THE URANIUM INDUSTRY, MARCH 2021
Nine years after the March 2011 Fukushima Daichii nuclear incident occurred, the uranium market, amongst others, became the focus of unexpected supply disruptions resulting from the COVID-19 pandemic. In the case of the uranium market, demand remained relatively steady as the world responded to the pandemic and nuclear power plants continued to operate largely without disruption, while the supply side of the market experienced significant disruptions from the world’s largest and most influential uranium producers. This marked the beginning of a meaningful price recovery through the first part of 2020. The unexpected supply reaction catalyzed by the pandemic was layered on top of a uranium supply/demand picture that had already begun to change over the past couple of years, with demand outstripping supply from primary production and the shortfall being made up by inventories and other secondary supplies. As this dynamic has played out, sentiment regarding a recovery in the uranium price has improved, particularly with the high-profile shutdown and curtailment of many supply sources across the industry, including the world’s largest and highest grade uranium mine, Cameco Corporation’s (“Cameco”) McArthur River Mine in northern Saskatchewan, Canada, which was placed into care and maintenance indefinitely in July 2018.
COVID-19’s short term effect on uranium supply has been dramatic, with additional production cuts announced by several of the world’s largest uranium producers. In March 2020, Cameco and Orano announced the closure of the lone remaining uranium production centre in Canada – the Cigar Lake Mine and the McClean Lake Mill. In April 2020, the world’s largest producer of uranium, National Atomic Company Kazatomprom (“Kazatomprom”), announced that it would reduce operational activities across all of its uranium mines for an expected period of three months. Kazatomprom indicated that production was expected to decrease by up to 4,000 tU (10.4 million pounds U3O8) over this period. Together, these supply shocks resulted in the uranium price quickly rising almost 40%, from a low of US$24.10 in mid-March 2020, to a high of US$34.00 in May 2020.
In July 2020, Cameco announced that it would reopen its Cigar Lake mine in September. This news surprised many market participants and the uranium price slowly fell from above US$32.20 at the time of the announcement, to US$30.65 by the end of August. The spot price remained relatively stable for the remainder of the year, with the market registering the highest ever spot market volumes for a single year. By the end of December, the spot volume transacted reached 92.3 million pounds U3O8, breaking the previous annual spot volume record from 2018 of 88.7 million pounds U3O8.
In August 2020, Kazatomprom announced that it had decided to maintain its 20% reduction in production below the planned levels in its subsoil use contracts through 2022. Kazatomprom also confirmed that it had purchased uranium in the spot market and could continue to do so through the rest of the year. These announcements seemed to help stabilize general market sentiment following the unexpected restart of Cigar Lake.
Based on these events, and other significant COVID-19 related production disruptions, it is clear that large volumes of inventories and other secondary supplies were depleted faster than expected in 2020 – essentially accelerating the supply-demand rebalancing that was put into motion with the shutdown of the McArthur River mine in 2018. This, coupled with the fact that nuclear power plants around the globe have remained online and using uranium, largely without disruption, through this difficult period, is expected to help move the market towards a long-term sustainable price increase sooner than it otherwise would have, absent COVID-19.
The uranium price demonstrated stability through the end of 2020, holding between US$29.00 and US$30.00. In December 2020, Cameco announced another temporary suspension of production at Cigar Lake as a result of rising COVID-19 cases in Saskatchewan’s far north. While the uranium price increased following this decision, the lack of buying activity as the market slowed for the holiday season seemingly flattened the impact of the announcement. Entering 2021, the market will watch closely to see how long Cigar Lake remains shut down and whether buyers are willing to enter the market before an eventual restart is announced.
Several trade issues in the United States have impacted the nuclear fuel market over the past few years, and the resolution of those matters in 2020 has brought growing market stability. In 2018, a petition was filed with the US Department of Commerce (“DOC”) to investigate the import of uranium into the US under Section 232 of the 1962 Trade Expansion Act. In July 2019, the US President ultimately concluded that uranium imports do not threaten national security and no trade actions were implemented. In conjunction with this, a further review was ordered of the nuclear supply chain in the US, and the Nuclear Fuels Working Group (“NFWG”) was established. The NFWG reported its findings in April 2020, which, among other recommendations, included a plan to budget US$150 million per year, in each of the next 10 years, for uranium and conversion purchases from US producers to stock the nation’s strategic reserve. In December 2020, review and discussion around this matter ended when the US Congress passed a Bill that included initial funding of US$75 million to begin building a US uranium reserve. The Bill passed the US House and Senate with bipartisan support, and was signed into law in late December, 2020.
The review of the Agreement Suspending the Antidumping Investigation on Uranium from the Russian Federation (also known as the Russian Suspension Agreement, or “RSA”) also created uncertainty in the uranium market during 2020, as the RSA was due to expire at the end of the year. A draft amendment, however, was announced in September 2020 and finalized in October 2020. The new arrangement extends the agreement until 2040 and aims to reduce US reliance on Russian uranium products over the next 20 years. The deal negotiated between the US DOC and Russian government reduces Russian exports of the enrichment component from the current level of approximately 20% of US enrichment demand to an average of 17% over the 20-year period, and limits Russian uranium concentrates and conversion components contained in the enriched uranium product to an average equivalent of approximately 7% of US enrichment demand. The agreement’s conclusion brought significant clarity and stability to many nuclear fuel market participants.
Overall, uranium demand has grown in recent years as new reactors have been started around the world and demand now exceeds the annual levels that existed prior to Japan shutting down all its nuclear units following the 2011 Fukushima Daichii nuclear incident. According to UxC, as of December 2020, there were 437 nuclear reactors operating in 31 countries and generating nearly 389 GWe – together supplying over 10% of the world's electrical requirements. In addition, there are 58 nuclear reactors being constructed in 18 countries, with a number of countries acting as principal drivers of this expansion, including China, India, South Korea, Russia, and the United Arab Emirates (“UAE”). By 2035, UxC LLC (“UxC”) forecasts in its Q1 2021 Uranium Market Outlook (“Q1 2021 Outlook”), under its base case, that operating reactors will increase to 468, generating around 456 GWe. Through this period, annual uranium demand is expected to grow from a projected 175 million pounds U3O8 in 2021 to around 213 million pounds U3O8 by 2035. Importantly, uncovered utility uranium requirements in this period, not including typical inventory building, are over 1.35 billion pounds U3O8.
UxC had estimated annual global uranium primary production in 2020 would be approximately 142 million pounds U3O8. This changed materially with the additional curtailment of production as a result of COVID-19. Actual production for 2020 is now estimated by UxC to have been only 124 million U3O8 pounds, which has created an even greater shortfall to 2020 estimated global annual demand of 181 million pounds U3O8. Though rebounding a little from 2020, UxC estimates that primary production in 2021 will remain low at 127 million pounds U3O8, as COVID-19 restarts are offset by the planned shutdown of long-standing production sources including Energy Resources of Australia’s Ranger mine and Orano’s COMINAK project in Niger. With annual demand for 2021 projected by UxC to be 175 million pounds U3O8, the 2021 differential between primary production and annual demand is projected to remain high, at approximately 48 million pounds U3O8.
With primary mine production in 2020 estimated by UxC to have supplied approximately 68% of the year’s estimated base case demand, the balance of demand is expected to have been supplied from secondary sources. These sources include the draw-down of commercial inventories, reprocessing of spent fuel, sales by uranium enrichers and inventories held by governments, such as those held by the US Department of Energy, and the Russian government.
The process of inventory drawdowns is indicative of a market that is approaching an inflection point – where the surplus material that has been easy to procure in past years is diminished and end-users of uranium begin to question where long-term uranium supplies will come from and how secure that supply will be over the long lives of their nuclear reactors. There is a growing sense that market participants are beginning to look beyond near-term market conditions in an attempt to understand what the supply environment will look like in the mid-2020s and beyond. With a renewed focus on nuclear energy as a critical element in the ‘energy transition’ that many nations are looking to in order to battle climate change, it is expected that global utilities will be looking to source future supply from operations that are not only low-cost, reliable, and situated in stable jurisdictions (the typical criteria for a good supplier), but also those which are flexible and environmentally responsible.
Future and growing reliance on nuclear energy is again being considered by policy makers and interest groups around the world. As many industries were shut down around the globe in 2020 under the strain of COVID-19 related problems, nuclear electricity generation worldwide remained steadfast, providing the secure, baseload electricity needed to drive key infrastructure, including hospitals – all the while producing little to no carbon emissions. Building on the growing world view of the reliability and clean nature of nuclear power, there continued to be many positive news stories emerging on the demand side of the nuclear fuel market throughout 2020, including the following:
- The UAE announced that its first nuclear power plant, Barakah unit 1, achieved initial criticality in July 2020. By December, the unit reached 100% power and is reportedly generating 1400 MW of electricity. Once the other units are operational, the four-unit plant will generate around 25% of the UAE’s electricity, preventing the release of up to 21 million tonnes of carbon emissions annually.
- China National Nuclear Corp reported, also in July 2020, that Unit 5 at its Tianwan nuclear power plant attained initial criticality. Construction of the unit began in December 2015. Unit 6 at the site began construction in September 2016. Both are expected to attain full commercial operation before the end of 2021.
- China continues to be a bright spot in the industry having recently reiterated in-country nuclear growth plans. The government indicated that it would build six to eight nuclear reactors each year between 2020 and 2025 in an effort to get back on track with past goals – aiming to have total capacity installed and under construction to be around 200 GW by 2035. At the end of 2020 China has approximately 49 nuclear reactors in operation, generating 51 GW, and 12 under construction. According to China’s Nuclear Energy Association, Chinese nuclear reactors produced 366.2 TWh of electricity in 2020, which represents an increase of roughly 5% compared to 2019. Nuclear power’s share of electricity in China was 4.9% in 2020. Looking ahead to 2021 China also is anticipated to announce its 14th Five Year Plan in March, which is expected to continue to emphasize its goals for nuclear energy.
- Russia’s Rosatom reported in August 2020 that Unit 2 of the Leningrad II plant successfully reached the minimum controlled power level, meaning that a controlled, self-sustaining reaction had begun in the new reactor. Commercial operation is set to begin in 2021.
- In the US, Southern Companies’ Georgia Power reached a milestone in the completion of its new reactor when it took delivery of the first nuclear fuel for Vogtle unit 3. The AP1000 reactor is approximately 96% complete, with fuel loading expected in April 2021. That company also added itself to a growing list of US utilities to announce a commitment to a long-term reduction in greenhouse gas emissions to net-zero emissions by 2050; its ability to reach that goal will be enhanced by completion of its new Vogtle Units 3 & 4.
- In Canada, following the recent reconnection of Unit 2 at Ontario Power Generation’s (“OPG”) Darlington Nuclear Generating Station, OPG announced another major milestone in September when work commenced on the refurbishment of Unit 3 following a brief postponement related to the COVID-19 pandemic.
- OPG also added its name to the list of utilities committing to achieving net-zero carbon emissions – committing to reach that goal by 2040 and committing to help the markets in which they operate achieve net-zero carbon economies by 2050. The company also announced in November that it would begin advancing plans to locate a small modular reactor (‘SMR’) at its Darlington site in order to support its net-zero goals. This built on an earlier announcement that OPG would leverage its more than 50 years of nuclear experience to advance engineering and design work with three grid-scale SMR developers, GE Hitachi Nuclear Energy, Terrestrial Energy Inc. and X-Energy LLC.
- The Canadian federal government also reinforced its support for nuclear energy and the development of SMRs, as a pillar in its plans for achieving the country’s climate change goals. Federal energy minister, Seamus O’Regan, highlighted the importance of nuclear power multiple times in 2020, including as part of a statement while releasing Canada’s national SMR Action Plan which calls for the development, demonstration, and deployment of SMRs.
- Positive nuclear news also emerged from Japan late in 2020 as the country’s new leader, Prime Minister Yoshihide Suga, pledged that the country will become carbon neutral by 2050. Japan’s current energy plan, set in 2018, calls for 22-24% of its energy to come from renewables, 20-22% from nuclear power, and 56% from fossil fuels. Suga, did not provide details on how Japan would reduce carbon emissions to zero, but said it would promote renewable energy and prioritize safety as it seeks a bigger role for nuclear.
- France’s President Macron indicated that nuclear will remain a key part of the country’s energy mix, highlighting that the nuclear industry will remain the cornerstone of France’s strategic autonomy. Though France has previously said it will cut its reliance on nuclear energy from 75% to 50% by 2035, it is also considering building next-generation EPR nuclear reactors.
Reinforcing the changing global energy landscape, the International Energy Agency (“IEA”) released its first Electricity Market Report in December 2020. The report highlighted growth in renewable electricity generation at the expense of conventional sources, such as coal-fired generation, as well as expectations for nuclear power generation to grow by approximately 2.5% in 2021. The IEA, together with the OECD’s Nuclear Energy Agency, also showcased the global competitiveness of nuclear energy as the most dispatchable low-carbon technology, with the lowest expected costs, in the report ‘Projected Costs of Generating Electricity 2020’, which also refers to a decline in costs for new nuclear power plants owing to lessons learned from recent first-of-a-kind new build projects.
According to UxC’s Q1 2021 Outlook, global nuclear power capacities are projected to increase to 447 reactors in 33 countries in 2021, generating approximately 398 gigawatts of electricity (“GWe”) as new plants come on line. By 2035, that is expected to be 468 reactors, generating approximately 456 GWe in 36 countries. According to the WNA, as of March 2021, current nuclear generation equates to approximately 10% of the world's electrical requirements, with twelve countries producing 25% or more of their country’s electricity from nuclear.
According to the WNA, there are currently 54 nuclear reactors under construction in 19 countries with the principal drivers of this expansion being China (16 reactors under construction), India (6), South Korea (4), UAE (3), and Turkey (3). In addition, there are another 97 reactors currently planned around the world.
In the Q1 2021 Outlook, UxC estimates base case demand will be 175 million pounds U3O8 in 2021. UxC also estimates that annual uranium demand could grow to 213 million pounds U3O8 under their base case by 2035 and to almost 300 million pounds U3O8 in their high case in the same period.
Primary Uranium Supply
UxC’s Q1 2021 Outlook estimates that world uranium production for 2021 is expected to be approximately 127 million pounds U3O8, a slight increase over 2020’s estimated production of 124 million pounds U3O8.
In Canada, Cigar Lake has temporarily suspended production as a result of the COVID-19 pandemic. The Q1 2021 Outlook has estimated that production at Cigar Lake will restart in June 2021, and will produce approximately 11 million pounds U3O8 in 2021. Annual production is then estimated to ramp up to 18 million pounds U3O8 by 2023, before ramping down in 2026 through 2031. McArthur River remains closed indefinitely with no immediate plans for future production, and a decision to restart is expected to be dependent on market conditions. Given the shutdowns of both McArthur River and Cigar Lake, during 2021 Canada is expected to be fourth largest producing nation (down from second largest in prior years), with more than 8% of the world’s expected 2021 production. Australia and Namibia are both expected to contribute more than 10% of expected 2021 production, and Kazakhstan is expected to continue to be the world’s largest producer of uranium in 2021 by a large margin, representing more than 45% of expected production.
UxC estimates in its Q1 2021 Outlook that existing mine production, plus new planned and potential mine production under its base case, will reach a peak of 147 million pounds U3O8 by 2028, before declining back down to 97 million pounds U3O8 by 2035. At its projected height in 2028, production levels are anticipated to include the resumption of mining at McArthur River, with UxC anticipating the mine will ramp up from 4 million pounds U3O8 in 2026 to 18 million pounds U3O8 by 2027. While Kazakhstan is seen to maintain relatively consistent supply in future years, it does start to drop off significantly closer to 2035. In order for other projects to move forward and increase production forecasts, UxC believes uranium prices will need to increase appreciably to support higher cost production profiles and the significant capital expenditures that will be required.
Secondary Uranium Supply
In the Q1 2021 Outlook, primary mine production in 2021 is estimated to supply approximately 73% of the year’s estimated base case demand, with the balance of demand expected to be supplied from secondary sources. These sources include commercial inventories, reprocessing of spent fuel, sales by uranium enrichers and inventories held by governments, such as the U.S. Department of Energy, and the Russian government. Primary mine production’s share of annual demand remains lower than pre-2017 levels, in which primary production made up 85% or more of annual demand.
Secondary supplies remain a complexity of the uranium market. The Q1 2021 Outlook forecasts that 49 million pounds U3O8 will enter the market from secondary supplies in 2021, leaving a surplus of approximately 1 million pounds U3O8, if the base case demand scenario for 2021 is met.
Though excess commercial inventories, which were one of the major sources of secondary supplies during the period from the early 1970s to the early 2000s, were largely consumed in that same period, the planned shutdown of nuclear programs in countries like Germany, and the continued struggles of the Japanese nuclear program to restart following Fukushima have contributed to commercial inventories again becoming a more significant factor. Government inventories also continue to contribute substantially to the secondary supply picture, particularly in the U.S. and Russia. The disposition of these commercial and government inventories may have a market impact in the near to medium term, although, UxC expects their role will diminish over time as these inventories continue to be depleted and the uranium and enrichment markets rebalance themselves.
In general, UxC expects that secondary sources of supply will fall significantly from estimated 2021 levels of 49 million pounds U3O8 to less than 17 million pounds U3O8 per year by 2035.
Imbalances between supply and demand of uranium significantly influence uranium spot prices. According to the Q1 2021 Outlook, it is projected that primary production and secondary supply will be sufficient to meet base case demand for U3O8 through the mid 2020’s, with significant supply deficits emerging later in the decade, contributing to upward price momentum.
With respect to long-term prices, utility uncovered requirements and long-term demand are significant influencers. Historically, nuclear utilities have purchased uranium primarily through long-term contracts. These contracts usually provide for deliveries beginning two to four years after they are signed with delivery typically extending anywhere from three or four years to ten years or more. In awarding medium and long-term contracts, electric utilities consider the producer’s uranium reserves, record of performance and production cost profile, in addition to the commercial terms offered. Prices are established by a number of methods, including base prices adjusted by inflation indices, reference prices (generally spot price indicators, but also long-term reference prices) and annual price negotiations. Contracts may also contain annual volume flexibility, floor prices, ceiling prices and other negotiated provisions. Under these contracts, the actual price mechanisms are usually confidential.
The long-term uranium demand that actually enters the market is affected in a large part by utilities’ uncovered requirements. This is the amount of uranium required by utilities to operate their fleet that is not yet covered by purchase contracts with suppliers. UxC estimates, in the Q1 2021 Outlook, that uncovered demand for 2021 was under 3 million pounds U3O8. Of course, this uncovered demand increases over time and is projected by UxC to increase significantly over the next decade. While more than 53 million pounds U3O8 are projected to remain uncovered in 2025, this number grows to almost 114 million pounds U3O8 in 2030. In 2035, this number grows to 166 million pounds U3O8 of uncovered demand, or roughly 82% of total expected base case demand in that year. In total just over 1.35 billion pounds U3O8 remain uncovered between 2021 and 2035.
At 166 million pounds U3O8, uncovered demand in 2035 is approximately 69 million pounds U3O8 more than total production expected from existing uranium mines for the same year, which UxC estimates at 97 million pounds U3O8. Uncovered demand in 2035 also exceeds the combined supply available from primary production and secondary sources by approximately 52 million pounds U3O8. In order to address the rising portion of demand that is uncovered, utilities will have to return to the market and enter into long-term contracts. From 2006 to 2010, on average, 39 million pounds U3O8 equivalent were purchased on the spot market per year and roughly 200 million pounds U3O8 equivalent were contracted in the long-term market each year. In contrast, in 2020, 93.6 million pounds U3O8 equivalent were purchased on the spot market, and 56.8 million pounds U3O8 equivalent contracted in the long-term market. Considering contract volumes over the past year remain well below annual requirements, and uncovered requirements are increasing out in time, we expect that long-term contracting activity will continue to increase in the future as utilities look to secure future supply in order to fuel the world’s growing fleet of nuclear reactors.
The long-term price is published on a monthly basis and increased slightly in 2020, starting the year at US$32.00 per pound U3O8 and ending the year at US$33.00 per pound U3O8. Nuclear utilities procure their remaining uranium requirements through spot and near-term purchases from uranium producers, traders and other suppliers. Historically, spot prices are more volatile than long-term prices. The spot price began 2020 at US$25.00 per pound U3O8, and increased during the year, in part as a result of COVID-19 related production curtailments, to reach a high of $34.00 before retreating slightly to US$30.00 per pound U3O8 at year end.
The uranium industry is small compared to other commodity or energy industries. Uranium demand is international in scope, but supply is characterized by a relatively small number of companies operating in only a few countries. Primary uranium production is concentrated amongst a limited number of producers and is also geographically concentrated with more than 75% of the world’s production in 2021 projected to be coming from only four countries: Kazakhstan, Canada, Australia and Namibia.
Competition is somewhat different amongst exploration & development companies focused on the discovery or development of a uranium deposit. Exploration for uranium is being carried out on various continents, but in recent years development activities by public companies have been generally concentrated in Canada, Africa and Australia. In Canada, exploration has focused on the Athabasca Basin region in northern Saskatchewan. Explorers have been drawn to this area by the high-grade uranium deposits that have produced some of the most successful uranium mining operations in recent history. Within the Athabasca Basin region, exploration is generally divided between activity that is occurring in the eastern portion of the Basin and the western portion of the Basin. The eastern portion of the Basin is a district that is defined by rich infrastructure associated with existing uranium mines and uranium processing facilities. Infrastructure includes access to the provincial power grid and a network of provincial all-weather highways. By comparison, in the western portion of the Basin, there are no uranium mines or processing facilities and access to the provincial power grid is not currently available. Several uranium discoveries have been made in the Athabasca Basin region in recent years, and competition for capital can be intense.