Market Overview

The world needs energy

The nuclear story is a growth story. Today, there are 2 billion people on the planet without access to electricity, or only limited access, and world population is expected to increase by another 2 billion by 2050. This is driving a continued and substantial increase in global energy demand. Electricity is one of the greatest contributors to quality of life, and countries with rapidly expanding population and economies, like China, India, and those in the Middle East, are trying to catch up. They’re adding capacity to their grids to provide the electricity needed to support their growth.

Nuclear – an integral part of the energy mix

Nuclear power is a safe, clean, reliable, affordable and, most importantly, baseload energy source. The areas of the world where we’re seeing the most growth in new nuclear construction are in regions where baseload power is needed—that fundamental, 24-hour power that is required to have healthcare, education, transportation and communications systems.

But it’s also important to provide that energy reliably and affordably. Nuclear reactors can run on a single load of fuel for about 18 months, helping to shield utilities from possible fuel cost swings and supply interruptions.

Reactors – gigawatt growth

That’s why, today, we see billions of dollars being invested in nuclear around the world: about 70 reactors are under construction right now, and some existing plants are adding capacity through uprates. By 2024, we expect over 100 gigawatts of nuclear power, or about 80 net new reactors, to be added to the world’s grids, with even more growth expected outside that timeframe.

China continues to lead the way with 26 reactors under construction. India, Russia, South Korea and the United States are also building new reactors. Of the reactors under construction today, if startups occur as planned, 45 of those units (about 46 gigawatts) could be online over the next three years.

Elsewhere, the United Kingdom (UK) government is maintaining its commitment to nuclear energy as a source of emissions-free energy. Critical milestones have been reached, allowing new build plans to move forward. In addition, several previously non-nuclear countries are moving ahead with their reactor construction programs or considering adding nuclear to their energy mix in the future. Construction continues on three of four planned units in the United Arab Emirates (UAE). Turkey is also moving forward with plans to build eight new reactors. Belarus, Saudi Arabia, Vietnam, Bangladesh, Poland and Jordan are continuing their plans to proceed with nuclear power development.

More reactors means more demand for uranium

Today, annual uranium consumption sits at around 155 million pounds. With the growth in reactor construction, we expect that to grow to around 230 million pounds per year by 2024—an average annual growth of 4%. This does not include the strategic inventory building that usually occurs with new reactor construction, which would suggest further growth in demand. So, over the long term, we see very strong growth in the demand for the products that we supply.

Can supply keep up?

Over the long term, while demand is increasing, supply, without new investment, is expected to decrease, resulting in the possibility of a widening gap between supply and demand.

There is already a gap between the uranium consumed by reactors and the uranium produced from the world’s mines, which has been the case for many years. That gap has been bridged by secondary supplies—uranium in various forms that is already out of the ground and sitting in stockpiles around the world. Today, about 20% of global supply comes from secondary sources, but those stockpiles are being drawn down, and are expected to contribute less and less over time. This means that more primary production will be needed from uranium mines—in fact, we estimate about 15% of total supply required over the next decade will need to come from new mines that are not yet in development.

But that could be difficult. In general, new mines are difficult to bring on in a timely manner. The long lead nature of mine development means our industry is not able to respond quickly to sudden increases in demand or significant supply interruptions. Bringing on and ramping up a significant new production centre can take between seven and 10 years.

Adding to the challenge are the number of new projects being cancelled or delayed, and the existing production being shelved due to the low uranium prices that have persisted since the 2011 events at the Fukushima-Daiichi nuclear power plant in Japan. Today’s spot and term uranium prices are not high enough to incent new mine production and, in some cases, not high enough to keep current mines in operation. While some new mines may be brought on regardless of price as a result of sovereign interests, overall, we expect supply to decrease over time due to the global lack of investment.

Today – little demand, a lot of supply

Today, the uranium market is in a state of oversupply, and there are a number of factors contributing: primary supply continues to perform relatively well; enrichers are underfeeding their plants in reaction to excess enrichment capacity, which creates another source of uranium that’s being put onto the spot market; and Japanese reactors remain idled, meaning their inventories continue to grow. We do not believe those inventories are coming to market, but it removes Japanese utilities from the market as buyers for the time being.

In addition, market activity is much lighter than it has been in the past. Utilities are well covered in their fuel requirements and are not under pressure to contract for more. They have time to wait it out to see if uranium prices continue to decrease. So far, this strategy has paid off for them. Similarly, existing suppliers appear reluctant to enter into meaningful contract volumes at current prices. The result has been very low levels of contracting over the past two years. For example, in a typical year, we’d expect to see an average of 175 million pounds per year committed under long-term contracts; in 2013 Ux estimated just 20 million pounds were contracted, and in 2014, about 82 million pounds. However, consumption is a fairly simple and constant equation based on the fuel needs of operating reactors. So, if contracting is not happening now, it will have to later; the demand has just been pushed further out in time.

2014 market developments

Supply and demand

Market conditions remained depressed in 2014. In particular, the slower than expected pace of Japanese reactor restarts and generally sluggish reactor construction and startups globally led to demand erosion. Unlike 2013, we did observe supply contraction during the year as several existing production centres were shut down and some uranium projects were delayed or cancelled in response to poor market conditions. However, this was more than offset by demand erosion and steady flows of secondary supply. The impact of these conditions was the continuation of the inventory overhang and depressed prices resulting from the 2011 events at the Fukushima-Daiichi nuclear power plant in Japan.

Contracting

Market contracting activity was modest. Spot volumes were normal, but long-term contracting was well below historical averages and current consumption levels—about half of current annual reactor consumption estimates, albeit higher than in 2013. Long-term contracting is a key factor in the timing of market recovery, and its pace will depend on the respective coverage levels, market views and risk appetite of both buyers and sellers.

Japan

There were several positive indications for the long term in 2014. Japanese utilities and the Nuclear Regulatory Authority (NRA) began implementing the regulatory process required for reactor restarts; currently, 11 restart applications have been submitted by 11 utilities covering 21 reactors. The frontrunners are the two Sendai reactors, which appear poised for restart in the first half of 2015 following a few final regulatory confirmations and safety checks. Beyond Sendai, two Takahama units were granted preliminary safety approval from the NRA in late 2014, moving these reactors into the final regulatory approval stages. More broadly, we continue to see a high degree of confidence from Japanese utilities who are spending billions of dollars on plant upgrades in anticipation of a positive restart environment.

Other regions

China’s remarkable nuclear growth program remains on track and the UK continues to be a bright spot for the industry as plans for new reactor construction move forward. India, Russia and South Korea are also among several key regions growing their nuclear generation fleet.

In 2014, growth was tangible as five reactors came online: three in China, one in Argentina, and one in Russia. It was also exciting to see two emerging nuclear countries start construction on reactors: one in the UAE and one in Belarus.

Industry prices

In 2014, the spot price declined from $40 (US) per pound to a nine-year low of about $28 (US) per pound, but managed to average around $33 (US) for the year. Utilities continue to be well covered under existing contracts, and, given the current uncertainties in the market, we expect they and other market participants will continue to be opportunistic in their buying. As a result, contracting over the next 12 months should remain somewhat discretionary.