Uranium market update

The nuclear fuel supply chain and the reliability of supply, especially of natural uranium concentrates (U3O8), continue to be hot topics of discussion in the uranium industry, owing mostly to increased interest throughout the international market for nuclear power.

Uranium spot prices have risen more than 30% since the beginning of 2004. Recent production and commercial supply chain disruptions only serve to heighten market uncertainty. Near-term supplies are tight, and while market fundamentals are reasonably balanced, that balance is tenuous, and market psychology is exerting greater influence on price.

For years, the uranium spot price has dominated both production planning and nuclear fuel procurement strategies. As primary production takes an expanded role and secondary sources dwindle, the question arises: What is the future role of the uranium spot market? Long-term prices are already rising to the forefront of both producer and consumer consciousness. At least one major primary uranium producer is evaluating the economic viability of its existing production facility. Anticipated capital requirements may result in its closure rather than further production.

Meanwhile, construction of new facilities in the U.S. and Western Europe, ongoing expansion programs in the Asia/Pacific region and Russia, and operating licence extensions elsewhere have led to a rise in current global uranium requirements, and will likely mean further increases down the road.

Secondary uranium supplies continue to exert significant influence over the near-term uranium market, but these sources are moderating and are leading to a greater role for primary uranium production and its associated site-specific cost structure.

The flooding at McArthur River in Saskatchewan in April 2003 and the October 2001 fire in the solvent-extraction circuit at Olympic Dam in Australia raised awareness, among operators of nuclear generators, of problems that can occur. Several nuclear fuel-buying organizations are reassessing strategic uranium inventory policies, which had been emphasizing minimal inventories.

In Russia, the probability of a follow-on blend-down program for Russian highly enriched uranium (HEU), or so-called HEU-II, is difficult to assess. Improved uranium prices led to agreement among three Western companies (Cameco, Cogema, Nukem) to buy their respective U.S. import quotas under the mandated schedule set by the U.S. and Russia. However, further purchases under contractual option provisions have recently been denied.

Commercial uranium inventories in the Russian Federation may be reaching strategic minimum levels. Increasing uranium requirements for its indigenous nuclear power program, as well as uranium needs in its former client states and new construction in countries such as China and Iran, may exert constraining pressures on Russia’s massive uranium supply capability.

What might be the market impact of an HEU program involving lesser annual volumes or the effects on the Western uranium market in the event that the Russian Federation decides to retain that material for its own uranium needs?

Russia has implemented a “value-added” strategy and is no longer selling uranium concentrates. Instead, it is focusing on sales of enriched uranium product (EUP), fabricated fuel, and even fueled reactors.

Sales activities relative to energy company USEC’s uranium inventory have decreased, with an emphasis on long-term sales of enriched uranium product (in some cases, in conjunction with other suppliers). Elevated levels of technecium in the existing USEC inventory are being addressed under an agreement with the U.S. Department of Energy.

Also, China has begun to pursue long-term contractual commitments with Western suppliers for nuclear fuel in support of its burgeoning nuclear power program. The country is also seeking production opportunities outside its borders.

— The preceding is from an information bulletin published by Golden, Colo.-based International Nuclear.