Supply & Demand
Market access and trade policy issues were at the top of the list of factors affecting the market in 2019. These issues created uncertainty and consumed a significant amount of time and focus from our customers and contributed to the delay of end-user demand in the spot market. Despite the significant demand created by the reduction in primary supply this year, at least half of the activity in the spot market has been churn, the same material changing hands many times.
In contrast, interest in long-term contracting increased compared to 2018. While the volume of uranium executed under long-term contracts is still below annual consumption levels, it reached its highest level since 2012 and there continues to be significant interest. We believe that underlying this interest is the recognition that the demand cycle is on an upswing while the production cycle has swung down and the market needs to transition to one where price reflects an economic return on primary production. This gives us confidence that the uranium market will undergo the same transition we have seen in the conversion market and that is beginning to occur in the enrichment market.
Economic realities and government-driven trade policies continue to have an impact on the security of supply in our industry. Not only does it not make sense to invest in future primary supply, even the lowest-cost producers are deciding to preserve long-term value by leaving uranium in the ground.
Adding to security of supply concerns today is the role of commercial and state-owned entities in the uranium market, and the disconnect between where uranium is produced and where it is consumed. Nearly 80% of primary production is in the hands of state-owned enterprises, after taking into account the cuts to primary production that have occurred over the last several years.
Furthermore, almost 90% of primary production comes from countries that consume little-to-no uranium, and 90% of uranium consumption occurs in countries that have little-to-no primary production. As a result, government-driven trade policies can be particularly disruptive for the uranium market.
The world needs electricity
Our industry is driven by energy and electricity consumption which continues to rise year over year. More than two billion people around the world remain without reliable electricity, a significant tool in improving people’s quality of life.
|Source: IEA World Energy Outlook 2019 New Policies|
The world needs clean-air energy
There is growing recognition of the role nuclear power must play in providing safe, reliable, affordable carbon-free baseload electricity and achieving a low-carbon future. Examples of this growing recognition include:
- In May 2019, the International Energy Agency released its first nuclear report in 20 years, “Nuclear Power in a Clean Energy System”. The report highlights that a steep decline in nuclear power would threaten energy security and climate change goals and result in billions of tonnes of additional carbon emissions by 2040.
- In October 2019, the IAEA held its first ever conference recognizing the critical role for nuclear power in combating climate change, “International Conference on Climate Change and the Role of Nuclear Power”. The IAEA advocates that it will be difficult to achieve the goal of reducing greenhouse gas emissions without a significant increase in nuclear power.
- In November 2019, the European Parliament adopted a resolution recognizing the role of nuclear energy in achieving its 2050 climate plan calling for net zero emissions.
Reactor growth helps achieve both
Five new reactors began commercial operation in 2019, and 53 reactors are under construction. With a number of reactor construction projects recently approved, and many more planned, the demand for uranium is growing. This growth is largely occurring in Asia and the Middle East.
Africa & Middle East
|Number of Reactors||12||10||7||6||5||5||4||4|
Notable developments include:
- China National Nuclear Company received the first new construction approval in China in about three years for units 1 and 2 at Zhangzhou, and construction began at unit 1 in October 2019.
- NextEra Energy’s Turkey Point 3 and 4 in Florida received the first ever subsequent license renewal, allowing them to operate for 80 years; Duke Energy announced it is seeking to renew the operating licences to 80 years for the 11 reactors it operates in North and South Carolina; Tennessee Valley Authority also announced plans to extend the licences for its six reactors in Tennessee and Alabama to 80 years.
- Three Mile Island nuclear power plant was retired from service by Exelon after 45 years of operation in Pennsylvania.
- In Ohio, a bill was passed providing funding to support the ongoing operation of the Perry and Davis-Besse nuclear power plants, similar to incentives enacted by other states including Illinois, New Jersey, New York, Connecticut, and pending legislation in Pennsylvania.
- There were reports that Kyushu Electric Power Co. and other utilities in Japan expect to temporarily close their currently operating units over the coming years to complete the implementation of the antiterrorism measures required by the nuclear regulators. Some of these units are expected to shut down starting in 2020 before returning to service within a year.
- Brazil announced the possible construction of six more nuclear reactors by 2050, in addition to completion of Angra unit 3, which is currently under construction. Brazil also plans to restart domestic uranium mining in 2019 for the first time in five years, and is open to private sector investment.
- The World Nuclear Association’s 2019 Nuclear Fuel Report shows demand is forecast to be higher in all scenarios examined over the period 2019 through 2040. In addition, the report shows that under all demand scenarios, the industry needs to at least double projected primary uranium production by 2040.
- In its latest uranium market outlook report, UxC increased its annual demand outlook by 8 million pounds per year and moved its assumed structural deficit from 2026 to 2022.
Supply-Demand: Putting it Together
Like other commodities, the uranium industry is cyclical. History demonstrates that in general, when prices are rising and high, uranium is perceived as scarce, and a lot of contracting activity takes place. The heavy contracting that takes place during price runs, drives investment in higher-cost sources of production.
Once that production is in the market, it tends to stay in the market longer than is economically rational, creating the perception that uranium is abundant and always will be, and prices decline. When prices are declining and low, like we have seen over the past eight years, there is no perceived urgency to contract, and contracting activity and investment in new supply drops off.
After years of low investment in supply, as has been the case since 2011, security of supply tends to overtake price concerns at some point, and utilities re-enter the long-term market to ensure they have the reliable supply of uranium they need to run their reactors.
In our industry, customers do not come to the market right before they need to load uranium into their reactors. To operate a reactor that could run for more than 60 years, natural uranium and the downstream services have to be purchased years in advance, allowing time for a number of processing steps before it arrives at the power plant as a finished fuel bundle.
UxC estimates that cumulative uncovered requirements are about 1.5 billion pounds to the end of 2035.
The longer the recovery of the long-term market is delayed, the less certainty there will be about the availability of future supply to fill growing demand. In fact, recent data from the US Energy Information Administration shows that utility inventories are starting to decline and are approaching levels that could put security of supply at risk. Ultimately, we expect the current market uncertainty to give way to increasing concerns about the security of future supply.
As utilities’ uncovered requirements grow, annual supply declines, demand for uranium from producers and financial players increases, and with trade policy potentially restricting access to some markets, we believe the pounds available in the spot market will not be adequate to satisfy the growing backlog of long-term demand. As a result, we expect there will be increased competition to secure uranium under long-term contracts on terms that will ensure the availability of reliable primary supply to meet growing demand.
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