Toward the Endgame

With all of this going on, Rosatom's head honcho Sergei Kiriyenko was bursting with enthusiasm when he spoke with Putin at a January 2014 meeting. He predicted that Russia's recent production rate of six and a half million pounds of uranium annually would soon almost triple. "In 2015, we will reach 8,400 tons [a year], and the prime cost will be completely different," Kiriyenko said. That's 18.5 million pounds.

It wasn't empty talk. Rosatom puts Russia's uranium reserves at 1.2 billion pounds of yellowcake, which would be the second largest in the world; the company is quite capable of mining 40 million pounds per year by 2020. Add in Russia's foreign projects in Kazakhstan, Ukraine, Uzbekistan, and Mongolia, and annual production in 2020 jumps to more than 63 million pounds. Include all of Russia's sphere of influence, and production easily could amount to more than 140 million pounds per year by 2020.

No other country has a uranium mining plan nearly this ambitious. By 2020, Russia itself could be producing a third of all yellowcake. With Kazakhstan chipping in another 25 percent, Russia would have effective control of more than half of the world's supply.

Russian dominance doesn't stop there.

Globally, there are a fair number of facilities for fabricating fuel rods. Not so with conversion plants (uranium oxide to uranium hexafluoride) or enrichment plants (isolating the U-235). The world leader in conversion and enrichment is ... a country where people speak Russian.

Russia's main conversion facility, in Angarsk, in the Irkutsk region of Russia, turns out 44 million pounds of uranium hexafluoride per year, with a smaller facility, in Seversk, in the Tomsk region, contributing another 22 million. All told, Russia has one-third of all uranium conversion capacity. The United States is in second place, with 18 percent. Russia's share is projected to rise, assuming Rosatom proceeds with a new conversion plant planned for 2015.

Similarly, Russia owns 40 percent of the world's enrichment capacity. Planned expansion of the existing facilities will push that share close to 50 percent.

While yellowcake production is important for controlling the market, it's not the critical element. Kazakhstan increased uranium production fivefold in a decade. Other countries, such as Russia, Namibia, and Mongolia, are capable of matching that production growth rate. But owning all the yellowcake on the planet won't help you one bit without the ability to turn it into something a nuclear reactor can use.

The choke point in the whole process isn't in the mines but in the conversion and enrichment facilities that turn yellowcake into nuclear fuel.

That's Putin's goal: to corner the conversion and enrichment markets. It's a smart strategy, too—control those, and you control the availability and pricing of a product whose demand will be rising for decades. And that control will tighten, because the barrier to entry for either function is very high. Building new conversion or enrichment facilities is too costly for most countries, and it is difficult in the West due to the influence of the NIMBY (not in my backyard) crowd.

Here's where Russia stands: on track to control 58 percent of global yellowcake production, currently responsible for a third of yellowcake-to-uranium-hexafluoride conversion, and soon to hold half of all global enrichment capacity.

There's a word for this: stranglehold.

The Transient Surplus

Putin's plan has required patience because, despite the inevitability of rising demand, the uranium market has been in the doldrums since the Fukushima meltdown in 2011. No one I know predicted that a single event would swamp the effect of all the billions of dollars spent in the past decade on reactor development. But that's what happened.

Post-Fukushima, the price of yellowcake dropped more than 60 percent, from $72 per pound before the event to around $28, its nine-year low. Share prices of uranium producers have been hammered. They've been losing money, so they're shutting mines.

As noted, though, Fukushima didn't scare the world away from atomic energy. So what are the reasons for the price drop?

First and foremost, there's Japan hitting the pause button for its entire nuclear industry. The country accounted for 13 percent of global nuclear power generation, and since Fukushima, all 50 of its plants have been shut. Most will come back into operation, but it will take time, with only the first half-dozen or so expected to return to service by 2015. That's a big blow to the demand side of the uranium market.

And there's selling from stockpiles. Japanese utilities were holding three years of uranium inventory when the plants went down, and they have since received a further two years of supplies they had committed to buy under long-term contracts. Rather than sit on it all, the Japanese dumped much of it on the spot market (delivery now for payment now).

That had a big impact, because normally the spot market accounts for only 10 percent of all uranium transactions. The other 90 percent is sold under long-term contracts, at prices that generally work out to be 45 percent or so above spot. Utilities use long-term contracts, with their higher expected prices, to ensure delivery of uranium years ahead. The alternative would be to gamble on the volatile spot market.

The sellers—Japan and South Korea, the latter of which had put some of its own inventory on the market while its reactors were shut— took a beating, since they had bought at higher prices. But one man's loss is another's gain. Buyers were able to build up their own stockpiles on the cheap. Japan hasn't named the countries it sold to, but I believe Russia was one of the big buyers. Russia would be content to hold it for years, awaiting the inevitable rebound.

All around the world, Fukushima accelerated the retirement of several older reactors, adding to the one-time sales of uranium in the spot market. The hurried-up decommissioning of the San Onofre nuclear plant in California, for example, released about 10 million pounds.

A second price hit came from the U.S. Department of Energy. In 2013, ConverDyn—the only U.S. plant for conversion of yellowcake to uranium hexafluoride gas—was shut down for most of the year, for planned maintenance. Without a conversion plant, supplies of yellowcake were building up. So what did the Department of Energy, the largest warehouse of both yellowcake and uranium hexafluoride in the United States, do? It began selling both forms of uranium in quantity.

Further, in July 2013, the agency released a new plan for "excess uranium inventory." An earlier plan, adopted in 2008, capped sales at 10 percent of the total annual fuel requirements of all U.S. nuclear plants. The new plan has no such cap. How much the Department of Energy will sell isn't known, but 7 to 10 million pounds per year wouldn't be surprising.

Finally, as noted earlier, low-cost U-235 from tails (Russian, naturally) is flooding the market. That will continue until about 2018, at which time all the cheap uranium will be gone, and primary production will return as the driving factor.

Sure, the present supply glut keeps prices depressed, which in itself seems bad for a big producer like Russia—but not if the big producer is as smart and future-focused as Russia is. While it has been waiting for higher prices, the country has disposed of surplus tails, stockpiled physical uranium, and picked up distressed assets (like Uranium One) at rock-bottom prices.

Russia has set itself up for muscular influence over everything related to uranium, especially in Europe, where Russia itself provides 32 percent of the uranium entering the EU, and Kazakhstan and Uzbekistan provide another 19 percent.

So, just as Europe relies on Russia for its natural gas, it is even more dependent on Russia for uranium.

Nuclear power has been the world's fastest-growing source of industrial-scale energy in every decade since the 1950s. That's not going to change, however loudly the green drums pound in Germany. Putin sees the payoff for winning the race for uranium. He has already given Russia a significant head start, and he's still running faster than anyone else. No one in the United States or Europe has even entered the race.

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