Resources and Energy Quarterly March quarter 2012

Uranium

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  In the short term, the uranium price is forecast to stabilise with lower planned production in Kazakhstan and continued demand growth in developing economies expected to offset lower consumption from reactor closures in Japan and Germany.
  
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  The future of the Japanese nuclear energy industry remains uncertain. It is expected that some nuclear reactors will restart this year; however policy changes that promote decreased reliance on nuclear power in the medium to long term may affect growth in Japan’s uranium consumption.
  
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  Over the outlook period, strong consumption growth from a large number of new reactors starting up, particularly in China, India and the Russian Federation, and reduced supplies from secondary sources are projected to lead to a price increase.
  
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  Increased production from new mining projects and higher export prices are projected to lead to strong growth in Australia’s uranium exports over the outlook period.
  

The uranium spot price averaged around US$57 a pound for 2011, an increase of 20 per cent from 2010, although the monthly average price varied considerably over the year (see Figure 1). In 2011, the spot price peaked at US$73 a pound in January before dropping by 30 per cent to a low of US$49 a pound in August in response to the reactor closures in Japan and Germany that followed the Fukushima reactor accident in March. However, with demand remaining high in other countries, particularly from the start up of new reactors in China, India, and the Republic of Korea, the uranium price stabilised in the second half of 2011, averaging around US$52 a pound.

The uranium price is forecast to average around US$53 a pound in 2012, a decrease of 7 per cent relative to the 2011 average price but at a similar level to prices in the second half of 2011. The relatively small change in prices in 2012, compared with 2011, reflects the impact of lower demand arising from the closure of Japanese reactors closures being largely offset by planned lower production in Kazakhstan. Developments in Japanese energy policy, particularly the timing of nuclear reactor restarts in the wake of the Fukushima reactor disaster, and global economic uncertainty are likely to influence uranium price movements in 2012.

Figure 1: Quarterly uranium price

Please refer to page 62 of the Resources and Energy Quarterly – March quarter 2012 PDF version.

Uranium prices to increase over the medium term

Between 2013 and 2017, uranium prices are projected to increase, as growth in consumption is projected to exceed growth in production. World uranium consumption is projected to increase, supported by the scheduled start up of a large number of reactors, particularly in emerging economies such as China and India, and continued robust consumption in the US and France.

From 2013 onwards it is assumed there will be a decrease in uranium supplies from secondary sources following the completion of the US-Russian Federation Highly Enriched Uranium (HEU) feed deal which over the past few years has supplied around 8000 tonnes of uranium a year to the market. Mine production, however, is not projected to increase at a rate that can offset lower secondary supplies. As a result uranium prices are projected to increase.

By 2017 the uranium price is projected to reach around US$69 a pound (in 2012 dollars), representing an average annual increase of 3 per cent in real terms over the outlook period. This projection is based on the assumption that emerging countries, such as China and India, do not significantly lower their rate of building new nuclear reactors. Delays to the scheduled start up of new mines, which is common with uranium mining, represents an upside risk to the uranium price projection.

Generation of nuclear power remains the main commercial use for uranium. Uranium consumption is highest when a new nuclear reactor starts operating, which typically requires around 600 tonnes of uranium for the initial core (based on a 1 Gigawatt electric light-water reactor). Once a reactor reaches a steady-state level of operation uranium requirements are lower, with refuelling taking place every one to two years that involves the replacement of only a portion of the nuclear fuel.

As of February 2012, there were 386 nuclear power plants operating around the world with a total generating capacity of approximately 330 Gigawatts electric. In addition, there are currently 49 Japanese nuclear reactors temporarily closed for safety inspections following the Fukushima reactor accident, although many of these may be expected to restart over the next two years. The US and France are the two largest producers of nuclear energy, with 104 reactors in the US and 58 in France producing 102 and 63 Gigawatts electric respectively.

In 2012, world uranium consumption is forecast to increase by 5 per cent to around 77300 tonnes. This growth will be underpinned by the start up of eight new reactors including two in both China and India. In addition, there are three reactors in Canada scheduled to restart and it is assumed that some of the nuclear power stations in Japan which are currently offline for safety inspections, will be restarted by the second half of 2012. Offsetting these factors will be lower demand associated with a number of reactors that shutdown in Germany and Japan in the second half of 2011.

Growth in the US nuclear energy industry has stagnated since the 1979 Three Mile Island reactor meltdown, with safety concerns and cheap gas prices leading to an increase in gas turbine power generation. In February 2012, the US Nuclear Regulatory Commission (NRC) gave approval for the construction of the first new nuclear power plant in the US in over 30 years. With around 20 Combined License Applications for new reactors also currently under review by the NRC, generation of nuclear energy in the US may start to increase after the outlook period.

At the start of 2011 Japan was the world’s third largest consumer of uranium and had an energy policy that promoted the increased use of nuclear energy. The future of the Japanese nuclear power industry is now uncertain after a 15m tsunami critically damaged the Fukushima Daiichi power plant leading to radiation leaks. Flooding from the tsunami caused a disruption to back up power supplies and cooling systems, with subsequent overheating leading to a core meltdown in three reactors and hydrogen explosions that damaged a fourth. These reactors have now been permanently closed with initial plans, based on the decommissioning of the Three Mile Island nuclear power plant, that indicate it may take up to 40 years to fully dismantle the damaged reactors and buildings.

In response to the accident, and growing public anti-nuclear sentiment, the Japanese Government has mandated all remaining reactors to close for a comprehensive safety assessment. Japan’s Energy Basic Plan, which previously promoted increasing nuclear energy to around 50 per cent of all energy consumption to reduce carbon emissions, is now being revised in response to government policy changes announced in the new Energy White Paper.

As of February 2012, only two of Japan’s 51 nuclear power plants remain operational, with plans to close these for inspection in early 2012. Fourteen power plants have undergone stress tests as part of the safety assessment, but still require approval from local authorities in order to restart. Given increasing public opposition towards nuclear energy in parts of Japan it is unclear when the reactors will restart, however, with almost 30 per cent of Japan’s energy previously coming from nuclear power it is assumed in this outlook that in the short to medium term Japan will need to return to nuclear energy.

Japan’s uranium consumption in 2012 is forecast to remain low at around 3300 tonnes based on the assumption that around 15 reactors restart. The restart of Japanese reactors is unlikely to require a significant amount of additional uranium in 2012, with existing inventories from offline reactors more likely to be used.

In the medium term, Japan’s consumption of uranium will depend on decisions to continue with previous plans to build additional nuclear reactors. Prior to policy changes away from nuclear energy, Japan had two reactors under construction with plans to build another two by 2017. Assuming that the two planned reactors no longer go ahead due to the policy change, uranium consumption is projected to decrease from a 2010 pre-Fukushima accident consumption level at an annual average rate of 1 per cent to around 8600 tonnes by 2017. Decreased nuclear energy production due to Government policy may result in even lower consumption if additional nuclear power plants are closed in the outlook period.

The main contributor to growth in world uranium consumption over the medium term will be China. China’s consumption is projected to more than triple between 2011 and 2017 to around 15500 tonnes, supported by an increase in the number of reactors from 15 in 2011 to around 60 in 2017.

In December 2011 the Chinese Government re-affirmed its commitment to increase nuclear energy over the medium and long term. China’s energy policy is supportive of nuclear power because it can provide large quantities of base load electricity generation capacity with lower greenhouse gas emissions than other fuel sources, and also provides for diversification in its energy sources for energy security purposes.

…and in the rest of Asia…

In Asia (including India, but not Japan and China) uranium consumption in 2012 is forecast to increase by 32 per cent to 10 200 tonnes, supported by five new reactors that are expected to commence operation. This includes two in each of India and Chinese Taipei and one in the Republic of Korea.

Over the outlook period, consumption in Asia is projected to increase to around 13 200 tonnes at an average rate of 9 per cent a year. Between 2012 and 2017, a total of 20 new reactors are scheduled to commence operation, including 10 new reactors in India and six in the Republic of Korea.

…and also Europe over the medium term

A number of European countries are reviewing their use of nuclear energy in response to the Fukushima reactor incident. Germany has already committed to permanently closing eight nuclear reactors. In 2012, European uranium consumption, including the Russian Federation and the Ukraine, is forecast to remain at around 32000 tonnes. Reactor closures in the UK and Hungary are likely to be offset by the start up of two reactors in the Russian Federation and one in Slovakia.

Over the medium term, European uranium consumption is projected to grow at an average annual rate of 3 per cent to total around 39000 tonnes by 2017. The opening of new of reactors in the Russian Federation, France and some Eastern European countries, including the Ukraine, Romania, Bulgaria and Slovakia should result in consumption growing faster in the second half of the outlook period relative to the 2012 to 2015.

Secondary uranium supplies to decline over the outlook period

Uranium supply can be divided into two categories: primary mine production and secondary sources. Between the late 1950s and 1989, uranium mine production was used extensively for military purposes and consistently exceeded requirements for electricity generation. However, since 1990 this trend has changed and uranium requirements for energy generation now exceed mine production.

This shortfall has been met from secondary sources of uranium which include spent nuclear fuel, down blended HEU used in nuclear weapons and mixed oxide fuels. The proportion of uranium supplied from secondary sources peaked at nearly 50 per cent in 1999 but has declined sharply in recent years with increased mine production meeting the growth in demand.

In 2011, secondary sources supplied around 17000 tonnes of uranium and accounted for approximately 23 per cent of the market. The largest source of secondary supplies was the US-Russian Federation HEU purchase agreement, which provided around 8000 tonnes. This purchase agreement ends in 2013 and secondary supplies are projected to decline to less than 9000 tonnes after 2014.

The medium term outlook assumes that the US-Russian Federation HEU purchase agreement is not renewed. In the event that a new agreement is signed, secondary supplies would be higher than projected and likely to lead to a lower uranium price.

Mine production to increase…

In 2011, world uranium mine production increased by 2 per cent to around 56600 tonnes with increases in Kazakhstan offsetting lower output in Canada. For 2012, production is forecast to increase by 3 per cent to approximately 58 200 tonnes as a result of higher Australian and African mine output.

Over the outlook period, world uranium production is projected to increase at an average annual rate of 7 per cent to around 87000 tonnes in 2017. The production increase is projected to be supported by new mine developments and expansions in Kazakhstan, Africa, Canada and Australia that are in the ramp up phase of production or are already under construction.

…supported by Kazakhstan, Africa and Canada

Kazakhstan remained the world’s largest producer of uranium in 2011 with the 19500 tonnes produced by its 15 mines accounting for around one third of global production. In 2012, production is forecast to remain constant following announcements in late 2011 that production would be stabilised in order to manage declining prices, and that no new projects would be developed while prices remain at current levels.

Over the outlook period it is assumed that increased demand and higher uranium prices will lead mines in Kazakhstan to increase their production levels. The medium term projection is for output from existing mines to reach around 25000 tonnes by 2017, with no new mines expected to start in this time due to the long start up time associated with uranium mining.

In 2011 uranium production in Africa fell by 2 per cent as a result of lower grades and extraction rates at Rio Tinto’s Rössing mine in Namibia. For 2012, production is forecast to recover, increasing by 4 per cent to 10 700 tonnes with increased production coming from Paladin Energy’s Langer Heinrich in Namibia and recently started SOMINA’s Azelik mine in Niger.

Over the medium term, uranium production in Africa is projected to grow at an average rate of 7 per cent a year to around 19000 tonnes in 2017. This growth is expected to be underpinned by the start up of new mines, including AREVA’s Imouraren mine (annual capacity of 2000 tonnes U₃O₈) in Niger, Extract Resources’ Rössing South (annual capacity of 2300 tonnes U₃O₈) Trekkopje (1900 tonnes U₃O₈) in Namibia and Simmer’s Buffelsfontein (annual capacity of 230 tonnes U₃O₈) in South Africa. An extension to the Rössing mine in Namibia is also expected to increase output by 600 tonnes a year from 2012.

Canada’s uranium production is forecast to remain steady in 2012 after the closure of the 1500 tonne capacity McClean Lake mine resulted in a 12 per cent decrease in production in 2011. Over 2012 to 2017, production is projected to increase at an average rate of 11 per cent a year to reach 16 700 tonnes by 2017. The start up of Cameco’s 4000 tonne a year Cigar Lake mine in 2013 is expected to underpin this growth. Production at the Cigar Lake mine has been delayed several times by flooding, but it is expected to become the world’s second largest uranium mine by 2017. Uranium production in Canada will be further boosted by an expansion at Cameco’s McArthur River mine in 2016 that will increase production by around 1000 tonnes a year.

Start up of new mines to boost Australia’s uranium production

Australia’s uranium mine production in 2011–12 is forecast to remain constant at around 7100 tonnes. As in 2010-11, production at ERA’s Ranger mine was affected by heavy rainfall in December 2011 and normal operation is not expected to resume until the second half of 2012. Uranium One’s Honeymoon mine in South Australia commenced production in 2011, however, output is forecast to remain low for the remainder of the 2011–12 financial year.

Out to 2016–17, Australia’s uranium mine production is projected to increase at an average rate of 12 per cent a year to 13 500 tonnes in 2016–17. The increase in production is based on the assumption that a number of new mines commence operation within the outlook period. Mines scheduled to start up within the medium term include Toro Energy’s Wiluna operation (annual capacity of 800 tonnes U₃O₈), Energy and Metals Australia’s Mulga Rocks operation (1200 tonnes U₃O₈), Mega Uranium’s Lake Maitland mine (1000 tonnes U₃O₈) and BHP Billiton’s Yeelirrie operation (3500 tonnes U₃O₈) in Western Australia, and Energy Metals’ Bigrlyi mine (600 tonnes U₃O₈) in the Northern Territory. Plans to expand production at BHP Billiton’s Olympic Dam mine in South Australian are not included in this projection as the expansion is not expected to be completed within the outlook period.

A number of the above projects are yet to receive company or government approvals and are undergoing feasibility and/or environmental studies. As a result, there is some uncertainty around project capacities and schedules that could result in actual production deviating from projections.

In 2011–12, the volume of Australia’s uranium exports is forecast to increase by 2 per cent to 7100 tonnes with high wet-season rainfall in the Northern Territory again affecting production at the Ranger mine. The value of Australian exports is forecast to increase by 12 per cent to around $708 million in 2011–12 as a result of higher average contract prices being negotiated by Australian suppliers. This forecast assumes production at Ranger can restart before June 2012; delays to this are likely to result in a lower export volume and value.

In Australia, the average long-term contract price has historically been lower than the world spot market price because long-term contracts were signed at a time of lower world prices. As a result, there are considerable differences between world spot prices and Australian unit export prices for uranium. As companies re-negotiate contracts, Australian unit export prices are expected to move closer to world spot prices.

Over the outlook period, Australia’s uranium exports are projected to increase as a result of high world demand and increasing prices. The projection is for export volume to grow in line with production at an average rate of 12 per cent a year to reach 13 700 tonnes by 2016–17 (see Figure 2). Export values are projected to grow at an average annual rate of around 18 per cent a year to $1.7 billion (in 2011–12 prices) by 2016–17.