Japan and Russia powering uranium rebound

Analysts across the board are forecasting rising uranium oxide prices in 2013, underpinned by China’s drive to build a pile of new nuclear reactors. The effort is well underway with 29 units already under construction, but China is not the only country with big nuclear plans. Russia, India and South Korea are building another 21 reactors in total, which will all need to be fed, as will any of the other 165 proposed reactors around the world. In addition, the world’s biggest uranium consumer — the U.S. — is about to see half of its nuclear fuel supplies evaporate, when a 20-year deal with Russia to turn old nuclear warheads into reactor fuel ends later this year.

In short, demand is primed to climb. This outlook is nothing new: uranium watchers have long emphasized that global demand will outstrip planned supply within the next decade. Global demand for yellowcake is actually higher today than it was before Japan’s nuclear disaster.

In the wake of the Fukushima Daiichi disaster, however, those predictions were obscured behind a cloud of global nuclear doubt. Now two fresh breezes — one from Japan, the other from Russia — are clearing away that cloud and bringing new life into the sector.

The first breeze is coming from Japan, where a new government is publicly acknowledging that Japan needs nuclear. Shutting down its 50 reactors after the Fukushima accident left Japan with rolling blackouts, electricity rates that have risen as much as fivefold, and such a reliance on liquefied natural gas that import prices almost doubled.

From an international perspective, when Japan suspended its nuclear sector in mid-2011, the market lost 20 million lb. of demand and a vocal supporter overnight. In addition, Japanese utilities dumped their inventories into the spot market, injecting a 15 million lb. supply into a tanking market.

To be sure, the Fukushima accident and Japan’s reaction to it were a punch to the uranium market’s solar plexus. Prices rapidly fell from US$65 per lb. to US$50, and have been sliding since. The world reconsidered whether nuclear power was necessary, or even safe.

Now, two years later, Japan’s about-face on the issue is just as important.

New safety guidelines for Japan’s reactor operators are being established, paving the way for restarts. Details from Japan are limited, but Cameco (CCO-T, CCJ-N), the world’s third-largest uranium miner, expects six to eight Japanese reactors to come back online in 2013.

Moreover, new Japanese Prime Minister Shinzo Abe says he is willing to allow the building of new nuclear reactors — a dramatic shift from the previous government’s pledge to phase out nuclear power completely by 2040.

Japan’s return to nuclear is contributing to uranium’s resurgence in two ways, the first — and arguably more important — of which is emotional. If Japan had abandoned nuclear power, it would have erased less than 10% of current global uranium demand. That’s a relatively small number, and one set to decline markedly as China’s nuclear building boom progresses. In addition to the 29 reactors under construction, China has another 51 planned and 120 proposed.

And so the disappearance of Japanese demand would not have dimmed future uranium demand much. But after the Fukushima tragedy, statistics meant little compared to the emotional impact of a global power and nuclear energy leader abandoning the sector. Two years later, Japan’s slow return to the uranium fold might mean little in terms of long-term global uranium needs, but it adds great credence to a sector in need of a confidence boost.

Japan’s return to uranium is also set to stabilize the markets — and improve uranium prices — in the short-term.
Once Japan starts rebooting its 50 nuclear reactors, its plant operators will stop deferring delivery of contracted uranium. This will slowly remove the millions of pounds of Japanese-contracted uranium that have been clogging up the spot market, enabling prices to recover. If real supply-demand developments can kick-start a price recovery, speculators will likely jump aboard and maintain the momentum.

The Fukushima disaster was terrible. Of the 160,000 people evacuated when three reactor cores melted down, some 60,000 people are still living in shelters, unable to return home because radiation levels remain too high. But now the very country that shouldered this burden is returning to nuclear power because, in places where renewables such as hydro and wind are not an option, nuclear remains arguably the cleanest and safest method to generate significant amounts of electricity.

Japan’s return to nuclear may be kick-starting uranium’s resurgence, but Russia is revving the throttle.

In mid-January Russian state-owned uranium company ARMZ offered $1.3 billion to buy the 48.6% of Uranium One (UUU-T) that it doesn’t already own. Analysts are debating whether the offer should have been higher, but they generally agree on one thing: ARMZ made its move because it believes uranium is at a bottom.

When the acquisition closes ARMZ will become the world’s fourth-largest uranium producer, but more importantly, Russia’s hold over the uranium market will have tightened again. It will be another step forward for a country that has been penetrating various aspects of the nuclear fuel sector for years, in an effort that many see as Russia positioning for control over a key future fuel.

The Uranium One acquisition will add production capacity to a country that already controls key uranium processes. In 2011 Russia was responsible for just 5.5% of world output, but it operates 40% of the world’s uranium-enrichment capacity, those complex facilities that turn yellowcake into reactor-ready fuel.

Russia’s state nuclear utility Rosatom is also a giant in the global nuclear sector. Rosatom builds more nuclear power plants than anyone else, and the company always tags a lifetime fuel supply contract onto its build deals, which positions Russia as the one and only supplier for all those reactors. For example, uranium to feed the 21 plants Rosatom has underway in China, Vietnam, India, Iran and Turkey has to come from Russia.

By year-end another event will have strengthened Russia’s grip further: the Megatons to Megawatts agreement — which for the last 20 years has seen Russia downblend old warheads to create nuclear fuel to feed U.S. nuclear reactors — is coming to an end.

Downblended warheads contribute 24 million lb. uranium to the world’s supply every year. The end of Megatons will see this supply evaporate, because there is only one small downblending facility in the U.S. The rest are in Russia, which is not expected to renew the deal because it is tired of getting the below-market pricing stipulated in Megatons for its downblended nuclear fuel.

But the U.S. relies on Megatons fuel: fully half of the uranium that feeds America’s nuclear reactors comes from downblended Soviet warheads, which means that 10% of U.S. electricity depends on a deal that will soon be over. The impending end of Megatons will leave the U.S. needing a new nuclear fuel supplier, just as China, India and a raft of other countries developing considerable new nuclear capacity are also shopping for nuclear fuel.

Russia, meanwhile, will be holding all the cards.

According to the World Nuclear Association, the world consumed 176.7 million lb. uranium in 2011 while producing 135 million lb. from primary sources — in other words, from mines. The rest came from that Megatons deal and from stockpiles.

Now Megatons is ending, and global demand is set to increase 13% by 2020, pushing annual demand to 200 million lb. That is a conservative estimate, as it only accounts for the 65 reactors under construction, and ignores the hundreds of other
s that are planned or proposed.

To feed a global hunger for 200 million lb. uranium a year, primary production would have to rise by 30% this decade.

That will not happen unless prices climb notably. Average production costs today are in the US$85 per lb. range, compared to a spot price of roughly US$42 per lb. No one is going to build a mine on those numbers.

It is this set of basic numbers that explain why uranium analysts are a bullish bunch. Haywood Securities is predicting an average spot price of US$60 per lb. uranium oxide in 2013. Over the long-term the firm expects a spot price of US$70 per lb. and a contract price of US$75 per lb. Adam Schatzker of RBC Capital Markets believes the spot price will regain US$70 per lb. by 2016. Bloomberg says the eight analysts it queried predicted an average spot price of US$58.20 per lb. this year, US$63.75 per lb. next year and US$69.17 in 2015.

There are risks, of course. Another disaster like Fukushima could derail the sector again. Other energy supplies, like natural gas or geothermal power, might prove cheaper or more adaptable than expected. And uranium prices could take longer to recover than analysts expect. It takes a long time to build a nuclear power plant, so the biggest rises in nuclear generation — and therefore uranium demand — aren’t expected until after 2020.

But the basics are in place: rising demand, insufficient supply and production costs that are almost double the spot price, all being propelled ahead by the U.S., which is quietly desperate for a major new nuclear fuel supplier, and a Russia keen to revel in its uranium positioning.