uranium supply shortfall in 2013

From the DYL thread .............................................................................................................................................There has been a lot of concern amongst uranium investors/ bulls recently regarding the new nuclear arms reduction treaty (New S.T.A.R.T.) recently signed by the US and Russia on 8 April 2010 mainly because of the possible implications it may have on the expected supply/ demand imbalance that was supposed to occur in 2013 as a result of the termination of the Megatons to Megawatts program.

For those who aren't familiar with the Megatons to Megawatts program, the program involved the down blending of weapons-grade uranium or Highly Enriched Uranium (HEU)from dismantled Russian nuclear warheads into Low Enriched Uranium (LEU) to produce fuel for American nuclear power plants.

To understand the importance of this program, an understanding of the current state of the supply and demand of uranium is required.

As at the 1 May 2010 (http://www.world-nuclear.org/info/reactors.html), there were 438 nuclear reactors operating in the world, 54 reactors under construction, 148 reactors on order or planned and 342 proposed. The 438 reactors currently operating, consume 68,646t of uranium per annum. Total uranium produced in 2009 on the other hand was only 50,572t or only 73.6% of actual reactor uranium fuel requirements. This means that all the uranium mines in the world do not currently produce enough uranium to meet reactor requirements. The shortfall of 26.4% is currently being made up by the Megatons to Megawatts program, and other reprocessing/ recycling methods eg MOX etc.

You can understand now why most uranium bulls/ investors were quite excited about the Megatons to Megawatts program coming to an end in 2013 which would have led to a potentially serious shortfall in uranium supply leading to a sky rocketing uranium price, and their obvious subsequent disappointment when a new S.T.A.R.T. treaty was signed recently that could potentially extend the Megatons to Megawatts program.

The research I have done to date however appears to indicate that the expected supply shortage in 2013 is still very likely and there is still hope for uranium investors/ bulls for the following reasons:

1)The new treaty is still not finalised and may take a while to be approved by the Senate. After a closed door meeting in Capitol Hill on the 21 April 2010, Senator Jon Kyl, the Republican partys whip in the Senate, told Reuters it would undoubtedly be months before he announces his decision on whether to back the new START. There is a long way to go before anybody can really make an informed judgment about the treaty, he said. In addition, both the US and Russia have 7 years from the date the treaty is finalised to reduce their nuclear weapons by 30%.
2)Even if the US and Russia get their act together and manage to implement the dismantling of nuclear warheads reasonably quickly, the US and Russia may not have the ability to accelerate the down blending of HEU to LEU to meet the expected increase in demand. A presentation done by the Institute of Nuclear Materials Management in July 2008 (http://www.nti.org/c_press/LSHH%20INMMPaper%20Final%20Logo.pdf) regarding the possibility of 'Expanding Russian HEU Blend Down' arrived at the following conclusion :
Although both the uranium and enrichment markets are presently stressed with a perceived supply deficit, it is unlikely that any of the options (from their recommendations) can be executed quickly enough to offset the current short term gap between uranium supply and demand. It was also noted in the presentation that the US do not currently have sufficient facilities in place to accelerate the down blending of HEU to LEU for nuclear power reactors. It is also important to note that since this presentation was done, China and India have significantly increased the number of Nuclear reactors they plan to build.
3)The actual quantity of additional weapons-grade uranium expected to be created from the treaty is still unlikely to be sufficient to meet expected increases in demand or possibly even existing demand. To understand this point, it is essential to understand some key facts. The Megatons to Megawatts program over 20 years is expected to dismantle 20000 nuclear warheads which equates to 500 tons of HEU. Once down blended, 500t HEU makes 15000t LEU which is the equivalent to about 152000t of natural uranium. The US and Russia currently have 7276 active nuclear warheads remaining as at April 2010 (Nuclear warhead numbers are estimates from the Natural Resources Defense Council published in the Bulletin of the Atomic Scientists). As the new treaty is expected to reduce the number of active nuclear warheads to 3100 (1550 each for US and Russia), this would mean that only 4176 will be dismantled. This equates to approx. 105t HEU which makes 3150t LEU or 31920t of natural uranium. As the new treaty is meant to go on for 10 years, this means that they can only be expected to release onto the market an additional 3192t of natural uranium a year which only amounts to less than 5% of existing annual nuclear power reactor requirements. This is significantly less than the 10,600t of natural uranium that the Megatons to Megawatts program is currently supplying to the market until 2013.

So based on the above points, it appears quite likely that a uranium supply deficit will still happen around 2013 unless production from uranium mines around the world increase significantly in the next 3 years. However this is highly unlikely if the uranium price continues to remain at around $40/lb in the short term and $60/lb in the longer term as most mines would be uneconomical to mine at these low prices.