In 2017, the uranium industry weathered yet another difficult and somewhat volatile year. An oversupplied spot market continued to put downward pressure on the spot price of U3O8, despite the announcement of various production curtailments from the world’s largest uranium producers. After reaching a 12-year low near US$18.00 per pound U3O8 in December 2016, the spot price started 2017 at US$20.25 per pound U3O8, traded north of US$26.00 per pound U3O8 in the first quarter of the year, retreated back to the US$20.00 per pound U3O8 level in the third quarter, then rallied in the fourth quarter to peak at US$26.50 per pound U3O8 in early December 2017. After a volatile year, the spot price closed 2017 at US$23.75 per pound U3O8 – representing an increase of over 17% for the year.
Industry insiders have pointed to multiple reasons for the volatility in spot prices during 2017 – including negative demand side stories from nuclear heavy-weight countries like the United States, France and South Korea, continued disappointment with the rate of nuclear reactor restarts in Japan, the deferral of utility contracting activity, and an abundance of secondary supplies entering the market (including underfeeding from under-utilized enrichment plants). These negative stories were offset at various times during the year by high profile production curtailments announced by Cameco and National Atomic Company Kazatomprom (“Kazatomprom”). The oversupplied spot market has also weighed on the long-term contract price of uranium, which has fallen 30% over the past two years, from a price of US$44.00 per pound U3O8 at the beginning of 2016 to US$31.00 per pound U3O8 at the end of 2017.With only an estimated 75 million pounds U3O8 contracted during 2017 (approximately 30% of the annual contract volumes seen during the 2005-2012 contracting cycle), there have been few opportunities for the market to truly discover an appropriate long-term price for uranium.
Low prices and minimal contracting volumes seem illogical when juxtaposed to statistics from the U.S. Energy Information Administration and American Nuclear Society regarding the fact that, on a net basis, more new nuclear power capacity was added to the global electricity grid during 2015 and again in 2016 than in any other year over the last 25 years. This view is bolstered by the fact that a uranium price in the low US$20.00 per pound range puts pressure on even the lowest cost producing uranium mines in the world to turn a profit on an all-in cost basis. With demand forecasts for uranium increasing steadily through 2030, meaningful new nuclear capacity is expected to come onto the grid while the uranium mining production pipeline has been stagnated by several years of low uranium prices. Uranium prices at current levels fail to incentivize the majority of undeveloped uranium projects towards construction, and, as a result, logic would suggest that prices should be on the rise. Underpinning that logic, however, is the assumption that growing demand in the future translates into increased buying today, and an oversupplied spot market, and historically low prices, will be fixed by opportunistic buying for long-term utility needs.
Volumes in the spot market during 2017 were sporadic, varying week to week with a total volume of approximately 44 million pounds U3O8 being traded during the year. With buyers staying on the sidelines, sellers have simply outnumbered buyers in the market and prices have battled downward pressure all year. This dynamic, combined with the reality of higher priced long term contracts falling off in the not too distant future, led to the announcement of significant production curtailments in 2017. The most notable of these curtailments being Cameco’s announcement regarding the shut-down of the McArthur River mine for 10 months (or longer, depending on market conditions). The McArthur River mine is the largest and highest grade uranium mine in the world. The announced curtailment represents the removal of approximately 15 million pounds U3O8 from the market in 2018, and up to 18 million pounds U3O8 in future years. Kazatomprom, the world’s largest uranium producer, also declared that it would exercise restraint in 2017 and future years, having announced in early 2017 that it would cut production by 10% in 2017.Later in 2017, Kazatomprom also confirmed that it would constrain production levels for a further 3 years, through the end of 2020.
As a result of these and other production curtailments, various analysts are now expecting that the uranium market could swing to a deficit position in the near future, which would help to consume excess inventories that could otherwise leak into the market as secondary supplies. For a price recovery to be sustained, however, utility buying must resume and contracting volumes must increase as utilities work towards securing approximately 1.2 billionpounds U3O8 in estimated uncovered uranium requirements for the period of 2018 to 2030.
Much of the uncovered future demand is estimated to come from non-U.S. utilities, as growth in nuclear energy is expected to be driven by increasing nuclear generating capacities in Asia – primarily from China and India. According to the World Nuclear Association (“WNA”), as of February 1, 2018, China had 38 operable nuclear reactors capable of producing 34.6 gigawatts of electricity. A further 20 reactors are under construction and an additional 182 reactors are either planned or proposed. Ux Consulting Company, LLC (“UxC”) estimates that 99 reactors are expected to be operable and capable of producing over 98.5 gigawatts of electricity in China by 2030. To achieve this level of production, China’s fleet of nuclear reactors will have to increase by between 5 and 6 reactors each year for the next 12 years. The WNA is projecting a similar growth profile for India, where 22 reactors were operable as of February 1, 2018, capable of producing 6.2 gigawatts of power. Taken together, 65 reactors are either under construction, planned or proposed in India. UxC estimates that India could have over 15 gigawatts of nuclear energy operable by 2030, representing over 2 times as much power capacity as is currently available from nuclear. To achieve this level of production, India’s fleet of nuclear reactors will have to increase by one additional reactor each year over the next 12 years.
With few economic sources of new supply able to advance through the project development pipeline, in this market, and the potential for additional production curtailments as high-priced contracts at various high-cost operations are expected to drop off in the coming years, a significant utility contracting cycle is expected to lead to the realization that current uranium prices are well below the level required to incentivize sufficient new sources of primary supply into the market. This could lead to a sustained market of rising prices, as buyers are forced to bid up the price to secure available supplies of uranium or incentivize new sources of supply into the market.
Primary Uranium Supply
According to UxC’s Q4 Outlook, uranium production for 2017 was estimated to decrease by nearly 7% year over year from 162.0 million pounds U3O8 in 2016 to 151.1 million pounds U3O8 in 2017. Production in 2018 is expected to decrease even further, with the Q1 2018 Outlook projecting 2018 production to drop a further 6.7% (from 2017 estimates) to only 141.1 million pounds U3O8.Production from Canada, Kazakhstan, Australia, Africa and the United States all declined in 2017, while production from Russia remained essentially flat.Production in Canada decreased by nearly 6% or 2.1 million pounds U3O8.Cigar Lake production is expected to remain constant at 18 million pounds of U3O8 per year through 2025.McArthur River has been modeled by UxC to produce 1 million pounds of U3O8 in 2018 (owing to the announced 10 month shut-down).Canada remains the second largest producing nation with approximately 23% of the world’s production from 2017 coming from within Canada.Kazakhstan continues to be the world’s largest producer of uranium, representing approximately 40% of production in 2017.
UxC estimates in its Q1 2018 Outlook that existing mine production, plus new planned and potential mine production, will increase primary uranium supply to 161.7 million pounds U3O8 by 2020, before declining to only 115.9 million pounds U3O8 by 2030.At its height in 2020, the projected production levels include the resumption of mining at McArthur River (estimated at 18.7 million pounds U3O8 per year) and represents a total increase of only 7% from estimated 2017 production levels.This is in contrast to the dramatic increases in uranium demand outlined above.In past years, UxC projected that Kazakhstan was expected to continue to be one of the principal drivers for the increases in primary mine production.In the Q1 2018 Outlook, the main drivers are now limited to the resumption of mining at McArthur River and the ramp up of production at the Husab mine in Namibia.For other projects to move forward to increase UxC’s production forecasts, uranium prices will need to increase appreciably to support their higher cost production profiles and the significant capital expenditures that will be required.
Secondary Uranium Supply
In the Q1 2018 Outlook, primary mine production is estimated to supply approximately 73% of estimated 2018 base case demand (compared to approximately 80% in 2017).The balance of demand is expected to be supplied from secondary sources such as commercial inventories, reprocessing of spent fuel, sales by uranium enrichers and inventories held by governments, in particular the U.S. Department of Energy.In years prior to 2017, primary supplies have normally made up 85% or more of annual demand.
Excess commercial inventories, which were once one of the major sources of secondary supplies during the period from the early 1970s to the early 2000s, have largely been consumed; however, as a result of the shutdown of the German nuclear program and the continued shut down of the majority of the Japanese nuclear fleet, commercial inventories could become a more significant factor.A large source of secondary supplies continues to be government inventories, particularly in the U.S. and Russia.The disposition of these inventories may have a market impact over the next 10 to 20 years, although, the rate and timing of this material entering the market is uncertain.
Secondary supplies remain a complexity of the uranium market.The Q1 2018 Outlook forecasts that 49.7 million pounds U3O8 will enter the market from secondary supplies in 2018, leaving a shortfall of 3.3 million pounds U3O8 for supplies to match the base case demand scenario for 2018.
Looking ahead, UxC expects that secondary sources of supply will fall from estimated 2018 levels to 23 million pounds U3O8 per year by 2030.