abare.gov.au - Australian commodities – March quarter . volume 16 . number 1 2009

Uranium

Outlook to 2013-14

Michael Lampard

World uranium oxide (U₃O₈ ) prices averaged US$61.80 a pound in 2008, 38 per cent lower than the 2007 average of US$99.30 a pound. Falling spot prices reflected an easing of the tight supply-demand balance observed in 2007 where strong demand coincided with concerns about availability of future supply.

Providing downward pressure on spot prices in 2008 was increased investor selling as hedge funds liquidated uranium stocks. Ux Consulting estimates the volume of uranium sold by traders in 2008 was nearly twice that traded in 2007. This increased liquidity resulted in the spot price falling from $US64.50 a pound in August to US$44 a pound in October.

Uranium spot price to recover in the short term...

World uranium requirements are forecast to increase faster than world supply in 2009. As a result, the uranium market is expected to remain in deficit for a sixth consecutive year. Supported by this deficit, spot prices are forecast to recover gradually in 2009 to end the year at around US$62 a pound. However for 2009 as a whole, the uranium spot price is forecast to average around US$52 a pound, a decline of 15 per cent on the previous year.

In 2010, the spot uranium price is forecast to average around US$70 a pound, an increase of 35 per cent on 2009 prices. Strong consumption growth and a decline in secondary supplies of uranium are forecast to support this price increase.

...but to recover over the medium term

While economic growth is assumed to begin recovering in late 2009 and early 2010, it will take time for demand growth to regain pace. Given that contract prices for JFY 2010 will be negotiated in early 2010, the potential for slow growth in demand is expected to result in further downward pressure on thermal coal prices. However, from JFY 2011 onward, thermal coal contract prices are projected to increase when economic growth prospects improve, but will remain below the JFY 2008 contract price. Strong demand growth from developing Asia is projected with many countries investing heavily in new coal-fired power generation capacity. However, the effect of climate change policies in some developed economies and uncertainty surrounding the global economic outlook present risks to these projections.

…before moderating over the medium term

From 2011 to 2013 world uranium spot prices in real terms are projected to decline. Despite forecast growth in uranium consumption over this period, strong growth in mine production and steady secondary supplies is expected to place downward pressure on prices. In 2014, prices are projected to increase moderately as significant growth in uranium consumption is expected to follow the end of the United States-Russian Federation Highly Enriched Uranium (HEU) purchase agreement in 2013, removing more than 5000 tonnes U₃O₈ from the market.

Large scale uranium producers sell most of their production through long-term contracts, while smaller operations sell the majority of their output on the spot market. The indicative long-term contract price, quoted by Ux Consulting, has not been as volatile as the spot price in recent years, although it has increased substantially. Long-term contract prices vary between companies because of differences in contract lengths, volumes and market conditions at the time of signing. For example, in Australia, the average long-term contract price is significantly lower than the world indicator contract price. Reflecting this, there are considerable differences between spot prices, world indicator prices and Australian export unit prices for uranium. In 2008, the uranium spot price averaged US$61.80 a pound while the world indicative contract price and Australian export unit price averaged US$82.50 a pound and US$28.55 a pound, respectively. Prices received by Australian producers are lower than the world indicator price as existing Australian contract prices were signed at a time when spot prices were significantly lower.

Demand for U₃O₈ to increase in 2009

The only significant commercial use for uranium is as a fuel for nuclear power plants. As of February 2009, there were 436 operational nuclear power plants worldwide, with a total generating capacity of nearly 372 gigawatts electric.

In 2009, nine nuclear reactors with a capacity of 6 gigawatts electric are scheduled to be commissioned with these reactors located in India, the Russian Federation, Japan, Iran and Canada. Commissioning a reactor (based on a 1000 megawatts electric light water reactor) typically requires around 600 tonnes of uranium for its initial core, after which uranium requirements are lower as the reactor reaches a steady state level of operation. Given this, world consumption of uranium is forecast to increase in 2009 by 6 per cent to around 81 000 tonnes U₃O₈.

India is forecast to have the largest increase in nuclear capacity as five nuclear reactors with a combined capacity of 2.5 gigawatts electric are expected to commence operations. In the Russian Federation, unit two of the Volgodonsk nuclear reactor (950 megawatts electric), and in Japan, unit three of the Tomari nuclear reactor (912 megawatts electric) are expected to be commissioned. In addition, the restarting of unit two of the Bruce reactor (769 megawatts electric) in Canada and the commissioning of the Bushehr nuclear reactor (950 megawatts electric) in Iran are forecast to further increase uranium consumption.

Nuclear capacity to increase in the medium term

Over the next six years, 64 nuclear power reactors are expected to be commissioned. Driving this growth are concerns about energy security, environmental considerations and rapid growth in electricity demand in developing economies.

In countries such as China, India and the Russian Federation, growth in household income and industrial production is expected to lead to rapid increases in electricity consumption. This, combined with concerns over energy security, is projected to result in substantial investment in nuclear generation in these countries over the medium term.

China has set a target of 50 gigawatts electric of nuclear capacity by 2020. In order to meet this target China is projected to commission 21 nuclear power plants with a combined capacity of more than 20 gigawatts electric over the outlook period. In the Russian Federation, the gradual replacement of ageing reactors, combined with increased electricity demand, is projected to result in the commissioning of 11 reactors with a combined capacity of 10 gigawatts electric. India is projected to also have similar growth with six reactors expected to be completed. Growth in Indian nuclear capacity and utilisation rates are likely to be supported by India’s ability to participate in nuclear trade (see box).

In Japan, the Republic of Korea and the European Union, the replacement of decommissioned capacity, concerns over greenhouse gas emissions and energy security are all expected to increase investment in nuclear capacity. In Japan and the Republic of Korea, 14 nuclear reactors are projected to be commissioned over the outlook period while five nuclear reactors are scheduled for commissioning in the European Union.

In all, these 64 nuclear power reactors with a planned capacity of 63 gigawatts electric are projected to increase U₃O₈ consumption by 4 per cent a year to nearly 100 000 tonnes by the end of the outlook period.

In addition to the commissioning of new nuclear power plants, power uprates which will further increase uranium demand are expected to occur at a number of existing reactors. A power uprate is the process of increasing the maximum power at which a commercial power plant can operate. The seven units of the Kashiwazaki Kariwa nuclear power plant in Japan are also anticipated to be restarted over the outlook period. Unit seven is expected to be recommissioned in 2009 with the remaining six units scheduled to be restarted in 2010 and 2011. The Kashiwazaki Kariwa nuclear power plant is the largest nuclear reactor in the world; all seven units were shut down following an earthquake in 2007.

The construction of nuclear power plants can be affected by long lead times for delivery of components, a lack of skilled labour, strict environmental regulations and negative public sentiment particularly in Japan and the Republic of Korea. These factors may affect the construction and startup times of the planned new reactors over the outlook period.

Nuclear trade and India

In 1970, the nuclear non proliferation treaty (NPT) was signed by the United States, United Kingdom, China, France and the Soviet Union. The treaty was intended to prevent the use of civilian nuclear reactors, material and technology in the development of nuclear weapons. The treaty mandated that non-signatory countries would be excluded from international cooperation and trade involving nuclear technology. The agreement was signed by 187 countries. India, however, remains opposed to this agreement.

India’s decision not to sign the NPT meant the country’s nuclear power program proceeded without fuel or technological assistance from other countries. Although not having access to international technology, India has continued to develop its own nuclear power industry becoming entirely nuclear self-sufficient. Despite this self-sufficiency, the widespread development of nuclear power in India has been limited by technological constraints and shortages of uranium.

In July 2007, a nuclear cooperation agreement between India and the United States (known as the 123 Agreement) was signed. In September 2008, following the US-India agreement, the Nuclear Suppliers Group, which consists of 45 nuclear supplying nations, also passed a resolution allowing nuclear trade with India. These agreements allow India to participate in nuclear fuel and technology trade for the first time since 1970.

India currently has 23 reactors operational or under construction with a combined capacity of 6.8 gigawatts electric. A majority of these reactors are small and locally designed Pressurised Heavy Water Reactors. Technical problems and insufficient supplies of domestic uranium have often resulted in these reactors having low utilisation rates.

India’s access to nuclear trade is likely to result in significant investments in nuclear power as the trade agreements have enabled the country to acquire new generation nuclear reactors. This, combined with access to adequate supplies of fuel and increasing domestic demand for electricity, is likely see a large increase in nuclear capacity over the long term.

World uranium supply from two sources

The supply of uranium can be divided into two categories – primary mine production and secondary sources. The latter includes reprocessed spent nuclear fuel, blended down highly enriched uranium (HEU) from nuclear weapons and mixed oxide fuels (MOX).

Secondary supplies to remain steady before declining at the end of the outlook period

Secondary supplies of uranium are expected to remain steady at around 20 000 tonnes U₃O₈ over most of the outlook period, with supplies dropping to around 12 000 tonnes U₃O₈ in 2014. The US-Russian HEU purchase agreement (commonly known as the ‘Megatons to Megawatts’ agreement) is scheduled to end in 2013 with the Russian Federation stating they do not intend to extend the agreement following its expiry. Once completed the HEU feed deal is expected to have resulted in the down blending of 500 tonnes HEU (equivalent to around 180 000 tonnes U₃O₈) from the Russian Federation’s nuclear weapons stockpile.

Mine production higher in 2009…

In 2009, global mine production is forecast to increase by 8 per cent to 56 000 tonnes U₃O₈, driven by production increases in Kazakhstan, Africa and Australia. In Kazakhstan, production is forecast to increase by around 14 per cent to 11 500 tonnes U₃O₈ as new mines commissioned over the previous two years increase production and Kazatomprom’s Semisbai in situ recovery (ISR) (2300 tonnes U₃O₈) and Uranium One’s Kharasan Two ISR (2000 tonnes U₃O₈) commence operations.

Paladin Energy’s Kayelekera project in Malawi (1500 tonnes U₃O₈), UraMin’s Trekkopje project in Namibia (1360 tonnes U₃O₈) and First Uranium’s Buffelsfontein project in South Africa (725 tonnes U₃O₈) are forecast to result in African production increasing by 10 per cent to more than 10 000 tonnes U₃O₈. In addition, South African and Namibian mines which commenced operating in 2008 are expected to contribute to growth in mine production. The commissioning of a laterite processing plant at Energy Resources Australia’s Ranger mine is expected to also contribute to a forecast increase in Australia’s uranium production by around 6 per cent to 10 630 tonnes U₃O₈.

…and projected to grow rapidly over the medium term

Large investments in new mine capacity are projected to result in mine production increasing by 10 per cent a year on average to around 90 000 tonnes U₃O₈ in 2014. Production increases in Africa, Australia, Canada and Kazakhstan are forecast to account for most of this growth. However, the timing of new production may be adversely affected in the short term by current credit conditions brought about by the global financial crisis.

Uranium production in Africa is projected to increase at 14 per cent a year to around
20 000 tonnes U₃O₈ in 2014 as significant new production in South Africa, Niger, Namibia and Malawi is commissioned. In South Africa, the commissioning of First Uranium One’s Randfontein (540 tonnes U₃O₈ ) and Uranium One’s Buffelsfontein (540 tonnes U₃O₈ ), both in 2010, and Valencia Uranium’s Valencia project (1200 tonnes U₃O₈ ) in 2011, is projected to see production increase by around 30 per cent a year to 3100 tonnes U₃O₈ in 2014. Nigerian production is also projected to increase by around 3000 tonnes U₃O₈ following the start up of SinoUranium’s Azelik project (1000 tonnes U₃O₈) and Areva’s Imouraren project (8900 tonnes U₃O₈) in 2012. Elsewhere, production in Namibia and Malawi is projected to increase by around 5400 tonnes U₃O₈ by 2014 as two projects expected to be commissioned in 2010 approach capacity.

In Canada, uranium mine production is projected to increase moderately from 10 750 tonnes U₃O₈ to 11 500 tonnes U₃O₈ in 2013, as production from the projected start up of Areva’s Midwest project (2600 tonnes U₃O₈) in 2012 is mostly offset by the closure of existing operations. In 2014, Canadian mine production is expected to increase significantly with the commissioning of Cameco’s Cigar Lake operation (8000 tonnes U₃O₈ ).

Cigar Lake was initially expected to commence operations in 2007, however flooding of the mine delayed its expected commissioning date to 2011. In 2008, water was again found to be entering the mine further delaying the scheduled start up. Once operational, Cigar Lake is expected to have a capacity of 8000 tonnes U₃O₈ making it one of the largest uranium mines in the world. Potential delays to the commencement of operations at Cigar Lake therefore present a downside risk to the production projections.

Kazakhstan to remain important to future supply growth

In 2005, Kazatomprom, Kazakhstan’s state uranium mining company, announced plans to expand uranium production to around 30 000 tonnes U₃O₈ by 2018. Since 2005, uranium production in Kazakhstan has nearly doubled, with production estimated at around 10 000 tonnes U₃O₈ in 2008. Given Kazatomprom’s ambitious production target, Kazakh mine production is projected to increase at around 15 per cent a year peaking at more than 23 000 tonnes U₃O₈ in 2014. Kazatomprom’s Budenovakoye ISR development (2500 tonnes U₃O₈ ) is the only project expected to be commissioned after 2009. However, production increases at eight other previously commissioned ISR projects are expected to drive growth. In line with projected production growth, Kazakhstan is expected to become the world’s largest producer of uranium in 2011.

Despite this projected growth, infrastructure constraints such as transport and equipment, technical expertise, shortages of electricity and sulphuric acid as well as credit constraints in the short-term, may limit Kazatomprom’s expansion plans.

Australian production and export value to increase

In 2008-09, uranium production is forecast to increase by 5 per cent to 10 583 tonnes U₃O₈. Most of this production increase is expected to come from Energy Resources Australia’s Ranger mine where the completion of a laterite processing plant (designed to enable the processing of high clay content ores) and a radiometric sorter (improves uranium recovery) in the first half of 2009 are expected to add around 680 tonnes of additional capacity. BHP Billiton’s Olympic Dam is also expected to contribute to higher production as the operation improves its uranium recovery. Reflecting increased uranium production, the value of Australian uranium export earnings is forecast to increase by 6 per cent to around $940 million in 2008-09 and by a further 31 per cent to $1.2 billion in 2009-10 in line with assumed increases in some contract prices.

Expenditure on uranium exploration in Australia has increased substantially since 2004, reflecting both higher uranium prices and the removal of bans on uranium mining in South Australia. In 2008, exploration expenditure is estimated to have totalled $224 million, an increase of more than $210 million on 2004 expenditure. This large increase in exploration activity has led to the discovery of numerous deposits, some of which are projected to enter production over the outlook period.

Australian mine production is projected to increase by around 6 per cent a year reaching 14 000 tonnes U₃O₈ by the end of the outlook period. South Australia and Western Australia are projected to account for most of this growth. In South Australia, four new projects are expected to begin operations namely Curnamona Energy Oban ISR project, Pepinnini Minerals’ Crocker Well mine (500 tonnes U₃O₈), Uranium One’s Honeymoon ISR project (400 tonnes U₃O₈) and Quasar Resources’ Four Mile ISR development (1360 tonnes U₃O₈).

The largest of these projects is Quasar Resources’ Four Mile ISR development. The project is anticipated to begin operation in 2010 with the mine concentrate to be processed at Heathgate Resources’ Beverley mine which is located near the proposed development.
Also in South Australia, BHP Billiton has announced staged plans to expand the Olympic dam mine. The first stage is scheduled to be completed in 2013 and will increase capacity at the operation by around 500 tonnes U₃O₈ a year.

In Western Australia, the state ban on uranium mining was removed in 2008 following the election of the Liberal-National coalition government. The removal of the ban is expected to result in the development of significant uranium deposits in Western Australia. Nevertheless, uranium production is not expected until the end of the outlook period because the development of regulatory frameworks, mine approvals and mine developments are not expected to be completed before 2013. Projects expected to begin operations over the outlook period include Mega Uranium’s Lake Maitland project (750 tonnes U₃O₈) and Toro Energy’s Centipede–Lake Way project (680 tonnes U₃O₈).

Export volumes to increase in line with production

All of Australia’s uranium production is exported. As such, projected growth in Australian mine production will lead to equivalent growth in export volumes. Australian export earnings are projected to increase to $1.7 billion (in 2008-09 dollars) in 2013-14, supported by increased export volumes and higher unit export prices. Australian contract prices are expected to continue to increase as existing contracts, which were negotiated during a period of low uranium prices, are renegotiated upward. This is expected to be achieved despite projected declining spot prices over the second half of the outlook period. Australian contract prices are assumed to approach the spot price over the outlook period.