Marketing of our product
All uranium produced by Rio Tinto's mines is marketed by Singapore-based Rio Tinto Uranium under a buy-sell arrangement with the mines. Rössing Uranium, one of the longest-operating uranium mines in the world, supplies its material via Rio Tinto to electricity companies located in all three major markets namely Asia, North America and Europe/ Middle East/ Africa. Almost all of our production is marketed through long-term contracts with a diverse selection of customers worldwide.
The uranium market stabilised somewhat in 2015 with less volatility compared to the previous year. Spot prices ranged from a low of US$34.00 to a high of US$39.50 per pound - the latter occurring for several weeks early in the year - and mostly traded between US$35 and US$37 per pound.
Rössing Uranium's final product U3O8 is drummed through an automated process. The drums are loaded and exported to overseas convertors for further processing. Working safely, the drums are checked and loaded by forklift operator Immanuel Witbooi and Final Product Recovery operator Napolean Stephanus.
Utility buyers remained generally inactive, buying on a strictly discretionary basis when prices appeared advantageous. This is the natural result of customers holding such high inventory levels in all regions. Utility inventory levels are at 20-year highs across the three main markets of North America, Europe and Asia.
Fortunately term prices remained fairly stable throughout the year, finishing 2015 at US$44 per pound. As most of our production is sold into long-term contracts utilising various term pricing mechanisms, this provides protection against spot volatility, and our actual realised sales price continues to exceed spot levels by a significant margin.
The market continues to be plagued by oversupply, including higher-than-expected levels of secondary supplies. Despite the expiration of the US-Russia High-Enriched Uranium (HEU) down-blending programme a few years ago, supplies from non-mine sources remain high. A significant part of this is coming from excess uranium stocks produced by enrichment facilities. Enrichers are able to utilise their excess capacity to upgrade enrichment tails (waste) material and turn it into natural uranium, which in turn competes in the market with primary mine supply.
Given the efficiency of the centrifuge enrichment process and the overcapacity that exists in Russian and European enrichment facilities, this source of supply is unlikely to diminish anytime soon. This excess enrichment capacity, like the excess mine production currently overhanging the market, is also a result of reduced reactor demand since the Fukushima incident in March 2011.
For the same reasons long-term utility demand was fairly weak in 2015, although several buyers in the US and Asia entered the market in the second half of the year to seek extra supplies for the 2016-20 mid-term period. Demand for contracting beyond 2020 was quite limited, in part because of the uncertain status of some older reactors in the US and Europe. Extra long-term demand is expected in 2016 and 2017 as utilities seek to secure fuel coverage for their post-2020 needs. As a long-term supplier with a strong track record, we are well placed to supply this demand as the interest emerges.
The difficulties that our utility customers are having in some of the regional power markets continued in 2015, resulting in the announcement of the early pending shutdown of six older units in the US and Sweden. This again demonstrates the negative effect that distorted power markets are having on some nuclear operators around the world.
China is expected to surpass the US fleet of 100 reactors some time before 2025. As the first foreign uranium supplier to China, we remain well-placed to capture a significant share of this demand.
Heavy government subsidies for renewable energy sources, combined with low prices of coal and natural gas, are making for a more competitive environment for nuclear operators in some regions.
Therefore, while China is adding new units at a rapid pace, some of this demand is offset by early or unanticipated closures of existing reactors in more mature markets.
The industry is working with power regulators and governments to ensure that these large-scale, clean and reliable units are properly valued for their contribution to low-cost electricity supply, grid reliability, and low-carbon energy, in the hopes that no further operating units will be closed down prematurely.
As in previous years, mine-production increases are also contributing to the current supply-demand imbalance. This was exacerbated in 2015 by the entry of one of the largest new uranium mines, Cigar Lake in Canada.
While long expected and the subject of several delays to commencing operation, the entry of a large, high-grade mine at the present time creates extra market challenges when utility demand is still slow to fully recover from the effects of the Fukushima incident.
Smaller production increases continued in Kazakhstan - the world's largest uranium producing country - and there were no notable shutdowns of mines elsewhere, thus the excess production and secondary supplies continue to add to the global inventory overhang.
On the positive side, Japanese re-starts are now underway and several more units are expected to resume operations in 2016.
Moreover, China's aggressive plans for new nuclear build continue to be realised, and recent signs indicate the pace of construction may accelerate in the wake of the global COP-21 1 climate talks in Paris in late 2015. Well-publicised periods of heavy air pollution caused by coal burning in China are also contributing toward the push for more nuclear development.
China currently operates 30 nuclear units - with a further 21 under construction - and dozens more planned for the 2020s. In fact, China is expected to surpass the US fleet of 100 reactors some time before 2025. As the first foreign uranium supplier to China, Rössing Uranium and Rio Tinto Uranium remain well-placed to capture a significant share of this demand going forward.
Thus, while challenges remain, particularly in the area of low market prices which may persist for several more years, the longer-term outlook for the nuclear industry remains bright. No other source of electricity can deliver large volumes of CO 2 -free power on a reliable, continuous basis, 24 hours a day.
Demand will gradually start to increase and public attitudes toward nuclear energy continue to improve. For higher-cost producers such as us, the next few years will remain difficult, but the nuclear fuel market continues to value the stability, reliability and diversification that Rössing Uranium and Namibia provide.
Rössing Uranium joined the Diamonds and Minerals group as part of Rio Tinto's organisational structure changes. Alan Davies is the chief executive of the Diamonds and Minerals group.
"The uranium market experienced another tough year in 2015, but prices traded in a narrower range with less downside volatility than was seen in 2014, exhibiting some market stability for the first time in several years. Importantly, late 2015 witnessed the re-start of two nuclear plants in Japan, the first to resume operations since the Fukushima incident in March 2011. While this did little to reverse the effects of the supply- demand imbalance afflicting the market, it was an important first step in the market's recovery. As a result, Rössing Uranium was able to return to continuous production, and the outlook for 2016 is for additional reactor re-starts in Japan and hopefully a further recovery in the market to price levels that better support mine production worldwide."