A few thoughts on Uranium trade

uranium powderUranium trade is an obscure subsector of physical commodities trading.  Which is why it is worth to learn a little bit more about it. Particularly in face of expanding world’s energy capacity derived from nuclear power. Which according to International Energy Agency estimates is to expand by a fifth until 2030.

Naturaly most of this expansion is bound to happen on Indian and Chinese markets to help fulfill their vast energy appetites. Nevertheless the developments in US, Russia, Japan and South Korea are also bound to play their role, along with obligatory full renewal of existing plants from 70s and 80s, since such facilities usualy enjoy a lifespan of no more than 40 years.

Whether some plants will be closed or renewed depends much from public incentives and an attitude of governments towards greenhouse gases. New nuclear plant is worth two times more than coal fired power station.

Hence same as in case of renewable energies tax breaks make nuclear energy commercialy viable.

The World Nuclear Association estimates are also pretty optimistic and state that the demand for uranium for the purposes of electricity generation will increase by 70 % from 2006 to 2030.

Mining

Uranium is relatively common element of the Earth’s crust. In the past most of uranium has been mined in Australia and Canada, however with time passage new producers located in less politically stable jurisdictions began to emerge (namely Kazakhstan, Namibia, Niger, and Uzbekistan) to now be responsible for a substantial part of the market share. Kazakhstan production at present dominates the landscape with 36 % of world’s output. Canada and Australia still comes as second and third with 15 % and 12 %  market share. The producing nations influence considerable control over all buyers and hence the uranium market is considered to be a typical seller’s market.

Production (nuclear fuel cycle)

Before uranium ends up in reactors of power station, it undergoes certain amount of processing. After being mined (underground or open pit), uranium is milled into yellowcake then enriched and further destined for fuel fabrication.

Purification facilities that transform ore into yellowcake are usually located near mining sites.

Uranium is composed  of different elements and only one miniscule element – uranium-235 – can be employed as a source of power. Uranium-235 makes up only 0.7 % of all the uranium that is mined.

Therefore - firstly since  since such a tiny proportion of the ore contains usable uranium it would be uneconomic to mill it away from the mining site. Secondly the small proportion of Uranium-235 in the rock brings a need for enrichment to make it more commercially viable for use in power generation.

Facilities for enrichment are located in the countries that produce significant amounts of nuclear power. Large commercial enrichment plants operate in France, Germany, UK, USA, and Russia.

After milling,  uranium is turned into uranium oxide U3O8 –  known as yellowcake.  The vast majority of ore (99.3 %) during milling process –goes to waste. Large volumes of poor grade uranium are also left behind unless the price is high enough to process them.

As a next stage, yellowcake is turned into gas – uranium hexafluoride UF6 – and then turned to  an element again.  This brings energy concentration up to 4 %. Finally the uranium is burned into ceramic pellets and situated in fuel rods, that ends up in reactor.

Recent developments

Not long ago nuclear industry undergone a rebirth due to nuclear technology advancement and governments concern for greenhouse gases. Supported further with endless India and China energy needs. In 2007  price reached an unimaginable level of $135/lb or $ 300 a kg. The prices of shares of Uranium exploration companies also reached new heights ( more than 450 companies have listed their shares on stock exchanges in Australia, Canada, the United Kingdom and the US trying to get funding for new mining projects). It was some time since the last Uranium boom of 70′s… However to the dismal of the industry’s hopes, Fukushima tragedy put another black spot on history of atom.

Late withdrawal of major banks from physical commodities trading due to increase in regulatory requirements regarding operations on this asset class sparked changes also among Uranium traders.

In February this year Reuters informed that both Goldman Sachs and Deutsche Bank are to exit their raw uranium (yellowcake) trading desks, by putting them on sale. The banks held high level of Uranium stockpiles (reportedly larger than this of Iran) and low market price for this commodity certainly did not help.

Goldman’s nuclear trading desk,  NUFCOR International Limited was responsible for marketing the vast majority of South Africa’s uranium production. Despite the fact that Uranium has been traded by the bank mostly with nuclear plants, many has questioned such involvment in after all, very politically sensitive business.

The problem is that even if global trade in uranium is monitored by governments, intelligence agencies, and the International Atomic Energy Agency, there is no single authority responsible for supervision of the trade.

According to Reuters sources, Yellowcake – uranium concentrate powder obtained after processing of Uranium ore can be bought and sold without any significant international controls.

Reuters claims that filings with UK authorities and nuclear industry sources state the two banks’ combined stockpiles of uranium are to be worthed $400 million, and amount to 5,000 metric tonnes (5511 tons) of yellowcake. It is enough to fuel 20 standard nuclear power plants for a year, or to build 200 nuclear bombs.

The banks have not been in uranium market for long, they entered it in 2009, when the supplies have been low and fight with global warming heralded the nuclear rebirth. It was a time, when even some hedge funds were going into amassing uranium.

Market

“The nuclear industry has been campaigning for decades to banalise uranium and make it appear like just any other commodity, but it should be subject to much stronger oversight.” Reuters source has stated. Indeed there has been several previous attempts to commoditize the uranium market. On physical uranium market, utilities, producers and investors buy and sell uranium. However Uranium can’t be moved physically. It’s controlled under an intergovernmental arrangement. Traders can only buy and sell the rights to hold the uranium, which are hold in registered warehouses. It resembles trading in base metals on the LME.

Two figures are worth of mention as far as development of Uranium trading is concerned: Oren Benton and Roy Adams. Mr. Adams pioneered uranium trading business, at major banks as Lehman and Deutshe Bank. Oren Benton in 80s and 90s spearheaded Nuexco Trading Corporation which was buying Russian uranium and selling it into Western markets.

There is also a futures market for uranium. NYMEX launched cash-settled uranium contract in 2007,  big banks as Deutshe Bank and Goldman Sachs among others provided liquidity on the exchane, becoming in fact market makers.

Prices

Involvment of financial institutions was not a surprise considering the price levels. In 2007 uranium sold for $ 140 per pound. While in 2002 pound of uranium costed only $20.

 

Max Uranium Price Chart - Uranium Price Per Pound
Between 2010 and 2014 price has changed by two fold, with visible downside trend.
5 Year Uranium Price Chart - Uranium Price Per Pound
Despite its inherent volatility, price of Uranium this year remained rather stable in the range of $30-35, fulfilling the expectations of traders from the first quarter
1 Year Uranium Price Chart - Uranium Price Per Pound
What was responsible for such spikes in the past? In opinion of some banks and funds were to be blamed, by amassing and holding up the commodity, in designated licensed warehouses.
However according to industry experts it was simply a matter of growing demand and unsufficient supplies on the side of producers. Experts adhered to the view that financial players have been unable to corner this market.
Substitutes

As a fact Uranium might be substituted if the price is high enough. It is common mechanism among commodities. Nuclear fuel can be also procured from thorium,  radioactive metal. Thorium is similar to uranium, better in regard to nuclear waste issues after the fuel is used and over 3 times more common in the earth’s crust than already widespread uranium. Thorium encapsules also more energy than uranium. Hence it can be applied as a fuel before the enrichment.  The problem remains that one can not easily feed an uranium adjusted reactor with thorium fuel. Application of thorium requires a specially adjusted technology.

Goldman’s story and NUFCOR dealings with Iran.

Goldman’s involvment in uranium came thorugh dealings with AngloGold Ashanti, which produces almost all of the yellowcake in South Africa. In 2009 Goldman acquired its uranium trading arm, called NUFCOR International Ltd, as a part of a wider deal. NUFCOR International’s goes back to 1968, when a group of private South African gold companies established the Nuclear Fuels Corporation of South Africa (NUFCOR SA) to market most of the country’s uranium, which was produced as a byproduct of their gold mining.

NUFCOR in the beggining of its operations did business with Iranian’s Shah. Company supplied Iran with low-grade uranium for its nuclear energy program. Agreement was signed for delivery of  2,400 metric tonnes of yellowcake. However only  775 metric tonnes has been shipped since Islamic Revolution began and deal has been put on hold by authorities.

The deal has been settled with approval of South African government – the uranium had not been delivered to Iran  but was sold to a New York trading company and a German electricity firm and the proceeds from the sales has been returned to Iran.

Outlook for the near future

There is a consensus among the market players that nuclear industry has seen much brighter days. This dark mood is unlikely to change in the near-term due to the departure of the investment banks and very slow pace of Japanese recovery. High hopes lie on China’s nuclear investments in the short and medium term. While people who are really bullish on uranium look at long term, that is 10-15 years perspective.

Usually there is also a divide in the forecasts, utilities as a rule voice sceptic opinions on the price development, not willing to put more fuel into the fire, while suppliers are traditionally more bullish. Drop in spot market liquidity with the closure of the uranium trading desks at Deutsche Bank and Goldman Sachs can be read in different ways. Some say its bad for the market, some say that less liquidity and hence less transparency will open up the opportunities for the well oriented traders. Also spot and mid market volatility should decrease with their exit.

As a downside we should not forget that inventories remain high and new mine projects are still coming to the already oversupplied market. Some as Chinese Husab project are not driven by market conditions but are issue of energy security for the world’s powers. On the other hand, according to experts new mines will have higher production costs, which will be passed on to customers.

 

Physical Trader Blog

 

References:

publications of Ux Consulting
Reuters “Goldman puts ‘for sale’ sign on Iran’s old uranium supplier”
Kevin Morrison “Living in a Material World”

 

 

 

 

 

 

 

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