Uranium as Nuclear Fuel
Uranium in its naturally occurring form consists primarily of two “isotopes” with the same chemical characteristics, but different atomic weights due to the differing number of neutrons in their nuclei. Both isotopes have 92 protons in their nuclei (and, thus, the same chemical characteristics), but the lighter isotope (atomic weight of 235) has 143 neutrons and the heavier isotope has 146 neutrons. The lighter isotope, U-235, comprises only 0.7% of natural uranium, but it is the only isotope that can actually undergo fission and, thus, produce energy. The other isotope, U-238, comprises the remaining 99.3% of natural uranium. In order to be useful as fuel in the most prevalent nuclear power technologies, the percentage of U-235 must be increased to the level of 2-5% U-235, a process called “enrichment.” Enrichment is a technically difficult process, the essence of which is highly secret because it is the same process used to produce some nuclear weapons material. (Nuclear weapons can be made from uranium of approximately 90% U-235.)
Unlike a fossil-fueled power plant, a nuclear power plant is not fueled continuously, but rather in batches. At its initial operation, the nuclear plant is loaded with what is called an “initial core” of fuel assemblies in a geometric configuration inside the plant’s “reactor core.” The plant is started up, and the fission of U-235 occurs in the fuel assemblies inside the core. Eventually (in 1-2 years of operation), the fission product level builds up inside the fuel and quenches the fission process. At this stage, the nuclear plant has finished an “operating cycle” and is shut down for refueling. A portion (typically 20-40%) of the fuel assemblies is replaced at refueling time, with U-235 enrichment levels specific for that plant and operating cycle, and the rest of the fuel is shuffled in the reactor core to optimize the plant’s future operations. The nuclear plant is then started up again in a new operating cycle, which lasts from 12-24 months, depending on the design of the plant’s operation. Utility companies like to shut down for refueling in their “off-peak” demand periods, which is usually in the spring or fall.
Enriched Uranium Product
The company fabricating the fuel assemblies does not normally use the enriched uranium product (EUP) delivered by that customer to manufacture the customer’s actual fuel assemblies. The fabricator is using its working inventory to produce the customer’s assemblies. In actual practice, the utility customer is asked by the fabricator to deliver EUP of different characteristics (quantity and U-235 enrichment) than that used for that customer’s fuel assemblies; in fact, the customer usually orders EUP matching a future fabrication customer’s needs. In each such case, the customer delivers EUP of the same enrichment services (SWU) content, but different natural uranium equivalent. When the fabrication customer delivers the EUP for fabrication, the customer’s EUP is broken up into “feed” (i.e., natural UF6) credits and SWU credits for the customer’s storage account at the fabricator. On a periodic basis (usually once a year), the fabricator and its customers reconcile their feed accounts, on the basis of the feed equivalent actually required to fabricate the customers’ fuel. (Remember that the customers each deliver the proper SWU content in their EUP.) If the feed equivalence of a customer’s actual EUP deliveries is less than the feed equivalence of the fabricated fuel delivered to the customer (after accounting for manufacturing losses), the fabrication customer delivers feed UF6 to the fabricator’s account somewhere, and vice versa for customers with excess delivered feed content.
To further complicate (or, actually, to simplify) matters, the enricher usually delivers the EUP prior to its customer’s contractual delivery date. This EUP is then recorded as feed and SWU credits for the enricher’s storage account at the fabricator. Then, when the enricher is required to make delivery of EUP to the enrichment/fabrication customer, the enricher just notifies the fabricator to make a book transfer of feed and SWU credits from the enricher’s account to the utility enrichment/fabrication customer’s account. Thus, the notion of a physically identifiable lot of EUP is meaningless in this industry, and the accounting concept of feed and SWU credits makes the feed and SWU fungible in their own right.
This accounting system does not mean that physical quantities of EUP are not important. There is a system of physical protection and nuclear nonproliferation safeguards that require a strict accounting for the physical inventory of EUP within the fabrication plant boundaries, so that any theft or diversion of EUP for military or terrorist purposes can be detected. The responsibility (including government inspection and reporting requirements) for this physical protection and the liability for any radiation-related accident is purely that of the fabrication facility owner, not the fabrication customer. It is tied to the physical possession of the EUP, not to the party with legal title to the EUP. The same situation occurs for the other processing stages of the nuclear fuel cycle.
Purchase of Uranium, UF6 Conversion & SWU
Electric utility buyers of uranium, UF6 conversion, and SWU often purchase by open bid request for their specific needs. Such purchases can be either for a “spot” purchase (with typically one delivery within 12 months of the date of the bid request) or for multi-year purchases under a “long-term” contract. Although only a minority share of the utility industry’s uranium and enrichment services needs are procured under spot purchases, long-term uranium contracts typically have significant buyer flexibility to buy more or less (typically ±20-30%) than a nominal annual quantity specified in the contract. Therefore, it is easy for the utility to shift to more use or less use of the spot market, depending on the then-current spot market price, compared to the delivery price in the long-term contract.
Enrichment contracts are most often based on covering a specified percentage of the utility’s (or power plant’s) requirements, which provides considerable flexibility to the buyer, but of a different sort than that of uranium contracts. UF6 conversion contracts can provide either type of flexibility, depending on the particular contract form.
Evolution of the Market
When the Western world’s nuclear power industry was starting its commercialization, the only supplier of uranium in the USA was the US Atomic Energy Commission (AEC). Under US legislation passed in 1964, private ownership of uranium was allowed starting in 1968. The same legislation authorized the AEC to provide “toll enriching services” for uranium, under nondiscriminatory terms, on the basis of the AEC’s recovery of its costs of providing such services. This part of the legislation was a clear mandate to the US government to involve itself in the commercial nuclear fuel industry only by providing enrichment services, and not the other segments of the fuel industry. This was an important precedent, because it leads to markets for each processing stage for nuclear fuel—markets that persist to this day. A typical utility buyer will contract separately for natural uranium concentrates (“yellowcake” or “U3O8”), services for processing U3O8 into uranium hexafluoride (“UF6 conversion”), services (“SWU”) for enriching uranium in its U235 content, and services for fabricating the EUP into finished fuel assemblies for loading into the nuclear power plant.
Uranium Price History
Although there is no formal “market” for uranium and SWU, in which standardized sales terms and quantities exist, several organizations publish prices for activity in these markets. The longest running of the uranium price series is the NUEXCO Exchange Value, currently published by TradeTech and in publication since August of 1968--the beginning of the commercial market for uranium. This uranium price series history is shown in the figure. The Exchange Value is a measure of the uranium price on the spot market, but is also used in the vast majority of long-term contracts with “market-related” delivery prices. In addition, the Exchange Value has, at times, been published as two series--one for the “Restricted Market” (i.e., with import restrictions on uranium from the countries of the former Soviet Union, or FSU) and one for the “Unrestricted Market” (i.e., for regions with no import restrictions).
In the early years of the commercial uranium market, the period of US government purchases for military purposes was just winding down, whereas the commercial nuclear power industry was just in its infancy. Consequently, uranium prices were at their all-time historical low (in nominal dollar terms) at the beginning of the commercial market. Several factors came together in the mid-1970s to change this situation. Firstly, nuclear power became more widely accepted (and proven economical) as a source of electricity by the world’s utility industry, and the years 1973-1976 witnessed massive orders of nuclear power capacity (over 36,000 megawatts for the peak year in the USA), indicating large future demand for uranium. In addition, there was a strategic push by governments to energy sources other than oil in response to the actions of the Organization of the Petroleum Exporting Countries (OPEC). Next, the world’s (then) only supplier of enrichment services (US AEC) first closed its order books because of its perceived enrichment capacity shortage, and then reopened new contracting by shifting from requirements-based contracts to contracts with 10-year-forward firm commitments, thus fixing uranium demand that far into the future.
Finally, there was the alleged formation of a cartel by non-US producers, partially in response to US import quotas on foreign uranium, followed by the abrogation of a large number of contracts by the Westinghouse Corp., which had sold uranium short (i.e., without covering these sales) as part of package deals for nuclear power plants. The price consequently rose rapidly from $7 per pound U3O8 at the end of 1973, to $14 in October 1974, to $21 in May 1975, to $40 in April 1976, before peaking at $43.40 in May-July 1978.
Uranium Production
By the end of 1979, it became clear that electricity demand, which had been experiencing annual growth rates in the USA of 7% for decades, was suffering from the economic impact of the OPEC oil embargo and, consequently, the backlog of nuclear plant orders became at risk for lack of anticipated future demand for electricity. On the supply side, the US import restrictions were being phased out, and the world’s uranium producers were responding to the price increases. Production increased from about 105 million pounds U3O8 in 1973 up to almost 175 million pounds in the 1980-81 period, the historical peak. Actual world consumption for the years 1980-81 averaged only 55 million pounds U3O8 per year. This high production (relative to consumption) was sustained through about 1988, before starting a precipitous decline thereafter.
There were several reasons that production did not decline in the early to mid-1980s, in spite of the precipitous price decline. For one, the long-term, fixed-commitment enrichment contracts of the period fostered the development of long-term uranium supply contracts, whose prevalent pricing mechanisms were (1) base-prices with escalation (from bases of $40 or so for contracts signed in the mid- to late-1970s) and (2) market-related prices with price floors typically around $35 per pound U3O8 for contracts signed in the mid- to late-1970s. Thus, producers with long-term contracts were protected from drops in the spot price. The second reason for sustained production was the discovery and development of a new class of “super deposits” of large size and low production costs in Australia and Canada. Thus, while production was declining from older low-grade deposits, this lost production was being replaced by new high-grade deposits. Throughout most of the 1984-1988 period, the Exchange Value hovered in the $15-17 per pound U3O8 range. However, a sustained decline ensued thereafter, due to pressure from the huge overhang of excess commercial inventories (much of it due to nuclear plant cancellations) and the entry of supplies from the Soviet Union into the West.
Accelerating this price decline was the high degree of market efficiency brought about by the creation of a new class of market participant: the uranium trader. The uranium trading companies, exemplified by NUEXCO, Nukem, and Urangesellschaft, bought and sold uranium for their own account, typically purchasing large quantities from utilities with large excess inventories or the Soviet Union (and, later, FSU), then reselling in smaller lots to match market demand. The uranium spot price dropped below $10 per pound U3O8 in May 1989--reaching the $7-8 range from late 1991 through mid-1992.
Uranium Antidumping
Late 1991 saw the beginning of the era of protectionism in the market, with the filing of a dumping complaint by some US producers against uranium from the Soviet Union. Shortly after that filing, the Soviet Union was dissolved, and the dumping investigation was continued against the six FSU countries that were determined to have produced uranium in the past. In early- to mid-1992, the US Department of Commerce (DOC) found preliminary justification in the complaint and ordered an interim dumping duty of 148% on uranium from these countries. The FSU countries were thus faced with the prospect of intolerable dumping duties, and the US government was faced with the dilemma of trying to reward the FSU countries for “throwing off the yoke of communism” in the face of impending trade restrictions on one of the few products these countries had to export. The compromise was the implementation of so-called suspension agreements between the DOC and the FSU countries, using a relatively obscure provision of US trade law and under which the FSU countries individually agreed to limit their exports to the USA, under terms essentially dictated by the DOC.
The suspension agreements were put into place in October 1992, and the Euratom Supply Agency in Western Europe followed suit with its own brand of trade restrictions against FSU uranium. A market bifurcation resulted, with FSU uranium selling at a $2-3 discount from non-FSU uranium. This discount range generally persisted from late 1992 through mid- 2001. Import restrictions have been discontinued in the USA against all but Russian uranium, whereas Euratom continues its overall guidelines restricting use of FSU uranium in general.
Past Price Trend
The market reacted to these restrictions in two stages. First, the price for non-FSU uranium in the restricted markets rose to over $10 per pound U3O8, staying in the $9-10 range until the early 1995 period. By February 1995, the depletion of commercial inventories available to the restricted markets and the bankruptcy of NUEXCO, the leading uranium trader at the time, helped spur a price rise from $10.40 in February 1995 to a peak of $16.50 in the May-July 1996 period.
However, this price run-up was short-lived, as pent-up production responded and the FSU suspension agreements had been modified earlier in 1994 to effectively loosen the terms of the import restrictions. In fact, the Russian suspension agreement was modified to allow “matched sales” with equal parts of US-produced uranium and Russian imports, under terms that effectively subsidized the US producers. The “restricted” spot price dropped below $12 per pound U3O8 in May 1997. The spot market has seen some upward price excursions (late 1997 and early 1999), but was generally on a downward incline since late 1996, especially during the year 2000.
After a rise to a plateau of about $10 per pound U3O8 in early 2001, the spot price began rising in April 2003 as a shift from a buyers’ market to a sellers’ market was initiated. This trend continued into 2004 with gradual increases in the spot uranium price and gained even more momentum the following year. The year 2005 was a watershed year for the uranium market, marking the most dramatic rise in the spot uranium price since 1975. The spot price at the beginning of 2005 was $21.20 per pound U3O8; however, by December 31, 2005, the spot price had risen by more than $15, to $36.50 per pound U3O8. A driving force behind this increase was the entry into the market of a new type of buyer--the investor/speculator. Total sales volume for 2005 was slightly less than 30 million pounds U3O8 equivalent, and investors accounted for more than 36% of all spot uranium purchases.
Current Price Movement
The spot uranium price rose to $40 per pound U3O8 on March 20, 2006--the first time since January 1980 that the uranium market has seen a spot price reach this level. By the end of August 2006, the spot price had climbed to $52 per pound U3O8, marking a record level in the history of uranium price reporting that began in 1968 by TradeTech predecessor NUEXCO. Just two months later, the price broke through another barrier by reaching $60.25 per pound U3O8 on October 31, 2006. The spot price jumped 7% after Cameco Corp. announced a flooding incident at its Cigar Lake uranium project in Canada and warned of a mine production delay of more than a year. At the end of 2006, the spot price had settled at $72 per pound U3O8.
The year 2007 has witnessed more increases in TradeTech’s spot uranium price as investor interest in the market continues to surge and near-term uranium supplies remain thin. On April 6, 2007, TradeTech’s uranium spot price jumped $18 to $113.00 per pound U3O8, following the results of the sealed-bid auction of 100 thousand pounds U3O8 by a US producer. This is the largest single increase since uranium prices were first reported by NUEXCO in 1968, and marks a 57 percent increase in the spot uranium price since the beginning of the year. On May 4, 2007, TradeTech’s uranium spot price soared to $120 per pound U3O8--setting another record price as market participants waited to see if the launch of uranium future contracts would bring more price volatility to the market. A futures contracts, launched on May 7, 2007, by the New York Mercantile Exchange, Inc., involves financially settled contracts that are separate from the physical uranium market and sets the stage for a new set of players in the market.
The price run-up continued and peaked at an all-time high of $138.00 per pound U3O8 on June 1, 2007, after another auction with intense biddings, where it stayed for four weeks. On June 30, 2007, the spot price began to drop. After 23 consecutive months of tight supply, rising spot prices and intense bidding for material, buying interest waned considerably and the market witnessed increasing interest on the part of sellers to move material. On August 10, 2007, the uranium spot price plunged $15 to $120.00 per pound U3O8, the largest single drop recorded in the spot price since the uranium price was first published. A number of factors contributed to the price decline, the most influential of which was the introduction of supply from a variety of sources including speculators/hedge funds, producers, intermediaries, and the US government. The reasons for the influx of material vary from seller to seller, but have primarily been driven by the individual sellers’ desire or need to generate cash. Another factor that contributed to the downturn in prices is the sharp decrease in demand that has occurred over the past several months. Utility buying has fallen off sharply in recent months primarily due to the high prices, and thus, budgetary and financial burden associated with acquiring material. Speculator/hedge fund buying has also fallen off, as prices first flattened, then began to fall. Although the buying interest remains weak, some buyers are watching the drop in prices closely with a view toward re-entering the market.
The price decline, however, lasted nearly four months, and it began to rebound on October 12, 2007 where it rose $2 to $80.00 per pound U3O8. The price increase began gradually, but by month-end the price rise gained momentum as news of production shortfalls from a variety of producers made its way into the market. The news that Uranium One would miss its production targets in 2007 and 2008 by a significant margin, followed by the official announcement from Cameco that the production startup date for Cigar Lake is now expected to be 2011, at the earliest, prompted sellers to withdraw from the market.
In 2008, BHP Billiton’s Olympic Dam operation, while back into more-or-less full operation (although with persistent production problems), needed to allocate a significant portion of its production to the repayment of loans made to it over the past several years—loans needed to make up for the production shortfall from the fire at its solvent extraction facility and the aggressive sales program just prior to BHP Billiton’s acquisition of WMC Resources. In addition to this need, most of BHP Billiton’s long-term customers with annual contract quantity flexibility were likely to be taking the maximum quantity allowable under their contracts, given that spot prices were now much higher than the estimated level of contract prices with BHP Billiton.
Given this price split, BHP Billiton was not as active buying in the spot market as in the past two years, but may need to either continue to borrow more uranium or defer uranium loan repayments in order to be able to accommodate its customers. The expected impact of this is to possibly keep the active supply of spot uranium from increasing significantly above current levels.
The trend that led to record uranium prices in 2007 was reversed in 2008, as the global financial crisis spilled over into the uranium market and caused the uranium spot price to tumble more than 40 percent.
TradeTech’s uranium spot price peaked early in the year at $89 per pound U3O8 on January 4, 2008. By mid-October, the price sagged to a low of $45 as near-term demand weakened. Production setbacks brought some uranium producers to the spot market as buyers and the price rebounded slightly in November before settling at $52 as the year came to a close.
The decline in the uranium spot price during 2008 was due largely to the presence of sellers driven by cash requirements, as well as a major sell-off by hedge funds and investors prompted by the recent economic downturn and credit crisis. This sell-off created downward pressure on the spot price and forced other sellers to cut their prices to remain competitive in a market where demand remained primarily discretionary and extremely price sensitive.
Weak utility demand and the desire of some sellers to generate cash before year-end all combined to keep spot uranium prices soft. On December 31, 2008, the Exchange Value settled at $52.00 per pound U3O8.
Buyers are expected to return to the market during the first quarter of 2009 as new budgets take effect and buying from India and China increases; however, it could take several weeks for the market to regain momentum.
The spot price continued its downward slide in January as the sell-off by investors and hedge funds that began in 2008 flowed over into 2009. Buyers showed little interest in January and only two spot transactions were reported. The uranium spot price remained stable until the last week of February when it dropped by $3.00. For most of the month, buyers and sellers refused to move from their respective positions and as a result, no transactions were concluded until month-end. Finally, the impasse was broken when sellers made the first move and began offering lower prices.
