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TradeTech Uranium Market Update August, 2007. Treva E. Klingbiel President TradeTech. TradeTech Web Site http://www.uranium.info. TradeTech Services and Products. Spot and Long-Term Prices (weekly and monthly) Price Forecasts (U308, Conversion and Enrichment)
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TradeTech Uranium Market Update August, 2007 Treva E. Klingbiel President TradeTech
TradeTech Services and Products • Spot and Long-Term Prices (weekly and monthly) • Price Forecasts (U308, Conversion and Enrichment) • Strategic Analyses (Procurement, Contract Review, and Competitive Analysis) TradeTech is independent – no ownership or investment position in producers, trading companies, or utilities
Topics • Outlook for Nuclear Power • Supply/Demand Balance • Secondary Supply • How the Market Works • New Participants
Nuclear Power Worldwide Nuclear Power Units • 437 Operating • 30 Under Construction • 74 Planned • 162 Proposed • Large existing base + growth from nuclear renaissance
World Nuclear CapacityWNA Reference Case • USA has the largest nuclear capacity
Nuclear Capacity GrowthWNA Reference Case Asia! • Largest regional growth area: Asia
China’s Supply/Demand Situation(Going from self-sufficient to large import dependence)
Nuclear Power Plant Types Light Water Reactor(BWR: Boiling Water Reactor; PWR: Pressurized Water Reactor; VVER: Russian Pressurized Water Reactor) Pressurized Heavy Water Reactor(Canada, India, Korea, China, Argentina, Romania, Pakistan) Light-Water Graphite Reactor (RBMK)(Russia, Lithuania) Gas-Cooled Reactor (UK: Magnox and Advanced Gas Reactors or AGR) Fast Breeder Reactor(Russia, France) 85% Chernobyl Obsolete • LWR dominates current commercial technologies
Topics • Outlook for Nuclear Power • Supply/Demand Balance
Future Uranium Requirements World Nuclear Association “Reactor Requirements” (Reference Case)
Future Uranium Requirements With Market Prices Higher Than Delivered Prices In Legacy Long-Term Contracts, Utilities Take Maximum Allowed Quantities From Old Contracts
Future Uranium Requirements Investors First Buy Into Stockpiles, Then Sell To Realize Profits Utilities Take Maximum Allowed Under Legacy Contracts History Projected
2006 Uranium Production By Country • Four countries accounted for 66% of world production. • Eight countries accounted for 92% of world production.
Historical Over-production Inventory Draw-Down Inventory Build-Up Some Military Stockpiles and Warhead Dismantling Coming Back As Secondary Supplies • Over-production has led to large secondary supply
Demand vs. Existing Supply Sources Production from new sources needed, especially starting in 2013 • ~60 million pounds U3O8 new production needed (Reference Case)
Price-Exploration Relationship Price (1997 US$/lb. U3O8) Exploration Expenditures (Million US$) 100 1,400 Price 1,200 Exploration Expenditure 80 1,000 60 800 600 40 400 20 200 0 0 1970 1975 1980 1985 1990 1995 Exploration decreased dramatically as a result of low prices.
Past Production and Projected Capacity Future production highly dependent upon price, politics, and technical capability
Demand vs. Potential Supply Sources Production from new sources more than adequate; the only question is the production cost and politics • Prices must not fall too low to bring on significant production sources
Topics • Current Market Overview • Supply/Demand Balance • Secondary Supply
Primary and Secondary Supplie(r)s Million Pounds U3O8 Thousand tU • Secondary supply is very large • A few producers control primary supply
Future Secondary Supply About 40% of world requirements for the immediate future, but dropping to 15-15% in the longer term.
“Russian HEU Deal” 10% of America’s electricity is coming from this source! 4-5% U-235 90% U-235 0.2% U-235 1.5% U-235
Topics • Outlook for Nuclear Power • Supply/Demand Balance • Secondary Supply • How the Market Works
What’s Happened to the Markets? • Uranium, UF6 Conversion and Enrichment Prices Are All Up Sharply Since 2003 • Fewer Suppliers Are Making Offers • Terms Being Offered Are Much Less Favorable to Buyers It Has Become A Sellers’ Market!
Events Impacting Uranium Prices The Uranium Ma • Note how key events affected the price Ranger flood (in operation) Metropolis UF6 plant restart McArthur River restarted Cigar Lake mine flood (under development) Advent of “hedge funds” investors Metropolis UF6 plant shutdown McArthur River flood TENEX- GNSS dispute
Nuclear Fuel Costs At Spot Prices(In US$/MWh) • These total fuel costs still represent only a small part of total bus-bar cost and are rolled into the generating cost over the course of several years
How Does The Market Work? • Has been described as a very immature market • Very Psychological • No physical exchange like LME • Various sale/purchase methods • Open bid request • “Off-market” limited negotiation • Seller auction
“Spot” vs. “Long-Term” • Spot: 1 (or 2) deliveries, within 12 months of transaction date* • Long-Term: Multi-year deliveries * Transaction date is the date on which the significant commercial terms (price, payment, quantity, delivery) are agreed.
Current Supply Sources and Market Most uranium is sold in the long-term market and supplied from primary production.
Pricing in Long-Term Contracts • Specified Price Delivered price trajectory is determined at contract signing • Market Related Delivered price is determined from future markets • Hybrid Combinations of the other types • Negotiated Price is negotiated ahead of each year’s deliveries • Production Cost Price is based on cost of mining/milling
Market-Related Pricing Terms • Price Floor Delivery price is the maximum of market price or (usually escalated) price floor • Price Ceiling Delivery price is the minimum of market price or (usually escalated) price ceiling • Discount Price is discounted (a few %) from market price at time of delivery, and the discount may increase as the market price increases
Spot Price History Enrichment UF6 Conversion Uranium • Rising prices have attracted new players
New Uranium Market Participation • Hedge Funds • NYMEX uranium futures • Equity Investment Groups • Rising prices have attracted new players
New Uranium Market ParticipationHedge Funds • Entered the physical uranium market late 2004-early 2005 • Moving “up the chain” by holding natural (and enriched) UF6 • Lending uranium to credit-worthy borrowers (electric utilities and uranium producers) • Currently hold ~25 million pounds U3O8 equivalent (acquisition value ~$1 billion, market value ~$3½ billion) • Are said to be holding several times this acquisition value in uranium company equities • Have been a major factor in sustaining price rise
New Uranium Market ParticipationNYMEX Uranium Futures • Trading started early May 2007 (Symbol: UX) • Started at 30 consecutive months of contracts, expanded last month to 60 months starting with July 2 trading • Contract size is 250 pounds U3O8 • Financially settled (thus, really a fixed-for-floating swap) • Settlement price is the UxC spot price indicator for last Monday of the month • Trading has been extremely light so far
What is the outlook for uranium? • Nuclear power enjoying a “renaissance” due to nuclear power’s performance and cost and due to concerns about greenhouse gases • World uranium production capacity will need to grow to keep up with increased demand and decreasing secondary supply
Uranium: The Problem Child • Prices have risen most quickly in this segment of the market • A long period of depressed prices has stifled investment and exploration activities • A larger secondary supply in this market than the other segments
Uranium Spot Price ? Long period of depressed prices • How high will the price go?
Emergence of Speculators • The key to projecting near-term price is speculators
Future Uranium Requirements Investors First Buy Into Stockpiles, Then Sell To Realize Profits Utilities Take Maximum Allowed Under Legacy Contracts Required to Fuel Reactors History Projected
Demand vs. Existing Supply Sources Production from new sources needed, especially starting in 2013 • ~60 million pounds U3O8 new production needed (Reference Case)
Demand vs. Potential Supply Sources Production from new sources more than adequate; the only question is the production cost and politics • Prices must not fall too low to bring on significant production sources
Conclusions • Supply/demand fundamentals do determine market direction – eventually. • Non-traditional market players (i.e. governments and hedge funds) will continue to play a major role. • Strategic inventories are low, making the markets particularly vulnerable to supply disruptions. • Market will continue to evolve, and a price correction with occur.
Uranium: Market Response is Predictable • Supply is tight through 2008, but not unmanageable • If prices remain high and no new technical problems develop with new projects, there could be a supply over-shoot beyond 2010 for Mid Demand or beyond 2008 for Low Demand • The elimination of Russian HEU feed after 2013 could pose a serious long-term problem, that has to be compensated by primary supply