Ux Weekly – 30 Jan 2017
Over the years, we have written a number of cover stories dealing with the interrelationship of the uranium and enrichment markets. This is the third such cover in a little over a year. We have done this because this interrelationship is one of the key factors influencing the nuclear fuel markets, and one whose importance has only grown over time.
In November 2015, we wrote a cover entitled “SWUranium” to emphasize how interrelated these markets were becoming. In March 2015, we penned a cover entitled “Divergence,” in reaction to the notable divergence in the trend of uranium and SWU prices. While uranium and SWU prices had diverged in the past, this was due to unusual circumstance, and we found it necessary to explain why this was happening.
While SWU prices dropped notably during 2016, uranium prices fell by even more, at one time registering an almost 50% decline. Importantly, the long-term uranium price also declined notably. As a result of these changes, SWU and uranium prices bore a closer relationship, as shown in the chart below (You3OAte - not included). Most recently, spot uranium prices have again increased, due in large part to Kazatomprom’s decision to cut back production.
Although it may not be recognized as such, one of the most important factors impacting uranium prices today is enrichment technology. Without the move to an all-centrifuge enrichment industry, enrichment capacity could have more easily been cut back in recent years, bringing the SWU market into better balance and leaving less excess SWU capacity to substitute for uranium. Instead, we currently have a situation where centrifuges keep spinning, pushing down SWU prices due to their low variable costs and increasing the substitution between uranium and enrichment as enrichers operate their plants at lower tails assays (You3OAte – aka underfeeding).
Technology improvements in enrichment thus serve to increase the interrelationship of these two markets and indeed change the nature of nuclear fuel markets, as it becomes easier to substitute away from uranium production. Not only can enrichment substitute for uranium in the making of enriched uranium, but it can be used to enrich depleted tails material to create natural uranium. The Angarsk plant in Russia is already devoted to enriching tails to make uranium, and a Silex laser enrichment plant has the potential to similarly mine tails material owned by the U.S. Department of Energy (DOE).
In this respect, the convergence in uranium and enrichment relates not only to prices but also to the fact that excess enrichment capacity can be used to create uranium by enriching tails and new enrichment capacity can be built for this specific purpose. Of course, this type of capacity substitution tends to pull uranium and SWU prices together. But, given lead times to start up, transfer, or cut back enrichment capacity, the resulting price reactions are not instantaneous.
As has been previously discussed in the Ux Weekly, while cutbacks in uranium production are a positive for uranium prices, a key factor that remains is what happens to uranium demand. While the industry places much focus on reactor re-starts in Japan and the progress of nuclear power expansion in China, another important area to watch is what happens in the world of enrichment. To the extent that enrichment capacity is cut back, there is less ability to substitute SWU for uranium, and hence uranium demand can strengthen. However, to the extent that capacity is repurposed to create uranium via the enrichment of tails, then uranium supply is bolstered, and another type of substitution comes into play. Enrichment capacity is being cut back, but more incrementally, by not replacing aging centrifuges. At some point, excess SWU capacity will become less of a drag on uranium prices since there will be less opportunity to substitute enrichment for uranium. The positive price impact of the elimination of excess SWU capacity is akin to restarts in Japanese reactors and new capacity build. Until enrichment capacity declines, any recovery in uranium prices is likely to be less robust than it could be.
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