OHN C. ZINK, Ph.d., p.gif., Managing editor
Uranium supply and demandreach precarious balance
Uranium is unique in the world of fuels used to generate electricity. Its demand depends upon the number of nuclear power plants in operation more than it does on the overall demand for electricity. Nuclear plants are expensive to build but, once built, generate large quantities of electricity at relatively low fuel cost. Therefore, utilities baseload these units. This means that, while the demand for coal and gas to fuel generators is sensitive to the demand for electricity, the demand for nuclear fuel is mostly sensitive to the number of nuclear power plants in operation and their reliability.
The slowdown in the construction of nuclear power plants throughout the western world over the past 10 years has had a devastating effect on the demand for uranium. In the 1970s many uranium mining companies entered into contracts for long-term uranium sales to supply the nuclear plants then in the construction pipeline. Since then, utilities have canceled plans for many of these plants in the United States, and the demand throughout much of the rest of the world has also experienced a lull.
One would expect the price of uranium to fall as demand decreased and left a surplus of production capacity. That is exactly what happened during the 1970s and 1980s, forcing many producers to shut down. These cutbacks were so severe that the only uranium production in the United States at this time is from the unconventional production means of in-situ leaching processes and uranium recovery as a by-product of phosphate mining. All of the conventional open pit and underground uranium mines in the United States have been shut down.
Things began to change in the 1990s, as these production shutdowns took effect and supply and demand came more into balance. In addition, early 1996 saw the market affected by the bankruptcy of a large uranium broker, leaving some demand uncovered. The average annual price of uranium, as published by the Uranium Exchange Co., showed this rough supply-demand balance in the early 1990s by meandering about in a range between $8.50 per pound and $10.00 per pound. Then the price began to firm substantially in 1995 and reached a level just under $16 per pound in March 1996.
While the trend might seem encouraging for uranium producers–and it is, compared to how things have been–it is good to keep in mind that uranium was selling for $43 per pound in 1978. Nuclear Assurance Corp. estimates that the full production costs of “all but a handful” of Western producers still exceed the current spot price of uranium, although current operating expenses are covered.
As uranium prices plunged during the 1980s, uranium buyers reacted in a rational manner: they stopped making long-term purchase commitments, lest they get locked into purchasing at above-market prices. Instead, users drew down their inventories. Consequently, since 1990, world production of uranium has been below reactor requirements. Annual inventory drawdowns during 1993 and 1994 supplied about 45 percent of the world`s uranium requirements, according to the International Atomic Energy Agency.
The market now is in a position where significant portions of future fuel needs for existing plants are uncommitted and, according to Edlow International, uranium producers will need to add capacity in the next three years or so. Reactor operators` realization of this fact has helped lead to the current firming of uranium prices as utilities now try to make sure their near-term fuel needs are covered.