Uranium enrichment – why are prices now much lower and what is the impact?

8 December 2016

The spot uranium enrichment price has fallen by a third since the beginning of 2015, from around $90 per SWU to $52 in October 2016, which is actually the lowest it has ever been. Indeed, this is merely the latest element of a long-term trend as enrichment prices have fallen continuously in almost a straight line from the time of the Fukushima accident in March 2011, when they stood at a near-record $155 per SWU.

Much cheaper enrichment is probably the most important feature in the nuclear fuel market today and its implications arguably go far beyond the fuel sector. Could it even be the first sign that instead of being an over-regulated and government-dominated industrial sector, nuclear power can finally become more like a normal business with costs and prices determined by usual market criteria? 

It’s firstly important to understand why enrichment prices have fallen so far and so fast. There has been a lot of nonsense written in recent months about this, with the corollary that prices will at some point return to more “normal” levels. This is akin to those who invariably anticipate higher uranium prices, when the opposite is often more likely to be the case.

The key point about the enrichment market is that prices were, for many years, kept at excessive levels by a combination of high cost gaseous diffusion plants (GDPs) and the governmental protection that was provided to keep them in operation. The GDPs used huge quantities of electricity and even when supplied by generous tariffs from nearby nuclear and other power units, needed prices in the $100-150 range to sustain them from the 1990s onwards. The justification for the government protection they received was a mixture of non-proliferation and domestic employment arguments. Nuclear weapons proliferation concerns surrounding enrichment plants have led to attempts to limit their numbers in non-nuclear weapons states. The monopoly that the US enjoyed in enrichment services in the early days of commercial nuclear power in the 1970s was only slowly broken by Urenco and Eurodif plants in Europe and by the arrival of Russian SWUs onto the world market. The impact on prices was then delayed by protectionist trade policies which served to curtail competition and effectively allowed the GDF plants to run rather longer than they would have otherwise.

Now with the closures of the last United States Enrichment Corporation (now Centrus Energy) GDP in the US and the replacement of Eurodif’s GDP in France by one using centrifuges, we have entered a new world of much lower prices. These will be determined by the marginal operating costs of the now universal centrifuge plants. When there is plenty of supply, as there is just now, prices will approximate to the marginal costs of current production capacity, and at $52 per SWU, may now be approaching the bottom.

An important factor, however, is that the production cost bases in US dollars terms have been cut further by weaker exchange rates in the countries where the plants are located. If more SWU production capacity is required, prices will have to rise to reflect capital investment costs too. But centrifuge enrichment capacity is modular and, subject to licences,
can be expanded comparatively easily if the manufacturing machine capacity is also available. Hence long run marginal costs are not so far above the short-term as they are with uranium production capacity, which is much harder to expand quickly when required.

The ‘dumb’ explanations for the enrichment price drop begin with the favourite, namely weak demand following Fukushima. In fact, as optimum tails assays have fallen with enrichment prices and with incremental demand from new nuclear reactors in China, Russia and South Korea, world demand for enrichment is far from sickly. Indeed, if one believes that supply and demand factors have dominated the market, two aspects would suggest that prices should actually have risen instead of fallen.

Supply has been cut sharply by the closure of the last two GDPs and by the ending of the highly enriched uranium (HEU)
deal between Russia and the West. Although Urenco and Eurodif have been installing centrifuges to replace the lost capacity and Tenex has gained the right to contract directly with US utilities, this cannot explain the price falls. There may be little uncovered demand out there as key buyers have (foolishly in retrospect) signed up for supplies until the early 2020s at the previous high price levels, but the important point is that the enrichment companies can still make money at much lower price levels. It’s at last a competitive market with fewer distortions than before. Producers will not make as much money as when prices were much higher, but will earn sufficient returns to just stay in business.

Any belief that prices will rise in the future must confront the fact that the Chinese are rapidly expanding their enrichment capacity and are unlikely to require any outside supply. Indeed, they may join Urenco, Eurodif and Tenex in the export market for both enrichment services and enriched uranium product (EUP). With the Chinese and Russian markets effectively closed to outside suppliers and India taking very little enrichment (most before 2030 will surely come with the Russian reactor deals), the demand outlook for enrichment elsewhere looks very uninspiring. Rector closures in the US and is Europe demonstrate this. If the American Centrifuge Program (ACP) or laser enrichment through SILEX eventually ever leads to operating plants, they must surely be designated at specific tails material re-enrichment programmes, rather than the main market. This is reflected in the recent agreement whereby the US Department of Energy may sell deleted uranium stockpiles to the SILEX company for re-enrichment at the shuttered Paducah GDP.

Enrichment is therefore an unusual example in nuclear where economic forces seem to have won out. Once centrifuge technology is mastered, it isn’t particularly difficult to produce lots of SWUs. With only low potential radiation exposures and a limited number of plants, the regulatory side is also not particularly onerous. With three primary suppliers (and the Chinese a rising fourth) in place, competition (and prices) should remain keen.

What do lower prices mean for the nuclear fuel market as a whole? The impact from the point of view of the buyers is clearly highly favourable. The enrichment market has historically been overprotected with constrained competition, and enrichment was the most expensive component of the fuel bundle. Now economic forces have won over and fuel should gradually become cheaper as term fuel contracts at higher SWU prices gradually run out. This won’t transform the economics of nuclear power, but savings of millions of dollars per year on fuel costs are very useful to utilities now battling competition from cheaper gas and newly abundant renewables in competitive power markets.

The uranium conversion element in the fuel cost has always been negligible and low prices are supported by abundant capacity. The fuel fabrication market is also becoming increasingly competitive as suppliers attempt to enter market segments previously dominated by rivals.

“The ‘dumb’ explanations for the enrichment price drop begin with the favourite, namely ”weak demand following Fukushima.

From the enrichment producers’ standpoint, lower prices are clearly not good news but they are protected for several years by term contracts at much higher prices, typically well above $100 per SWU. As these run out, the average price per SWU received will fall, as will the profits of the producers. They have, however, needed a good level of profitability in the recent past to invest heavily in centrifuge technology. This period is now over, so lower profitability won’t hurt so much. One reflection is that the owners of Urenco would have done much better to agree their mooted sale a few years ago rather than now. The price they would receive today (if they ever get around to agreeing) is likely to be far below what they would have benefited from then.

Lower prices also act as a disincentive to new investment in enrichment capacity. The Chinese will expand rapidly to meet
the requirements of their domestic reactor programme (and any overseas sales they make). The financial benefit of exporting SWUs will, however, now be lessened and the degree of competition faced in gaining bigger footholds in Europe and the US notably severe. The possibility of new plants in the US is also reduced by lower SWU prices as returns on investment will be lower. So the ACP and the mooted SILEX laser enrichment facility both look economically difficult to pursue. Only a political objective to retain a domestically owned US plant is likely to save these projects.

The impact of lower enrichment prices on the uranium market is, however, arguably the most interesting consequence. Buyers ultimately want a quantity of enriched uranium at a specified assay and are indifferent to which balance of natural uranium and enrichment services is used. Low cost centrifuge enrichment can essentially be seen as a triumph of technology over uranium deposits in the ground and yet to be mined.

Since the beginning of the commercial nuclear era in the 1950s, there have always been fears of a shortage of uranium. The anticipated need to move quickly to fast breeder reactors didn’t happen as higher uranium prices stimulated an enhanced exploration effort, leading to significant increases in proven resources. There remains a general expectation, however, that at some point increased uranium demand will create the need to exploit higher cost deposits, necessitating uplifts to prices. This now looks highly unlikely.

A lower enrichment price means that more enrichment will be used as opposed to uranium in creating the required enriched uranium and this will be reflected in the selection of lower tails assays at the plants. There is an optimum for the buyer for every mix of uranium and enrichment prices, and uranium demand will now be notably lower. Hence there is an important impact on uranium prices which themselves should be pushed down by lower enrichment prices. Uranium prices at $20 per pound are partly a reflection of this.

It obviously takes time for new price relativities to become reflected in longer-term contracts. In the shorter term, both underfeeding of plants and re-enriching tails become more attractive. While uranium is delivered to plants based on old optimum tails assays, the enrichment companies can create additional uranium by underfeeding and using more enrichment, magically creating surplus uranium for other use. This incentive gradually evaporates as new contracts are fixed but may disappear more quickly if uranium prices also fall further. The same goes for re-enriching tails material, particularly historical stockpiles at high assays. The higher uranium supply that this creates will likely push uranium prices down as an additional source of secondary uranium supply appears on the market.

Another consequence of cheaper enrichment is that the suppliers have arguably attained a more central role in the nuclear fuel supply business. From mere contractors offering SWUs to the buyers, they have become more prominent by offering both uranium and enrichment. It may well be that the natural uranium market itself gradually becomes less significant with many buyers purchasing EUP instead. This evolution is exactly what the key suppliers such as Tenex and Urenco are angling for, with the role of the big uranium suppliers diminished. Nevertheless, how this eventually pans out depends on buyers who have important security of supply objectives. They invariably don’t want to become over-dependent on a smaller number of suppliers, even if they offer cheap prices.

A final thing to watch with lower enrichment prices is the tails assays used in forecasts of uranium and enrichment demand. Many are arguably too high, thus overstating uranium demand. For example, will China (where uranium is regarded as a scarce resource) not follow Russia and use very low tails assays at its enrichment plants? With a difficult export market, using surplus domestic capacity to extract as much value as possible from natural uranium imports surely makes good economic sense.  


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