor. Uranium leaves the mines as yellowcake (U3O8) and is further refined before conversion into a gas (uranium hexafluoride – UF6) at five facilities in the United States, Canada, France, Russia and China2.
Nuclear reactors produce energy by splitting the atoms of the U-235 isotope to release energy in the form of heat. U-235 is the main fissile isotope of uranium. Uranium in its natural form contains around 0.7% U-235 and the enrichment process uses centrifuges to increase the concentration of U-235 to around 3.5% to 5%, the level required for use as a fuel in most nuclear reactors. Uranium enrichment is a sensitive technology from a nuclear non-proliferation standpoint and is tightly controlled. Around 90% of the world’s enrichment capacity is located in China, France, Russia, the United Kingdom and the United States3.
The various types of reactors use different fuel assemblies specific to their design. In the fuel fabrication process4, enriched UF6 is converted into uranium dioxide (UO2) that is used in the manufacture of nuclear fuel bundles. Most fuel fabricators are owned by reactor vendors, which usually supply the fuel assemblies for the reactors they produce. Significant fuel fabrication capacity is located in China, France, Russia, the United Kingdom, the United States, Japan, Canada and India.
- OECD-NEA, The Economics of the Nuclear Fuel Cycle (1994)
- World Nuclear Association, Conversion Enrichment and Fabrication/Conversion and Deconversion
- World Nuclear Association, Conversion Enrichment and Fabrication/Uranium Enrichment
- World Nuclear Association, Conversion Enrichment and Fabrication/Fuel Fabrication
Nuclear energy remains a key and growing element of global energy supply
Uranium is primarily used in the production of electricity in nuclear power plants. Currently, the US is the largest user of uranium, accounting for 27% of global uranium demand and nuclear contributes 20% of the country’s total energy compared to the global average of around 10%5.
URANIUM REQUIREMENTS (PERCENTAGE OF WORLD DEMAND) (%)
Source: World Nuclear Association6
Global energy consumption is forecast to rise nearly 50% from 2018 to 20507 with almost all of the growth attributable to non-OECD countries as a result of rapid population and economic growth. The majority of this growth is forecast to come from China (35%) and India (27%). Energy consumption in OECD countries is forecast to increase by 15% over the same period, driven by trends such as the increased use of electric vehicles.
While most of the growth in electricity production is forecast to come from renewable energy sources7, nuclear will continue to contribute around 10% to total electricity production over this time and is forecast to grow 35% to 2050 from 2018, a compound annual growth rate of 1% a year.
The World Nuclear Association’s (WNA) reference case forecasts strong growth of 55%8 in nuclear power to 2040, while the OECD and the International Atomic Energy Agency jointly forecast a 58% increase in installed nuclear generating capacity to 2040 in the high case and a decline of 11% in the low case9.
There are currently 443 reactors operable worldwide with an additional 155 reactors currently under construction or planned6. 43% of the nuclear capacity currently under construction is in China, Russia and India, and 74% of capacity planned is in those countries. All three countries are currently heavily reliant on fossil fuel energy sources and nuclear is likely to have a strong role to play in their future energy mix if they are to meet carbon emission reduction targets. While nuclear makes up close to 20% of Russia’s energy, India only derives 3% of its energy from nuclear and China 5%. Reactors are also being built or planned in many emerging markets including Bangladesh, Belarus, Egypt, Turkey and the UAE6.
CURRENT AND FUTURE REACTORS (MWe)
Source: World Nuclear Association6
Since 1998, new reactors coming online (105) have largely balanced old plants being retired (103), although the larger size of the new reactors installed has led to a slight increase in capacity over this period6. In recent years, many nuclear reactors have been uprated to increase their capacity and operating licences have been extended beyond the initially planned lives of various facilities. The WNA has concluded that there are currently no firm projections for retirements in the next two decades10, but the WNA’s reference case conservatively estimates 154 reactors closing by 2040 compared to 289 coming online.
Nuclear power is also likely to be an important part of the energy mix for countries that plan to reach the goal of limiting global warming to +1.5C by 2050 in terms of the Paris Agreement on climate change. Nuclear power is not only an efficient, secure and very low carbon source of energy, but its reliability and predictability make it an excellent complement for renewable sources of energy that supports grid stability. In September 2020, President Xi Jinping announced China’s intention to achieve net zero emissions by 2060, with CO2 emissions peaking no later than 203011. With China already the world’s largest producer and consumer of energy12, nuclear could have a significant role in achieving this aspiration.
Although nuclear energy has very low operating costs relative to most other forms of energy, the high new-build costs and lengthy construction schedules of traditional nuclear power facilities have constrained6 growth in some developed markets. To address this, significant investments are being made in developing small modular reactor (SMR) solutions that typically have generation capacities below 400 MW per unit. These reactors are less technically challenging to construct, quicker to build, easier to fund and could be sited on existing approved nuclear power facilities due to their relatively small size.
Utility long-term contracts need to be replaced
The average refuelling cycle for nuclear power utilities is around 18 months13 and these utilities secure the majority of their uranium purchases through long-term contracts (three to five years in advance and for delivery over an extended period, usually five years). The balance is purchased in the spot market (defined as delivery within a year) which generally trades at a discount to the term contract prices.
While utilities hold uranium inventories, most of these are not readily available for use or sale as large proportions are either classified as working inventory (being enriched, or fabricated into fuel) or held as strategic inventory (forward requirements held in the event of supply disruption).
Typically, around 80% to 85% of utilities’ uranium purchases are contracted, however currently only around 79%14 of European and 38%15 of US utilities’ 2025 uranium requirements are currently contracted.
FUTURE CONTRACTED COVERAGE RATE OF US & EUROPEAN UTILITIES (%)
Source: Euratom Supply Agency14, US Energy Information Administration15
The uncertainty around certain US policy issues that may have contributed to the delay in long-term contracting were resolved during 2020. These include the Section 232 investigation, Iran Sanctions Waivers and the Russian Suspension Agreement.
Spot volumes hit a new record in 2020
The total volume of uranium traded on the spot market in 2019 declined 28% to 64 million lb of U3O8 as a result of the persistent market uncertainty, particularly relating to the Section 232 Investigation and formation of the NFWG. However, the supply disruptions caused by COVID-19 early in 2020 helped to drive spot market volumes to a new record of 92 million lb for the year, surpassing the previous record set in 2018. Buying by utilities in the spot market declined 22% in 2020 while buying by producers nearly tripled as COVID-19 related disruptions affected mining activities. While activity in the spot market in the first two months of 2021 was muted, transactions increased significantly in March.
With improved clarity around policy and bipartisan support for nuclear energy in the US, we expect pent up demand to drive the market, particularly given the need for US and European utilities to secure long-term contract coverage.
The long-term case for uranium demand remains sound, in particular as the world increasingly recognises the need for the clean baseload energy nuclear provides. We expect demand to rise as the new nuclear fleet currently under construction comes on stream and we see a sustainable return to buying from utilities.
- US Energy Information Administration 2020 Uranium Marketing Annual Report (May 2021)
- World Nuclear Association, World Nuclear Power Reactors and Uranium Requirements (May 2021)
- US Energy Information Administration (EIA) International Energy Outlook (IEO) 2019
- World Nuclear Association: The Nuclear Fuel Report, Global Scenarios for Demand and Supply Availability 2019-2040
- OECD Nuclear Energy Agency and International Atomic Energy Agency: Uranium 2020 Resources, Production and Demand
- World Nuclear Association, Plans for New Reactors Worldwide (March 2021)
- World Nuclear Association, Nuclear Fuel Cycle Overview
- Euratom Supply Agency Annual Report 2020
- US Energy Information Administration 2020 Uranium Marketing Annual Report (May 2021)
The ability of the global supply of uranium to respond to increases in demand is constrained by the nature of supply.
The world’s uranium resources are relatively concentrated with 52%16 found in Australia, Kazakhstan and Canada. Together these countries produce two thirds17 of global uranium mined production. Interruptions as a result of COVID-19 led to production in 2020 falling to the lowest level in more than a decade at 125 million lb of U3O8.
PRIMARY PRODUCTION AND MARKET DEMAND (MLB U3O8)
Source: World Nuclear Association
Primary production has consistently fallen below market demand for uranium over recent years and the primary supply deficit reached a new record in 2020. In January 2021, Energy Resources of Australia Ltd (ERA) (majority-owned by Rio Tinto) announced that the Ranger Uranium Mine (Northern Territory, Australia) had ceased processing stockpiled uranium ore and would now commence decommissioning and reclamation, which is to be completed by January 202618. ERA reported that uncommitted production was being sold into the spot market. The Ranger Uranium Mine commenced operations in 1981 and produced March 2021, Orano ceased operations at its majority-owned Akouta underground uranium mine in Niger. Operated by Compagnie Minière d’ Akouta (COMINAK), the facility produced an estimated 195 million lb of U3O8 since entering commercial operation in 197819.
Secondary supply sources include material from commercial and government inventories, enricher underfeeding, and depleted uranium tails recovery20. The supply gap is currently being covered mainly by underfeeding at enrichment facilities and utility/producer inventory draw-down, but secondary supplies are declining and may not be sufficient to fill the supply deficit.
The current spot and term uranium prices do not incentivise investment into developing new resources. While the spot price of U3O8 briefly reached a five-year high of USD34/lb in May 2020, even at this price an estimated onethird of worldwide production operations are believed to be loss-making on an estimated total cost basis21. The incentive price for the majority of new uranium mining projects is also likely to be above USD50/lb, discouraging exploration and development, and leading to a potential future supply gap in the face of rising demand. While higher cost producers have had the benefit of long-term supply contracts set at higher prices, these contracts are now expiring.
Producers have shown increasing supply-side discipline over the last five years, shutting down or suspending selected operations to manage supply. These include:
- Paladin’s suspension at Langer Heinrich in May 2018;
- Cameco’s shut down of Rabbit Lake in 2016, and suspension at McArthur River in July 2018; and
- Kazatomprom’s announcement in January 2017 of a 10% cut to planned production22 and their subsequent announcement23 in August 2019 of a 20% production reduction for three years compared to the planned levels under Subsoil Use Contracts.
Impact of COVID-19 on supply
Although the COVID-19 pandemic affected both the demand and supply sides of the market, the supply side took the brunt of the impact. Global electricity demand decreased 1% and nuclear power generation by 4% in 202024, while market demand for U3O8 was broadly unchanged year on year at 177.425 million lb. 2020 primary production decreased by 12%24 and the primary supply deficit increased to 30% of market demand.
COVID-19 interrupted production in most mining jurisdictions during the lockdowns announced in response to the pandemic at the end of the first quarter of 2020.
Without a material and sustained increase in the long-term uranium price, supply deficits are projected to continue and the continued ability for secondary supplies to cover the shortfall remains uncertain.
- NEA/IAEA (2021), Uranium 2020: Resources, Production and Demand, OECD Publishing, Paris, https://doi.org/10.1787/d82388ab-en.
- World Nuclear Association, Uranium Production Figures
- Energy Resources of Australia, “Processing Operations at ERA’s Ranger Mine Conclude”, 8 January 2021
- 32 Orano, “A New Stage Commences for the COMINAK Mine in Niger,” 31 March 2021
- World Nuclear Association, Supply of Uranium (August 2019)
- Company analysis based on SRK Consulting Global Operating Cost Curve for Primary Uranium Production, Section 232 Investigation of Uranium Imports dated 16 January 2018
- Kazatomprom, kazahstan-sokrashchaet-dobychu-urana-na-10
- London Stock Exchange, www.londonstockexchange.com/exchange/news/market-news/market-news-detail/KAP/14195200
- UxC Weekly “2020 U3O8 Production Review” 26 April 2021
- UxC Weekly “2020 Uranium Spot Market Review” 25 January 2021