The Nuclear Industry Today
In last year’s annual review of the uranium market, we indicated that the near-term environment for the industry was challenging, but that the long-term outlook remained very positive. We believe this continues to be the case today.
There was little improvement in 2012 over 2011 due to the lingering effects of the events in Japan, as well as global economic slowdown. However, we started to see some clarity on issues that have been overhanging the market. The most significant of these was the establishment in Japan of the Nuclear Regulatory Authority (NRA), which is currently drafting new safety standards for the nuclear industry in that country, against which reactor restarts will be evaluated. The NRA indicated that this process would likely take until mid-2013. While this means that reactor restarts will take longer than we had previously thought, we believe that the NRA brings important stability to the nuclear regulatory environment in Japan, and welcome the clarity it has already brought to the issue of reactor restarts.
We believe the election of the Liberal Democratic Party (LDP) in Japan will be similarly positive for the nuclear industry. Though it remains to be seen what kind of energy policy will emerge from the newly elected government, the LDP has been positively disposed towards nuclear in the past, and has been clear that rebuilding Japan’s economy is its main priority, in which the nuclear industry plays a large role.
Later in 2012, China lifted a temporary moratorium on new reactor construction and has since started construction on four reactors. The resumption of reactor construction in China is clearly a positive signal for the market.
Beyond Japan and China, some other countries made changes to their nuclear programs, including announcements of older reactor retirements from Canada, France and Belgium. India also revised its 2020 nuclear target down from 20 to 14.6 gigawatts. These changes, combined with slower than expected restarts in Japan, the temporary pause in China new-build approvals, and slower economic growth worldwide, caused us to re-examine our reactor forecast at the end of 2012. While the market continues to evolve, our current estimates project nuclear generating capacity to reach about 510 gigawatts by 2022 from today’s 392 gigawatts, which represents average annual growth of 3%. Of this expected growth, approximately 64 new reactors with 64 gigawatts of generating capacity are under construction today.
Reactor retirements and delays in both restarts and new construction have had an effect on demand and the uranium price in 2012. There has been concern that excess inventories resulting from reduced requirements, deferrals and/or cancellations of deliveries under sales contracts could be introduced to the market. In 2012, any excess inventories have been responsibly managed between suppliers and customers, but the situation has caused market participants to be discretionary in their purchases and the uranium price to remain depressed. This remains the case at the beginning of 2013, but we believe the clearing of excess inventories, resumption of restarts in Japan and new-build around the world, in addition to promising supply-demand fundamentals, will lead to improved market conditions. We also anticipate utilities will be ramping up contracting activities well in advance of their requirements becoming uncovered around 2016.
The other side of the equation is supply, which saw a great deal of destruction and deferral in 2012 as the uranium spot price remained at a level well below where new projects are economic. A number of uranium producers decreased their production growth plans, ourselves included when we announced the adjustment to our growth plans from 40 million pounds annual production down to 36 million pounds of annual supply by 2018. Details on our strategy are available here.
These challenges to primary supply occur while secondary supply is decreasing as a result of the end of the Russian Highly Enriched Uranium (HEU) commercial agreement in 2013, and while steady demand growth continues – with an expectation that it will reach about 3% per year.
So, although the supply-demand outlook continues to evolve, nuclear remains an important part of the global energy mix and it is clear that new uranium supply will be needed. Though some of the future supply gap could be filled by additions to secondary supplies, the majority will need to come from new mines and expansions to existing mines, which we expect will bring the economics of new production to bear on the market. You can read more about our outlook on future supply and demand in The long-term view.
Industry prices
In 2012, the spot price declined from $52 (US) per pound to the low $42 (US) per pound range. Utilities continue to be well covered under existing contracts. Given the current uncertainties in the market, we expect utilities and other market participants will continue to be opportunistic in their buying. We expect uranium demand in the near- to medium-term to remain somewhat discretionary, and prices to be relatively stable in 2013.
| 2012 | 2011 | Change | |
|---|---|---|---|
|
|||
| Uranium ($US/lb U3O8)1 | |||
| Average spot market price | 48.40 | 56.36 | (14)% |
| Average long-term price | 60.13 | 66.79 | (10)% |
| Fuel services ($US/kgU as UF6)1 | |||
| Average spot market price | |||
| • North America | 7.99 | 10.61 | (25)% |
| • Europe | 8.56 | 10.61 | (19)% |
| Average long-term price | |||
| • North America | 16.75 | 16.09 | 4% |
| • Europe | 17.25 | 16.42 | 5% |
| Note: the industry does not publish UO2 prices. | |||
| Electricity ($/MWh) | |||
| Average Ontario electricity spot price | 23 | 30 | (23)% |
World consumption and production
We estimate global uranium consumption in 2012 was about 165 million pounds and production was 152 million pounds.
We expect global uranium consumption to increase to about 170 million pounds in 2013, and global production to be approximately 158 million pounds. Secondary supplies should continue to bridge the gap.
By 2022, we expect world uranium consumption to be about 220 million pounds per year, representing average annual growth of about 3%. These consumption estimates exclude strategic inventory building that we expect will occur in growth regions.
We expect existing primary production to decrease over the next decade, reaching 125 million pounds by 2022, which highlights the need for new primary supply.
We expect world consumption for UF6 and natural UO2 conversion services to increase by about 3% in 2013.
Contract volumes
The Ux estimate for global spot market sales in 2012 is about 43 million pounds, significantly lower than in previous years. Utilities were responsible for over 45% of the purchases. Traders and financial players were also participants, taking advantage of the lower spot prices to make opportunistic purchases.
At the start of 2012, we estimated long-term contracting volumes for the year to be between 80 million and 100 million pounds, though they ended the year at about 194 million pounds. The higher than expected contracting can be attributed to a small number of large volume deals. We estimate long-term contracting volumes in 2013 will be between 75 million and 100 million pounds, depending on supply, market expectations and market prices.