Following the natural disaster in Japan that forced the closure of the Fukushima Daiichi nuclear power plant in 2011, the country shut down all the nuclear power plants in the country as a safety precaution. The disaster at Fukushima was caused by a major earthquake and 15m tsunami that cracked the installation, leading to equipment failure and the release of radioactive materials. However, in early August this year, the country restarted its first reactor after nearly two years of no generation from any of its 54 nuclear reactors. ‘Following its restart, Sendai Unit 1 will begin generating electricity within days and return to normal operation in early September,’ according to the US Energy Information Administration.
Before the Fukushima disaster, Japan was the world’s third-largest producer of nuclear power, after the US and France. The sudden withdrawal of nuclear power from its national energy grid, and the global nuclear energy mix, had a severely negative impact on the demand for uranium and hence the price of the commodity.
Having peaked at around US$130 per pound (lb) in the middle of 2007, the spot price of uranium declined dramatically and has only recently begun to show some signs of life. It averaged US$33/lb in 2014 and, according to KPMG, in the first quarter of 2015, reached US$38/lb, increasing about 9% year-on-year.
‘With the introduction of several new reactors (particularly in China), uranium demand is expected to grow in the medium term. However, there is potential brownfield supply in Canada and Kazakhstan, which subject to appropriate price signals, may satisfy the initial increase in demand in the short term,’ writes KPMG in its June 2015 Commodity Insights bulletin.
China General Nuclear Power Corporation (CGN) reports that there are 26 nuclear power units under construction in China, accounting for about 40% of the global nuclear construc-tion scale. With 51 units either being built or in operation in China, the country now ranks third globally in terms of nuclear production.
Despite this uptick, KPMG highlights that the spot market for uranium is not a liquid market, with annual volumes of approximately 30 million lb (Mlbs) versus an historical uranium market of closer to 200 Mlbs per annum, driven in the main by long-term contracts.
Despite headwinds, there seems to be a broad agreement that demand for uranium will continue to grow, albeit at a slow pace
KPMG’s global commodity uranium head, Derek Meates believes that the real impact of the restarts in Japan potentially lies in initiating the long-term contracting process, in line with the market’s history of more than 150 Mlbs per annum in long-term contracting.
Similarly, Will Smith, senior fund manager at New City Investment Managers, argues that while Japan restarting nuclear reactors is helpful for sentiment, it is unlikely to have a dramatic effect on near-term demand or spot prices.
‘In common with many other commodities at the moment, demand is slow, while supply is disproportionally impacted by various off-takers selling into the spot market,’ he says.
‘Off-takers’ refer to uranium producers that have made prior arrangements with buyers in order to secure a market for their future production.
Nonetheless, signs of anticipated demand are evidenced in the fact that 66 nuclear reactors are in the ‘under-construction phase’, with nuclear power-generating capacity expected to increase by about 20% over the next five years, according to KPMG.
Despite headwinds, not least of which include anti-nuclear sentiment from the public and tightening government policy, there seems to be broad agreement that demand for uranium will continue to grow, albeit at a slow pace.
The Chinese government plans to relaunch its nuclear reactor construction programme to increase capacity from around 19 000 MW to 70 GW by 2020 and 110 GW by 2025. This is according to Wickus Botha, EY’s head of African mining and metals, who says these announcements caused the spot price to increase from a low of US$28/lb to US$44/lb, with the long-term price increasing to touch US$50/lb in November 2014.
Botha believes that once the first two Sendai reactors in Japan come on-line, it will set a precedent to restart the remaining 18 reactors under evaluation, with a total of six reactors expected to be on-line by the end of this year. ‘With the reactors back on-line, nuclear demand is expected to grow at a rate of 3.6% a year until 2025,’ he says.
Several other countries are expanding nuclear capacity, including Russia, India, the United Arab Emirates (which is building its first nuclear power plant), South Africa and Namibia.
Even in the current low-price environment, new mines were started in 2014. For example, Cameco’s Cigar Lake mine is the second-largest high-grade uranium deposit after the McArthur River mine, and KPMG reports that the mine is expected to ramp up its production to about 18 Mlbs by 2018.
In South Africa, the recently JSE-listed Oakbay Resources and Energy holds 74% of Shiva Uranium: a uranium mine currently mining gold to help its development. Varun Gupta, Oakbay’s CEO recently told Mineweb that Shiva has 200 Mlbs of uranium and will be able to produce 2.5 Mlbs of uranium each year at its peak.
‘Once those uranium stockpiles in Japan are depleted, there is a possibility that we’ll see a sharp upward correction in the uranium price,’ says Oakbay CFO Trevor Scott.
Gupta adds that when uranium hits around US$50/lb to US$55/lb, it will take Oakbay 12 to 18 months to kick-start the operation and bring its production on-line.
Meanwhile, South Africa is pressing ahead with a nuclear build programme despite opposition from environmental activists and others, which will see it award a reported ZAR1 trillion tender to one lucky bidder. In his State of the Nation address, President Jacob Zuma confirmed that government hopes to add 9 600 MW of nuclear power to the national grid by 2030, and that bids will be sought from the US, China, France, Russia and South Korea.
Koeberg power station near Cape Town has a nuclear capacity of some 1 800 MW. According to government’s integrated resource plan for electricity, by 2030 South Africa’s power generation mix should include 13.4% of nuclear power, up from the current level of below 5%.
Minister of Energy, Tina Joemat-Pettersson has said that the procurement process for the new nuclear power plant, earmarked for Thyspunt in the Eastern Cape, will begin in September, with a strategic partner to be selected by March 2016. Earlier this year, Eskom handed control of the nuclear build programme to the Department of Energy.
In Namibia, CGN is making a US$2 billion investment in the Husab mine. Zheng Keping, CEO of CGN’s Namibian unit, Swakop Uranium, told Bloomberg that Namibia – currently the world’s fifth-largest producer of uranium – would overtake Niger and Australia by 2017 as a result of Husab’s production.
The Husab mine will potentially produce 15 Mlbs of uranium oxide when it is fully operational in two years.
‘It seems that the fundamentals support future investment, but it’s a long-term investment strategy, and accordingly I think it would take time for new mines to be developed,’ according to Botha.
‘Furthermore, most of the South African gold miners are able to produce large quantities of uranium as a by-product, which could be supplied into the market once the price fundamentals firm up.
‘In the current mining environment, companies are likely to expand existing operations rather than venturing into completely new greenfield projects.’
Echoing these sentiments, Smith says that the incentive price for new mines is way above current levels, but concedes that there are real signs that the spot price has found a floor. KPMG’s research suggests that a price north of US$70 is required to incentivise new supply.
‘The inevitable upturn in the cycle for most commodities is expected in the next few years because of emerging constraints in new supply from lack of exploration and development in recent years, the removal of high-cost supply and the expected continued growth in demand,’ says Mike Elliott, EY’s global mining and metals leader. He warns that mining companies may miss future growth opportunities because of short-term pressures to cut costs rather than to invest.
‘The switch to growth is looming, and assets are now still relatively cheap,’ he says. ‘Given the long lead time to develop new supply, decisions to invest for future growth have to be made now or long-term returns will be lowered.’
