Discussion
Discuss about the Demand and Supply for Uranium.
At the present, the world is grappling with serious issues dealing with global warming and climate change and it is likely that if this problem is left unabated, it may even threaten human existence on the planet. As a result, the emphasis on clean fuels and non-renewable sources of energy is at its peak so as to control the ever increasing greenhouse gas concentration in the atmosphere. One of the clean energy alternatives that could prove to be a beacon of hope in this regard is nuclear energy. Most of the nuclear energy at the present is generated from uranium even though the usage of other minerals is also being explored. Uranium is of significance for the Australian economy considering the fact that it is the largest exporter of uranium in the world. In the recent times, the uranium prices have plummeted especially on account of security concerns which have been triggered due to the Fukushima incident (Green, 2016). This is a concerning situation for the uranium producers in Australia. In the backdrop of the above facts, the report aims to highlight the influence of demand and supply factors on the uranium market dynamics especially the price. Further, the report also seeks to present the likely futuristic pricing trends based on the market dynamics prevailing at the present and expected in the near future.
As per the relevant microeconomic theory, the price of a particular good or service tends to be driven by the respective demand and supply factors which impact either the demand or supply of the underlying good/service. Although the relevance of the demand –supply analysis exists for all goods but it is more relevant for commodities where quality is pre-defined and price is directly driven by the demand and supply. Also, the price of such commodities tends to be dynamic and keeps on altering unlike the other products that are available at the retail level (Mankiw, 2014).
The global uranium prices since 2014 have plummeted to unprecedented levels which have fundamentally altered the market dynamics. The main reason attributing to this drop in uranium prices is the Fukushima incident which has fuelled safety concerns with regards to the nuclear reactors. As a result of this and the potential damage that could happen in case of a nuclear meltdown, the demand for nuclear energy and also the nuclear fuel i.e. uranium was adversely impacted. Not only did it lead to the incremental demand slowing down but the public opinion in Japan was so adverse that even the 48 other operational nuclear plants were shut down which further lowered uranium demand (FOE, 2013).
Conclusion
The fallout of the Fukushima disaster was not limited to Japan but was global and altered the energy mix in other nations also particularly those located in the developed world. For instance, certain European nations like Germany, Netherlands reached a decision whereby the phasing out of the operational nuclear plants began and the shortfall was made up by focusing on clean energy sources particularly wind. Before this incident, a significant amount of power was generated through nuclear energy in these nations and hence the demand for uranium was adversely impacted. The public opinion has also been hit in the developing world where massive protests have been witnessed particularly by the people situated in the vicinity of the plant location who were weary of the underlying safety concerns and thus wanted an alternative location to be considered. This in turn would slow down the building up of nuclear energy capacity which typically has a high gestation period (Green, 2014).
The cumulative result of the above is a reduced global demand for uranium. This is reflected in the following diagram.
It is apparent from the above that due to the Fukushima incident and its devastating effect on nuclear energy, the demand for uranium plummeted. Hence, the demand curve has shifted towards the left from Dh to Di. In the short run, since the supply does not alter, the shifting of the demand curve leads to lower equilibrium price and equilibrium quantity as indicated by PI and QI respectively. The fall in price of uranium due to the factors discussed above was about 50% of the peak prices existing before this incident (Nicholson and Snyder, 2011).
Due to the falling demand which led to the decline in the prices, the uranium supply was also adversely impacted. This is primarily because the profit margins associated with uranium mining trimmed significantly and as a result plans for new mines were postponed since there was an apparent oversupply. Also, the mining companies (for instance Paladin Energy) that had only uranium in its product portfolio suffered huge losses and hence had to exit from the market which resulted in a marginal decrease in the overall supply of uranium. Till the time that the demand of uranium picks up again, it is expected that the uranium supply would remain stagnant at the current levels only (FOE, 2013). As a result of this, the supply curve would marginally shift towards the left but the same was insufficient to bridge the demand supply mismatch and hence the soft prices prevailed.
Since then, Japan had reopened two nuclear plants and it was expected that this would provide a boost to demand and also remove the negative sentiments associated with nuclear energy. However, the price remained stagnant despite this move by Japan. A possible explanation for this anomaly lies in the fact that major nuclear energy producers already have significant stockpiles and hence any fresh demand would be generated only when the existing stocks deplete (Cormack, 2014). Also, there is reduced demand from western nations (such as Europe & USA) which in wake of rising nuclear liability are making a transition to renewable energy sources. Besides, the stockpiles already stacked with Japan are so substantial that any new demand for incremental uranium is expected to arise only after years when the current stock is depleted. Hence, the developed world paints a very gloomy picture with regards to future demand of uranium in the near future (McHugh, 2016).
However, in this gloomy global demand scenario, the developing nations led by India and China are serving as beacons of hope for this sector along with stability in uranium markets. This is primarily because these nations have energy shortage and thus are looking at nuclear energy as one of the viable alternatives to ensure better accessibility to power. However, it is highly likely that China with the intention of increasing the overall national energy security instead of relying on supply of uranium from outside sources may instead buyout certain uranium mines so as to ensure that backward linkages are developed. Besides, the growing need of India and China for nuclear reactor is being partially fulfilled by Russia due to restrictions of nuclear reactor exports to certain markets (Green, 2014). Meanwhile, the advancements of technology in nuclear reactors are also expected to dampen the demand for uranium since with the advent of breeder reactors, the uranium usage efficiency has tremendously improved and as a result the requirement of uranium for production of per unit nuclear energy is decreasing (Green, 2016). Also, the time period required for putting a nuclear reactor into place and attaining critically typically entails years and may be a decade also. This implies that impact of various environmental accords and international greenhouse gas emission cuts would be limited in the near future as the fresh demand would emerge only when the nuclear plant is actually constructed. Thus, it is highly likely that the demand for uranium in the near future would continue to be lacklustre and hence the price would also not firm up unless there are some major disruptions in supply of uranium which seems unlikely as of now (Levit, 2016).
Conclusion
On the basis of the discussion carried out above, it is correct to conclude that the Fukushima incident led to a decrease in the uranium demand on account of safety concerns and this leading to decrease in price as the supply remained constant. However, plummeting prices had an adverse impact on the profitability of uranium miners which led some of them to close shop and hence supply reduced slightly. However, still there is an excess of supply due to which prices continue being soft. In the near future, the likely demand is expected to emerge from developing nations as developed nations are looking for renewable energy alternatives. Additionally, the emphasis on climate and global warming is expected to be positive for uranium demand but the same would actually transform into real demand only years later due to high gestation period involved. Thus, in the near future also, it is expected that uranium prices would continue to be soft.
References
Cormack. L. (2014), Uranium jumps as Japan reopens reactors, Retrieved on August 3, 2016 from https://www.afr.com/markets/commodities/uranium-jumps-as-japan-reopens-reactors-20141112-11l8li
FOE (2013), Uranium price slumps, Paladin Energy in trouble, Retrieved on August 3, 2016 from https://www.foe.org.au/uranium-price-slumps-paladin-energy-trouble
Green, J. (2014), Uranium − how low can it go?, Retrieved on August 3, 2016 from https://www.businessspectator.com.au/article/2014/5/29/energy-markets/uranium-%E2%88%92-how-low-can-it-go
Green, J. (2016), Australia’s uranium industry foundering – ?nearly dead, i Retrieved on August 3, 2016 from https://nuclearinformation.wordpress.com/2016/06/12/australias-uranium-industry-foundering-nearly-dead/comment-page-1/
Levit, D. (2016), Uranium Prices Recovery Could Take 10 Years, Retrieved on August 3, 2016 from https://www.economiccalendar.com/2016/05/13/uranium-prices-recovery-could-take-10-years/
Mankiw, G. (2014), Microeconomics (6th edition), London: Worth Publishers
McHugh, B. (2016), Uranium price increase around corner as China and India look to nuclear to reduce carbon emissions, Retrieved on August 3, 2016 from https://www.abc.net.au/news/2016-03-09/uranium-future-price-set-to-improve-as-new-plants-built/7232944
Nicholson, W. and Snyder, C. (2011), Fundamentals of Microeconomics (11th edition), New York: Cengage Learning
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