Market Overview

The world needs energy

It’s no secret the world needs more energy. The world’s population increasing from 7 billion to 9 billion over the next two decades will drive the need for energy, but, even today, there are 2 billion people who lack access to electricity or have only limited access. This is unacceptable in today’s modern world, where electricity is one of the greatest contributors to quality of life. Many countries are working to fill that gap and, in many cases, to keep up with rapid growth. Nuclear energy is an important option in the world’s energy mix, and, as energy demand continues to grow, nuclear is expected to do the same.

Nuclear – an integral part of the energy mix

Today, nuclear power contributes 11% of global electricity. While that percentage is not expected to change significantly over the next two decades, nuclear power output is expected to change—increasing along with rising electricity demand. In other words, the nuclear story is a growth story.

It’s easy to see why. Nuclear power is a safe, clean, reliable, affordable, and, most importantly, baseload energy source. As a result, it is an integral part of the energy mix for many countries, and even more so as the focus on climate change and clean air intensifies. Not only does it provide baseload power—that 24-hour power required to have health care, education, transportation, and communication systems—but it does so without emitting greenhouse gases (GHGs).

Reactors – gigawatt growth

That’s why, today, we see billions of dollars being invested in nuclear around the world. By 2025, we expect to see around 113 new reactors built, more than 60 of which are under construction right now. In addition, some existing plants are also adding capacity through uprates. Although this growth will be tempered somewhat by the closure of around 55 reactors, the end result is growth in the range of 80 gigawatts of nuclear power added to the world’s grids over the next decade, and even more expected outside that time frame.

The areas of the world where we are seeing the most growth are those with increasing populations and rapidly expanding economies. China continues to lead the way with 24 reactors under construction. India, Russia, South Korea, United Arab Emirates (UAE), and the United States are also building new reactors. Of the reactors under construction today, if startups occur as planned, 65% of those units 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 four units in the UAE. Turkey is also moving forward with plans to build eight new reactors. Bangladesh, Vietnam, Jordan, Poland, Saudi Arabia, and Egypt are a few more of the countries continuing their plans to proceed with nuclear power development.

As we expand our 10-year market analysis by one year, the net new reactor count at the end of the window changes from about 80 net new reactors previously expected by 2024, to about 58 net new reactors expected by 2025. Although this change in growth expectations impacts the expected demand in the later years of our industry outlook, it does not influence our view of the market fundamentals and is primarily a function of rolling our analysis forward. This year, the change is related to:

• a number of new reactors that came online in 2015 and are now in the “Operable” category, rather than the “New build” category
• several reactors that are scheduled to be shut down in 2025, which are now included in our 10-year window, as well as additional shutdowns announced in 2015, increasing the “Retirements” category
• low electricity prices and flat demand, in conjunction with delays in finalizing energy policies, contributing to the announcement of construction delays for some reactors in the outermost years of the 10-year window, pushing the affected units beyond 2025 and removing them from the current “New build” category

More reactors means more demand for uranium

Today, the world’s reactors consume around 160 million pounds of uranium annually. With the growth in reactor construction, we expect that to grow to around 220 million pounds per year by 2025—average annual growth of 3%. This does not include the strategic inventory building that usually occurs with new reactor construction, which would mean even 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 several 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 10% 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 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 or to cover existing commitments, 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 continues to be 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; the majority of Japan’s reactors remain idled, meaning their inventories continue to grow and Japanese utilities will be well covered for some time; and the new reactors under construction today have not yet started to consume the inventories that have been purchased and stored for their operation.

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 three years. Consumption is a fairly simple and constant equation based on the fuel needs of operating reactors and, historically, the quantity of material contracted in the long-term market in a year has been roughly equivalent to the quantity of uranium consumed in the world’s reactors in a year. In fact, only 35% of the uranium consumed in nuclear reactors over the past three years has been replaced by utilities with long-term contracts. That’s less than 180 million pounds contracted when about 475 million pounds were used, meaning inventories and the current oversupply are being drawn down as future requirements remain uncovered. If contracting is not happening now, it will have to later; the demand has just been pushed further out in time.

2015 market developments

The good, the bad and the indifferent

As has been the case in recent years, a lot happened over the course of 2015, although the general state of the market did not see much change.

Making positive news for nuclear, as usual, was China. Not only did the country continue with its rapid reactor new build program and bring eight reactors online, but Chinese companies also signed agreements with Argentina, Romania and the UK for new reactors, illustrating the country’s commitment to nuclear and its intent to become a major international player in the nuclear industry.

Undoubtedly, the biggest headline of 2015 was the long-awaited first reactor restarts in Japan. Sendai units 1 and 2 were the first reactors in Japan to restart since 2013, and it is hoped they are the first of many to come.

New builds in the UK and US continued to be bright spots for the industry, in addition to a number of reactor life extensions approved in Japan, and the US, with utilities now considering additional extensions that could see reactor lives reaching 80 years.

However, these positive developments could not outweigh the more powerful influence of a continued sluggish global economy, geopolitical issues, concerns around growth in China, and flat electricity demand. These more general drivers had help from industry specific factors as well, such as slower new reactor construction, eight reactor shutdowns, the continued high level of inventories held by market participants, and France’s policy to reduce nuclear in their energy mix to 50% by 2025 becoming law.

In addition, supply performed relatively well, with only minor disruptions and one curtailment, unlike 2014, which saw six projects tempered or curtailed.

The end result was a market seemingly indifferent to the commotion of events that occurred throughout the year.

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, similar to 2014. 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

The big news in Japan was the restart of Sendai units 1 and 2, which occurred in August and October. In addition, the court injunction against the two Takahama units was overturned in December, 2015, clearing the way for Takahama unit 3 to restart on January 29, 2016, with unit 4 expected to restart later in the first quarter. Ikata unit 3 has also cleared a safety inspection by the Nuclear Regulatory Authority, and four more units are in the final stages of approval. In all, three reactors are now in operation, while 23 remain under evaluation for restart.

Over the long term, Japan’s energy policy states that nuclear will make up 20 to 22% of the energy mix in the country. The billions of dollars in investment being made by Japan’s utilities suggest a high degree of confidence in reactors coming back online and meeting this target; however, public sentiment towards nuclear in Japan remains somewhat uncertain.

Other regions

China’s remarkable nuclear growth program remains on track and the UK’s plans for new reactor construction continue to move forward. India and South Korea are also among several key regions growing their nuclear generation fleet.

In 2015, growth was tangible as 10 reactors came online—double that of 2014. These included the eight noted in China, one in Russia and one in South Korea. And seven more reactors began construction—six in China and one in the UAE, a formerly non-nuclear country with four reactors now under construction.

But, to round out the picture, eight units shut down. Five of these were in Japan, plus one in Sweden, one in Germany as part of its phase-out plans, and one in the UK—the last Magnox reactor operating in the world. In addition, there were announcements for future shutdowns in the US, where nuclear struggles to remain competitive in deregulated electricity markets and in the context of low natural gas prices.

One event that could have an effect on the future of nuclear in the US and other western countries is the UN Climate Conference COP-21 agreement, finalized in 2015. As a non-GHG emitter, nuclear could play a significant role in achieving climate change prevention goals.

Industry prices

In 2015, the spot price declined from a high of $39 (US) per pound to a low of about $34 (US) per pound, but managed to average around $37 (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 is expected to remain somewhat discretionary in 2016.