[Federal Register Volume 82, Number 88 (Tuesday, May 9, 2017)]
[Notices]
[Pages 21594-21631]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-09243]
[[Page 21593]]
Vol. 82
Tuesday,
No. 88
May 9, 2017
Part II
Department of Energy
-----------------------------------------------------------------------
Excess Uranium Management: Secretarial Determination of No Adverse
Impact on the Domestic Uranium Mining, Conversion, and Enrichment
Industries; Notices
Federal Register / Vol. 82 , No. 88 / Tuesday, May 9, 2017 /
Notices
[[Page 21594]]
-----------------------------------------------------------------------
DEPARTMENT OF ENERGY
Excess Uranium Management: Secretarial Determination of No
Adverse Impact on the Domestic Uranium Mining, Conversion, and
Enrichment Industries
AGENCY: Office of Nuclear Energy, Department of Energy.
ACTION: Notice.
-----------------------------------------------------------------------
SUMMARY: On April 26, 2017, the Secretary of Energy issued a
determination (``Secretarial Determination'') covering continued
transfers of uranium for cleanup services at the Portsmouth Gaseous
Diffusion Plant. The Secretarial Determination covers transfers of up
to the equivalent of 200 metric tons of natural uranium (``MTU'') in
the second quarter and up to 300 MTU per quarter in the third and
fourth quarters of 2017 and up to the equivalent of 1,200 MTU in 2018
and each year thereafter. For the reasons set forth in the Department's
``Analysis of Potential Impacts of Uranium Transfers on the Domestic
Uranium Mining, Conversion, and Enrichment Industries,'' which is
incorporated into the determination, the Secretary determined that
these transfers will not have an adverse material impact on the
domestic uranium mining, conversion, or enrichment industry.
DATES: Effective April 26, 2017.
ADDRESSES: The 2017 Secretarial Determination and supporting documents
are available on the Department's Web site at: https://energy.gov/ne/downloads/excess-uranium-management.
FOR FURTHER INFORMATION CONTACT: Ms. Cheryl Moss Herman, U.S.
Department of Energy, Office of Nuclear Energy, Mailstop NE-32, 19901
Germantown Rd., Germantown, MD 20874-1290. Phone: (301) 903-1788.
Email: [email protected].
SUPPLEMENTARY INFORMATION: The Department of Energy (DOE) holds
inventories of uranium in various forms and quantities--including
natural uranium--that have been declared as excess and are not
dedicated to U.S. national security missions. Within DOE, the Office of
Nuclear Energy (NE), the Office of Environmental Management (EM), and
the National Nuclear Security Administration (NNSA) coordinate the
management of these excess uranium inventories. Much of this excess
uranium has substantial economic value on the open market. One tool
that DOE has used to manage its excess uranium inventory has been to
enter into transactions in which DOE exchanges excess uranium for
services. This notice involves uranium transfers by the Office of
Environmental Management (EM) in exchange for cleanup services at the
Portsmouth Gaseous Diffusion Plant.
These transfers are conducted in accordance with the Atomic Energy
Act of 1954 (42 U.S.C. 2011 et seq., ``AEA'') and other applicable law.
Specifically, Title I, Chapters 6-7, 14, of the AEA authorizes DOE to
transfer special nuclear material and source material. LEU and natural
uranium are types of special nuclear material and source material,
respectively. The USEC Privatization Act (Pub. L. 104-134, 42 U.S.C.
2297h et seq.) places certain limitations on DOE's authority to
transfer uranium from its excess uranium inventory. Specifically, under
section 3112(d)(2) of the USEC Privatization Act (42 U.S.C. 2297h-
10(d)(2)), the Secretary must determine that the transfers ``will not
have an adverse material impact on the domestic uranium mining,
conversion or enrichment industry, taking into account the sales of
uranium under the Russian Highly Enriched Uranium Agreement and the
Suspension Agreement'' before DOE makes certain transfers of natural or
low-enriched uranium under the AEA.
On April 26, 2017, the Secretary of Energy determined that
continued uranium transfers for cleanup services at Portsmouth will not
have an adverse material impact on the domestic uranium mining,
conversion, or enrichment industry (``2017 Secretarial
Determination''). This determination covers transfers of up to the
equivalent of 200 metric tons of natural uranium (``MTU'') in the
second quarter and up to 300 MTU per quarter in the third and fourth
quarters of 2017 and up to the equivalent of 1,200 MTU in 2018 and each
year thereafter. The Secretary based his conclusion on the Department's
``Analysis of Potential Impacts of Uranium Transfers on the Domestic
Uranium Mining, Conversion, and Enrichment Industries,'' which is
incorporated into the determination. The Secretary considered, inter
alia, the requirements of the USEC Privatization Act of 1996 (42 U.S.C.
2297h et seq.), the nature of uranium markets, and the current status
of the domestic uranium industries, as well as sales of uranium under
the Russian HEU Agreement and the Suspension Agreement.
Issued in Washington, DC, on April 26, 2017.
Raymond Furstenau,
Acting Assistant Secretary for Nuclear Energy, Office of Nuclear
Energy.
The full text of the 2017 Secretarial Determination is set forth
below.
Secretarial Determination for the Sale or Transfer of Uranium
Since May 1, 2015, the Department of Energy (``Department,''
``DOE'') has transferred natural uranium and low-enriched uranium in
specified amounts and transactions, subject to a determination made on
that date pursuant to Sec. 3112(d)(2) of the USEC Privatization Act,
42 U.S.C. 2297h-10(d).
After reviewing the 2017 ``Analysis of Potential Impacts of Uranium
Transfers on the Domestic Uranium Mining, Conversion, and Enrichment
Industries,'' prepared by DOE, considering responses to the
Department's solicitations for public input, noting the Department's
goals regarding the projects being partly supported by uranium
transactions, and recognizing the Department's interest in maintaining
healthy domestic nuclear industries, I have concluded that the lower
rates of uranium transfers described herein are appropriate. I have
therefore determined to permit transfers only at the lower rates
described below.
Accordingly, I determine that the following uranium transfers will
not have an adverse material impact on the domestic mining, conversion,
or enrichment industry:
For the remainder of calendar year 2017, up to an additional 800
MTU contained in natural uranium hexafluoride, transferred to
contractors for cleanup services at the Portsmouth Gaseous Diffusion
Plant, in transfers of up to 200 MTU in the second quarter and up to
300 MTU per quarter in the third and fourth quarters.
For calendar year 2018 and thereafter, up to 1,200 MTU per calendar
year contained in natural uranium hexafluoride, transferred to
contractors for cleanup services at the Portsmouth Gaseous Diffusion
Plant, in transfers of up to 300 MTU per quarter.
I base my conclusions on the Department's 2017 ``Analysis of
Potential Impacts of Uranium Transfers on the Domestic Uranium Mining,
Conversion, and Enrichment Industries,'' which is incorporated herein.
As explained in that document, I have considered, inter alia, the
requirements of the USEC Privatization Act of 1996 (42 U.S.C. 2297h et
seq.), the nature of uranium markets, and the current status of the
domestic uranium
[[Page 21595]]
industries. I have also taken into account the sales of uranium under
the Russian HEU Agreement and the Suspension Agreement.
Dated: April 26, 2017.
Richard Perry,
Secretary of Energy.
Analysis of Potential Impacts of Uranium Transfers on the Domestic
Uranium Mining, Conversion, and Enrichment Industries
April 26, 2017
Executive Summary
The Department of Energy (``Department'' or ``DOE'') currently is
transferring excess uranium at a rate of 1,600 metric tons (MTU) per
year in exchange for cleanup services at the Portsmouth Gaseous
Diffusion Plant. A prerequisite to continuation of these transfers
after May 1, 2017, pursuant to the USEC Privatization Act, is a
determination by the Secretary of Energy that the planned transfers
will not have an adverse material impact on the domestic mining,
conversion, or enrichment industry. In support of a 2017 determination
the analysis below assesses the potential impact of planned transfers
going forward.
This analysis considers two different scenarios for planned
transfers of natural uranium (NU) for cleanup services at Portsmouth--
transfers of up to the equivalent of 1,600 MTU of NU for calendar years
2017 and thereafter (``Base Scenario''), and transfers at a rate of up
to 1,200 MTU per year beginning in May 2017 until the current stockpile
of natural uranium is exhausted. The Department concludes that
transfers at either rate will not have an adverse material impact on
the domestic mining, conversion, or enrichment industry. The Department
further notes that transfers at the lower rate of 1,200 MTU per year
will have lesser impacts than the Base Scenario.
In sum, for purposes of the Secretarial Determination, transfers
are deemed to have an ``adverse material impact'' if a reasonable
forecast predicts that an industry will experience ``material'' harm
that is reasonably attributable to the transfers. This analysis
compares the expected state of each industry in light of the planned
transfers to the expected state of each industry without the planned
transfers and examines to what degree the effects of DOE's future
planned transfers would impact the industries. In this case, the
Department regards an ``adverse material impact'' as a harm of real
import and great consequence, beyond the scale of what normal market
fluctuations would cause.
This analysis evaluates six factors for each industry: Changes to
prices; changes in production levels at existing facilities; changes to
employment in the industry; changes in capital improvement plans; the
long-term viability of the industry; and, as required by statute, sales
under certain agreements permitting the import of Russian-origin
uranium. The analysis relies on various inputs, including a report
prepared for the Department by consultant Energy Resources
International, Inc., market data and forecasts from several sources,
reports by other market consultants, and submissions in response to the
Department's requests for public comment.
The uranium mining industry serves the market for uranium
concentrates. DOE's transfers under the Base Scenario constitute 4% of
global demand and 13% of U.S. demand for uranium concentrates in the
near-term, 2017-2019. The Department forecasts, on the basis of results
from multiple economic models that transfers will tend to suppress
prices in the next decade by approximately $1.40 per pound, and in the
near-term (2017-2019) by approximately $1.60 per pound. These impacts
are about 6 or 7% of current spot market price. Transfers at the lower
rate of 1,200 MTU per year are expected to have a smaller effect. The
level of price suppression under either scenario is within the range of
recent market price fluctuations. The impact on production and
employment under either scenario in the industry will also be limited.
In the long-term, the Department concludes that the effect of its
transfers under either scenario would delay decisions to expand or
increase production capacity but would not change the eventual outcomes
in this regard.
The uranium conversion industry processes uranium concentrates into
uranium hexafluoride suitable for enrichment. DOE's transfers, under
the Base Scenario, constitute 4% of global demand and 14% of U.S.
demand for conversion services in 2017-2019. Most conversion is sold on
long-term contracts, and the sole domestic converter makes essentially
all of its sales that way. The Department concludes that the term price
will be relatively stable despite DOE's transfers. Although DOE
transfers are projected to cause a suppression of the global spot price
by about $0.30 per kgU in the next decade, about 5% of current spot
prices, the domestic industry has little exposure to the spot price. As
with uranium concentrates, transfers at the lower rate of 1,200 MTU per
year are expected to have lesser impacts. As a result the Department
concludes that its transfers under either scenario will have, at most,
limited impact on employment and plans for capital improvement and
expansion.
The enrichment industry provides enriched uranium, which has higher
levels of U\235\ than natural uranium. For context, this analysis also
discusses the effects of DOE's planned transfers of LEU, which are not
part of the action being approved by the Secretarial Determination.
This analysis concludes that the planned transfers of natural uranium
will not have a direct effect on the enrichment industry because
transfers of natural uranium only directly impact the uranium mining
and conversion industries. This analysis does take into account,
however, indirect effects, including the effects on operational
decisions in the enrichment industry potentially caused by a larger
supply of natural uranium. The Department concludes that production at
existing enrichment facilities and employment in the industry are
affected by the current imbalance in supply and demand, with only a
limited portion of that effect being reasonably attributable to DOE
transfers.
The Department has made its projections in recognition of current
conditions in the market, and acknowledges that these conditions have
been challenging for all three industries. Answering the analytical
question posed by section 3112(d)(2) of the USEC Privatization Act
requires a forecast of only the additional harm industry would suffer
that can reasonably be attributed to its future planned transfers of
uranium. The Department concludes that the potential effects to the
domestic uranium mining, conversion, and enrichment industries from
future transfers under either the Base Scenario or at the lower rate of
1,200 MTU per year will not constitute adverse material impacts.
Table of Contents
I. Introduction
A. Review of Procedural History
B. Legal Authority
C. Recent DOE Transfers and Excess Uranium Inventory
D. Transfers Considered in This Determination
II. Overview of Uranium Markets
A. The Nuclear Fuel Cycle
B. The Uranium Markets
C. The Nature of Demand for Uranium
D. The Nature of Uranium Supply
E. Uranium Prices
III. Analytical Approach
A. Overview
[[Page 21596]]
B. Factors To Be Considered
C. Comments on DOE's Analytical Approach
IV. Assessment of Potential Impacts
A. Uranium Mining Industry
B. Uranium Conversion Industry
C. Uranium Enrichment Industry
V. Other Comments
VI. Conclusion
I. Introduction
A. Review of Procedural History
The Secretary has periodically determined whether certain transfers
of natural and low-enriched uranium will have an adverse material
impact on the domestic uranium industries. DOE issued the most recent
Secretarial Determination under Section 3112(d) covering transfers for
cleanup at the Portsmouth Gaseous Diffusion Plant and down-blending of
highly-enriched uranium (HEU) to low-enriched (LEU) on May 1, 2015.\1\
The 2015 Secretarial Determination and Analysis recounted in detail the
history of prior DOE uranium transfers and the 2008 and 2013 DOE excess
uranium inventory management plans. Introductory information provided
in the 2015 Secretarial Determination and Analysis, and other
information as noted below, is incorporated by reference and repeated
here in part or updated as appropriate.
---------------------------------------------------------------------------
\1\ See Excess Uranium Management: Secretarial Determination of
No Adverse Impact on the Domestic Uranium Mining, Conversion, and
Enrichment Industries, 80 FR 26366 (May 7, 2015) (hereinafter 2015
Secretarial Determination), and the analysis incorporated by
reference in the 2015 Secretarial Determination (hereinafter 2015
Secretarial Determination and Analysis).
---------------------------------------------------------------------------
In preparation for this Secretarial Determination, DOE sought
information from the public through a Request for Information (RFI)
published in the Federal Register on July 19, 2016 (81 FR 46917). DOE
specifically requested comment on the uranium markets and the potential
effects of planned DOE uranium transfers on the domestic uranium
industries. In response to the RFI, DOE received comments from a
diverse group of parties representing interests across the nuclear
industry, including members of the uranium mining, conversion, and
enrichment industries, trade associations, nuclear utilities, local
governmental bodies, and members of the public.
In addition, DOE tasked Energy Resources International, Inc., (ERI)
to assess the potential effects on the domestic uranium mining,
conversion, and enrichment industries of the introduction of DOE excess
uranium inventory in various forms and quantities through sale or
transfer during calendar years 2017 through 2026 (``2017 ERI Report'').
On March 9, 2017, DOE published a Notice of Issues for Public
Comment (NIPC) in the Federal Register (82 FR 13106) (``NIPC''). That
notice announced the public availability of comments received in
response to the July 2016 Request for Information, the 2017 ERI Report,
and a list of factors for analysis of the impacts of DOE transfers on
the uranium mining, conversion, and enrichment industries. DOE received
comments from members of the uranium mining, conversion, and enrichment
industries, trade associations, and DOE contractors.\2\ Citations to
comments received in response to the RFI or NIPC are denoted by the
commenter and page number of comments submitted; e.g., ``NIPC Comment
of Uranium Producer, at 3,'' is found on page 3 of ``Uranium
Producer's'' comments submitted in response to the NIPC.
---------------------------------------------------------------------------
\2\ The 2017 ERI Report and the comments received in response to
the RFI and the NIPC are available at http://www.energy.gov/ne/downloads/excess-uranium-management. Some comments were marked as
containing confidential information. Those comments are provided
with confidential information removed.
---------------------------------------------------------------------------
B. Legal Authority
DOE manages its excess uranium inventory in accordance with the
Atomic Energy Act of 1954 (42 U.S.C. 2011 et seq., ``AEA'') and other
applicable law. Specifically, Title I, Chapters 6-7, 14, of the AEA
authorizes DOE to transfer special nuclear material and source
material. LEU and NU are types of special nuclear material and source
material, respectively. The USEC Privatization Act (Pub. L. 104-134, 42
U.S.C. 2297h et seq.) places certain limitations on DOE's authority to
transfer uranium from its excess uranium inventory. Specifically, under
Section 3112(d)(2)(B) of the USEC Privatization Act (42 U.S.C. 2297h-
10(d)(2)(B)), the Secretary must determine that certain transfers of
natural or low-enriched uranium ``will not have an adverse material
impact on the domestic uranium mining, conversion, or enrichment
industry, taking into account the sales of uranium under the Russian
Highly Enriched Uranium Agreement and the Suspension Agreement'' before
DOE makes these transfers under its AEA authority (hereinafter referred
to as ``Secretarial Determination'' or ``Determination''). Section
306(a) of Division D, Title III of the Consolidated and Further
Continuing Appropriations Act, 2015 (Pub. L. 113-235), limits the
validity of any determination by the Secretary under Section
3112(d)(2)(B) of the USEC Privatization Act to no more than two
calendar years subsequent to the determination.
Section 3112(e) of the USEC Privatization Act (42 U.S.C. 2297h-
10(e)), however, provides for certain transfers of uranium without the
limitations of Subsection 3112(d)(2). For example, under Subsection
3112(e)(2), the Secretary may transfer or sell enriched uranium to any
person for national security purposes. Nevertheless, this analysis
considers the impact of transfers made pursuant to Section 3112(e)
along with other DOE transfers in any determination made to assess the
adverse impacts of the Department's transfers under Section 3112(d).
C. Recent DOE Transfers and Excess Uranium Inventory
DOE has detailed its transfers up to 2014 in the 2015 Secretarial
Determination and Analysis.\3\ Pursuant to the 2015 Secretarial
Determination, DOE transferred 2,500 MTU NU equivalent in calendar year
2015, broken down as follows: 500 MTU of NU equivalent in the form of
LEU transferred for down-blending services and 2,000 MTU of NU
equivalent for cleanup services at the Portsmouth Gaseous Diffusion
Plant. From the beginning of calendar year 2016 until now, DOE has
transferred at a rate of 2,100 MTU per calendar year NU equivalent,
broken down as follows: Up to 500 MTU per year of NU equivalent in the
form of LEU transferred for down-blending services, with the balance
transferred for cleanup services at the Portsmouth Gaseous Diffusion
Plant. Transfers for cleanup services at the Portsmouth Gaseous
Diffusion Plant from January through April of 2017 have been about 530
MTU.
---------------------------------------------------------------------------
\3\ 2015 Secretarial Determination, 80 FR at 26367, 26366,
26369.
---------------------------------------------------------------------------
Table 1 provides an overview of DOE's inventory of excess uranium
as of December 31, 2016.
1. Current Excess Uranium Inventory
[[Page 21597]]
Table 1--Overview of DOE Excess Uranium Inventories as of December 31, 2016
----------------------------------------------------------------------------------------------------------------
NU equivalent
Inventory Enrichment level MTU million lbs. NU equivalent MTU
U3O8
----------------------------------------------------------------------------------------------------------------
Unallocated Uranium Derived from HEU/LEU 4.5 2.0 [dagger] 774
U.S. HEU Inventory.
Allocated Uranium Derived from U.S. HEU/LEU 8.6 4.2 [dagger] 1607
HEU Inventory.
U.S.-Origin NU as UF6............... NU 3,194 8.3 3,194
Russian-Origin NU as UF6............ NU 2,091 5.4 2,091
Off-spec UF6 as LEU................. LEU 1,218 5.2 2,015
Off-spec Non-UF6.................... NU/LEU 221 1.6 600
Depleted Uranium Hexafluoride (DUF6) DU 300,000 208-260 80,000-100,000
*.
----------------------------------------------------------------------------------------------------------------
[dagger] The NU equivalent shown for HEU is the equivalent NU within the LEU derived from this HEU, most of
which will be retained by DOE in the timeframe under consideration herein. This table includes LEU down-
blended from HEU and HEU that is to be down-blended or that is in the process of being down-blended.
* DUF6 quantity is based on uranium inventories with assays greater than 0.25% U \235\ but less than 0.711% U
\235\. The amount of NU equivalent is subject to many variables, and a large range has been shown to reflect
this uncertainty. DOE has additional DUF 6 inventory that is equal to or less than 0.25% U \235\ that is not
reported in this Table.
D. Transfers Considered in This Determination
This section provides an overview of the various uranium
transactions considered in this analysis. The first category are
transfers that DOE plans to undertake during the next two years
pursuant to today's determination under section 3112(d). The second
category includes other transfers that have been made or may be made
that are not subject to section 3112(d), but which may be relevant to
DOE's analysis of the possible impacts of transfers in the first
category. The third category includes transfers that may be subject to
section 3112(d) but do not impact the commercial domestic uranium
markets, and are included for completeness without further
consideration. The fourth category are transfers made under the Russian
HEU Agreement and Suspension Agreement, which do not directly involve
DOE, but are considered as required under section 3112(d).
1. Planned Transfers Covered by This Secretarial Determination Under
Section 3112(d)
Today's determination concludes that transfers of natural uranium
for cleanup services at the Portsmouth Gaseous Diffusion Plant at the
rate of 1,200 MTU per year will not cause an adverse material impact on
the domestic uranium industries.
Through its Office of Environmental Management (EM), DOE contracts
with Fluor- BWXT Portsmouth for cleanup services at the Portsmouth
Gaseous Diffusion Plant. This work involves decontamination and
decommissioning of approximately 415 facilities (including buildings,
utilities, systems, ponds, and infrastructure units) that make up the
former uranium enrichment facility. In recent years, work under this
contract has been funded through both appropriated dollars and uranium
transfers. As the value of transferred uranium changes depending on
market prices and on the Department's decisions regarding how much
uranium to transfer, uranium can constitute a greater or lesser
proportion of the total funding.
This analysis considers planned transfers of natural uranium
hexafluoride for cleanup services at the Portsmouth Gaseous Diffusion
Plant under two scenarios. The first scenario consists of continued
transfers at the current rate of 1,600 MTU per year until the
Department's natural uranium supplies are exhausted in 2020. The second
scenario consists of transfers for the remainder of calendar year 2017
and thereafter, at a rate of 1,200 MTU per year, until the Department's
uranium supplies are exhausted in 2021. This scenario accounts for
transfers that have already occurred in 2017 at the higher rate of
1,600 per year and initiates the lower rate of 1,200 MTU per year
beginning May 2017.
2. Uranium Transfers Considered But Not Covered by This Secretarial
Determination
In addition to transfers described above, this analysis considers
several transfers that are not covered by today's determination, for
various reasons. Although some of these transfers are not subject to
section 3112(d), this analysis considers the potential impacts on
domestic industries and the expected impacts of those yet to be carried
out, to provide a complete picture of the Department's uranium
transfers.\4\
---------------------------------------------------------------------------
\4\ The 2015 Secretarial Determination also considered uranium
transfers under the TVA BLEU program, a program dating from 2005
where TVA has been blending off-spec HEU from the NNSA for use in
its reactors. Since 2015, NNSA has not finalized plans for
additional down-blending of off-spec HEU, and therefore there are no
further transfers of material associated with the TVA BLEU program
in the 2017 to 2026 time period. 2017 ERI Report, 22, 23.
---------------------------------------------------------------------------
i. NNSA Transfers for HEU Down-Blending
As discussed in the NIPC, NNSA transfers of LEU for HEU down-
blending services were determined to serve a national security purpose
in supporting the Department's nonproliferation goals and are thus
covered by Section 3112(e)(2). Pursuant to Section 3112(e), these
transfers for down-blending purposes no longer require a Secretarial
Determination under Section 3112(d). However, this analysis still
considers proposed NNSA LEU transfers of 500 MTU per year from 2017 to
2019 for the purposes of assessing the impact of DOE's natural uranium
transfers for EM cleanup services at the Portsmouth Gaseous Diffusion
Plant.
ii. Depleted Uranium Hexafluoride to Energy Northwest
This analysis considers uranium transfers made in the past that
continue to displace commercial supply. In 2012 and 2013, DOE
transferred 9,075 MTU of high assay depleted uranium hexafluoride
(DUF6) tails to Energy Northwest. Energy Northwest then
contracted with USEC, Inc.--now known as Centrus Energy Corp.--to
enrich the tails to LEU. Energy Northwest sold most of the resulting
LEU to TVA, for use in its reactors between 2015 and 2022. Energy
Northwest retained the remaining LEU for us in its own reactors. DOE
accepted title to 8,582 MTU of secondary tails resulting from the
enrichment of the high-assay tails.
iii. Depleted Uranium Hexafluoride to Global Laser Enrichment and Off-
Spec Inventory Transfers
This analysis also considers certain planned and future DOE
transfers which are outside of the two-year window of
[[Page 21598]]
the Secretarial Determination. In July 2013, DOE issued a Request for
Offers (RFO) for the sale of depleted and off-specification uranium
hexafluoride inventories. These inventories include large amounts of
high-assay and low-assay DUF6, approximately 538 thousand
MTU of DUF6 in over 65,000 cylinders located, and smaller
amounts of ``off-spec'' (meaning material that does not meet American
Society for Testing and Materials specifications) uranium hexafluoride,
approximately 1,106 MTU contained in 239 cylinders, located at DOE's
Portsmouth and Paducah sites.
Previously, in 2008, a DOE contractor issued a Request for
Proposals for the sale and disposition of off-specification, non-
UF6 uranium located at Portsmouth. This inventory consists
of approximately 4,461 MTU of uranium in various forms, including
metal, oxides, fluoride, and aqueous solution.
Following the July 2013 RFO, DOE entered into negotiations with GE-
Hitachi Global Laser Enrichment, LLC (GLE) for the sale of the
DUF6, which resulted in an agreement in November 2016.
Subject to the terms and conditions of the agreement, in 2024, DOE
expects to begin annual transfers of depleted uranium to GLE, in an
amount equal to 2,000 MTU of NU equivalent. GLE would enrich the
depleted uranium to NU at a new laser enrichment facility it intends to
build near the Paducah site.
Also in connection with the July 2013 RFO, DOE announced in
November 2013 that it would enter into negotiations with AREVA for the
sale of off-spec uranium hexafluoride in the form of LEU.
To date, the proposed sales of off-specification LEU and off-
specification non-UF6 have not been concluded. If concluded,
DOE expects that off-spec LEU in an amount equal to approximately 456
MTU as natural uranium equivalent would enter the market in 2020, and
off-spec non-UF6 in an amount equal to approximately two MTU
as NU equivalent would enter the market in 2021 or 2022.
iv. Uranium Transfers for Research Applications and Medical Isotope
Production
DOE also transfers LEU enriched to assays between 5 and 20 wt-%
U\235\ (hereinafter high-assay LEU) for domestic and foreign research
applications. Most of these transfers are conducted in accordance with
section 3112(e) of the USEC Privatization Act, such as transfers to
domestic and foreign research reactors; however, some may fall within
section 3112(d), such as transfers for use in commercial research and
isotope production applications. DOE issued two Secretarial
Determinations under section 3112(d) to cover transfers of high-assay
LEU in connection with the development and demonstration of, and the
establishment of production capabilities for, respectively, the medical
isotope molybdenum-99.\5\
---------------------------------------------------------------------------
\5\ See Excess Uranium Management: Secretarial Determination of
No Adverse Impact on the Domestic Uranium Mining, Conversion, and
Enrichment Industries, 80 FR 65727 (October 27, 2015), and Excess
Uranium Management: Secretarial Determination of No Adverse Impact
on the Domestic Uranium Mining, Conversion, and Enrichment
Industries, 81 FR 1409 (January 12, 2016).
---------------------------------------------------------------------------
In general, these transfers of high-assay LEU do not contribute to
any impacts that DOE uranium transfers overall have on domestic uranium
industries because the transfers do not displace commercially supplied
uranium, conversion, or enrichment from the market. No commercial
supplier is currently capable of providing high-assay LEU, so a
research reactor operator would not be able to replace DOE-sourced
material by buying uranium hexafluoride and having it enriched to those
levels. In general, it would also be technologically infeasible for
research reactor operators to replace DOE-sourced high-assay LEU by
converting the reactors to use commercial-assay LEU and retain the
ability of the reactor to be used for research. Even if these reactors
could use LEU (either at high or low assay) from commercial suppliers,
the amounts are extremely small. Thus, DOE's supply of high-assay LEU
for research applications and medical isotope production has at most a
de minimis effect on the commercial uranium markets, and this analysis
therefore does not consider these transfers further.
3. Transactions Under Russian HEU Agreement and Suspension Agreement
As explained above, section 3112(d) of the USEC Privatization Act
states that a Secretarial Determination must take into account the
sales of uranium under two agreements relating to uranium from the
Russian Federation: The Agreement Between the Government of the United
States of America and the Government of the Russian Federation
Concerning the Disposition of Highly Enriched Uranium Extracted from
Nuclear Weapons, Feb. 18, 1993 (``Russian HEU Agreement''), and the
Agreement Suspending the Antidumping Investigation on Uranium from the
Russian Federation, 57 FR 49220, at 49235 (Oct. 30, 1992) (``Suspension
Agreement'').
The 2015 Secretarial Determination and Analysis detailed the
history of transfers which have taken place under the Russian HEU
Agreement, the last of which took place in 2013, and those which may
occur in the future under the Suspension Agreement. The specific
volumes of uranium, conversion, and enrichment allowed into the United
States from Russia under the Suspension Agreement are discussed below.
Material imported under the Suspension Agreement would not involve DOE
transfers but would be accounted for in the various projections and
models of the uranium markets that are considered in this analysis.
Two developments with respect to the Suspension Agreement since the
2015 Secretarial Determination bear mention. First, the Suspension
Agreement requires the Department of Commerce to adjust the export
limits in 2016 and 2019 to take account of changes in projected reactor
demand for uranium, and Commerce proposed such adjustments in September
2016 and requested comment from interested parties. Letter from Sally
C. Gannon, International Trade Administration, Department of Commerce,
Sept. 9, 2016. The proposed adjusted export limits are, on average, 6.6
percent above current limits over the remaining years of the agreement.
Commerce has not yet issued final adjusted export limits.
Second, the Suspension Agreement requires Commerce to conduct
sunset reviews in 2011 and 2016. In February 2017, the Department of
Commerce initiated the fourth sunset review. 82 FR 9193 (Feb. 3, 2017).
Commerce expects to issue final results of this review within 120 days
of publication of the initiation. In the previous five-year review,
Commerce determined that termination of the Suspension Agreement and
underlying anti-dumping investigation would likely lead to a
continuation or recurrence of dumping and therefore declined to
terminate the Agreement. 76 FR 68404, at 68407 (Nov. 4, 2011). DOE's
analysis assumes that the Suspension Agreement will remain in effect
through 2020.
II. Overview of Uranium Markets
The nuclear fuel market consists of four separate industries:
Mining/milling, conversion, enrichment, and fabrication. These
industries interact in complicated and sometimes counterintuitive ways.
In order to analyze the effect on the various industries of introducing
a given amount of uranium into the market, it is necessary to
understand how uranium is processed into nuclear fuel, how the
different aspects of this process interact,
[[Page 21599]]
and how the consumers of uranium--nuclear reactor owners/operators--
procure uranium. This section provides an overview of these industries
and markets, beginning with the process for producing nuclear fuel from
uranium ore. The 2015 Secretarial Determination and Analysis discussed
the primary players and drivers of the U.S. uranium industries. As in
section I of this analysis, the information in this section
incorporates by reference and repeats in part the information provided
in the 2015 Secretarial Determination and Analysis, updated as
appropriate.
A. The Nuclear Fuel Cycle
In order to be useful as fuel for a reactor, uranium must be in a
specific chemical form, it must have the correct isotopic
concentration, and it must be fabricated into the correct physical
shape and orientation.
1. Mining
The first step in the nuclear fuel cycle is mining. Uranium is
relatively common throughout the world and is found in most rocks and
soils at varying concentrations. There are two primary methods of
mining uranium: Conventional and in-situ recovery. Which method is used
for a particular deposit depends on the specific characteristics of the
deposit and surrounding rock. Conventional mining can involve either
open pit or underground removal of uranium ore. Once removed from the
ground, the uranium ore must be transported to a mill for processing.
Many mining operations are located close to mills; where mines are
close together, one mill may process ore from several different mines.
Once at the mill, the ore is crushed and chemically treated to remove
the uranium from the other minerals, a process called ``leaching.'' The
solids are then separated from the solution and dried. The final result
is a powdered uranium oxide concentrate, often known as ``yellowcake''
and predominately made of triuranium octoxide, or
U3O8. This powdered yellowcake can be packed in
drums and shipped for the next stage of processing.
An alternative mining process is known as in-situ recovery (ISR).
In ISR mining, the uranium ore is not removed from the ground as a
solid. Instead, an aqueous solution--either acid or alkali--is pumped
into the ground through injection wells, through a porous ore deposit,
and back out through production wells. As the solution moves through
the ore deposit, the uranium in the ore dissolves or leaches into the
solution. Once the uranium-laden solution is pumped out, it is pumped
to a treatment plant where uranium is recovered and dried into
yellowcake. In order to maintain a stable rate of production,
wellfields must be continually developed and placed into production.
There are several key differences between conventional and ISR
mines. ISR mining typically has lower costs, both capital and
operational. ISR mines also have a shorter lead-time for development.
There are other advantages compared to conventional mining such as
decreased radiation exposure for workers, reduced surface disturbance,
and reduced solid waste. However, ISR mining can only extract uranium
located in deposits that are permeable to the liquid solution used to
recover the uranium, and the permeable deposit must have an impermeable
layer above and below to prevent the solution from leaching into
groundwater. To the extent that uranium is located in other types of
deposit, ISR mining may not be possible.
2. Conversion
The second step in the nuclear fuel cycle is conversion. When
yellowcake arrives at conversion facilities it may contain various
impurities. Conversion is a chemical process that refines the uranium
compounds and prepares it for the next stage.
As discussed in the next section, most nuclear reactors require
uranium that is enriched in the isotope U\235\.\6\ The enrichment
process typically requires uranium to be in a gaseous form. To meet
this need, U3O8 is converted into uranium
hexafluoride (UF6), which sublimes--i.e. converts directly
from solid to gas--at a temperature (at normal atmospheric pressure) of
approximately 134[emsp14][deg]F (56.5 [deg]C). The UF6 is
then loaded into large cylinders and shipped to an enrichment facility.
---------------------------------------------------------------------------
\6\ Some nuclear reactors, particularly pressurized heavy water
reactors, may use natural uranium.
---------------------------------------------------------------------------
3. Enrichment
The third step in the nuclear fuel cycle is enrichment. As found in
nature, uranium consists of a mixture of different uranium isotopes.
The two most significant isotopes are U\235\ and U\238\. The relative
concentration of the various isotopes of uranium in a given amount is
referred to as the isotopic concentration or ``assay.'' \7\ NU consists
of approximately 0.711% U\235\, 99.283% U-238, and trace amounts of U-
234.
---------------------------------------------------------------------------
\7\ The measure of assay is sometimes referred to in terms of
``weight-percent'' or ``wt-%.''
---------------------------------------------------------------------------
Nuclear reactors typically require uranium that is enriched in the
isotope U\235\, meaning that it has a higher concentration of U\235\
compared to natural uranium. Commercial light water reactors, which are
the most common type of nuclear reactor, typically require an assay of
3% to 5% U\235\. Uranium enriched in the isotope U\235\ is referred to
as LEU if the assay is less than 20% but above 0.711%, and as HEU if
the assay is greater than 20%.
There are many different enrichment processes, but only two have
been used commercially: Gaseous diffusion and gas centrifugation.
Currently, all commercial enrichment services use gas centrifuge
technology; the last commercial-scale gaseous diffusion facility ceased
operating in 2013. After UF6 arrives from a conversion
facility, this UF6 or ``feed'' is introduced into the
enrichment centrifuges. The centrifuges exploit the slight mass
difference between U\235\ and U\238\ atoms and separate the isotopes
into varying levels of enrichment. Two streams of material are
produced: Product and tails. The product is the enriched UF6
or LEU output (also referred to as Enriched Uranium Product or EUP),
which is pumped into a 2.5 ton cylinder and shipped to a fabrication
facility. To achieve a concentration increase from 0.711% to 5% in a
centrifuge, material passes sequentially through many stages of
centrifugation.
Just as the product stream has a higher proportion of U\235\ to U-
238 than the original feed, the other stream, the tails, has a lower
proportion of U\235\ to U\238\. This material is sometimes referred to
as ``depleted.'' The assay of U\235\ in the tails from an enrichment
process depends on what concentration of U\235\ was needed in the
enriched product and how much natural uranium was used as feed. Typical
tails assays range from 0.1 wt-% to 0.4 wt-%. Tails are pumped into
large (typically 10 or 14 ton) cylinders and then stored on-site at the
enrichment facility for eventual disposal or other use. Some depleted
uranium may be of value to the market depending on the assay level,
cost to re-enrich and other market conditions.
Enrichment services are sold in ``separative work units'' (SWU).
One SWU is the amount of effort it takes to enrich uranium of a given
isotopic concentration to a specified enriched level with a specified
tails assay for the depleted uranium.
4. Fabrication
The final step in the process is fabrication. Almost all commercial
nuclear reactors require fuel to be in the form of uranium dioxide
(UO2). At the fabrication facility, the enriched
UF6 is converted into UO2 powder, and then formed
into small ceramic pellets. These
[[Page 21600]]
pellets are then loaded into metal tubes and attached together to form
fuel assemblies. Fuel design is reactor specific, and thus each fuel
assembly is manufactured to the unique specifications of the reactor
operator. Although fabrication is an important step in the fuel cycle,
this analysis does not cover effects in the fabrication market.
5. Secondary Supply
Uranium that undergoes the above-described four steps without any
intermediate use is generally termed ``primary supply.'' However, there
are other sources of uranium available in the market. Uranium from
these other sources is collectively known as ``secondary supply'' and
may include government inventories of uranium, commercial inventories
(some strategic and some resulting from shutdown nuclear power plants),
uranium produced by re-enriching depleted tails, and uranium resulting
from enricher underfeeding. An additional source of secondary supply is
from recycled uranium and plutonium either from reprocessing of
commercial spent fuel or from weapons-grade plutonium disposition. The
product of these processes enters the fuel cycle and is fabricated into
mixed oxide (MOX) fuel.
Most secondary supply comes from utilization of excess enrichment
capacity by underfeeding or re-enriching tails. Due to technical
constraints, enrichers generally cannot easily decrease capacity that
is already constructed and operating. If an enricher were to shut down
a centrifuge that is currently spinning, it may not be possible to
restart the centrifuge. Doing so would risk damaging the machine and
destroying the substantial capital investment. As a result, enrichers
that have unsold capacity will tend to apply the excess enrichment work
in one of two ways.
First, enrichers can apply extra separative work to a given amount
of uranium feed material, thus extracting more of the U\235\. This is
known as ``underfeeding'' because it enables the production of a given
amount of enriched product with a smaller amount of feed material.
Normally, a purchaser of enrichment services seeking a specific amount
of enriched product would need to determine (1) how much natural
uranium feed to provide and (2) how much SWU to apply to it. Increasing
the amount of enrichment services has a cost, but the additional work
will extract more of the U\235\ content of the feed material so that
less feed material is needed, at less cost. The relationship between
the prices of uranium concentrates, conversion, and enrichment can be
used to determine the amount of feed and SWU--and thus also the
resulting tails assay that will lead to the lowest cost per kilogram of
enriched product. This is known as the ``optimal tails assay.'' If an
enricher has excess capacity, it may choose to feed in a smaller amount
of natural uranium and apply more SWU to that material than was
purchased. Thus, the end result is the customer's desired amount of
enriched product plus depleted tails as well as the natural uranium
that was delivered to the enricher but not fed into the enrichment
process. The enricher can then sell this excess natural uranium on the
open market.
Second, enrichers can feed depleted tails back into the enrichment
process and apply additional separative work to them. This is known as
re-enrichment of tails. Over time, depleted tails may accumulate and an
enricher may choose to feed them back into the enrichment process.
These tails can be enriched up to the level of natural uranium (0.711%)
or higher. The enricher may then sell the resulting natural uranium or
LEU on the open market.
6. Note on Units
Uranium concentrates are generally measured in pounds
U3O8, conversion services are generally measured
in kgU as UF6, and enrichment services are measured in SWU.
It is worth noting that the measures of uranium concentrates and
conversion services are not identical for several reasons. In addition
to the fact that one is denominated according to U.S. customary units
and the other is denominated under the international system of units
(SI), the measure of uranium concentrates refers to the mass of
U3O8 whereas the conversion metric refers only to
the mass of the uranium atoms. Only about 85% of the mass of
U3O8 consists of uranium. Thus, one kilogram of
U3O8 contains approximately 0.848 kgU.
Furthermore, converting between pounds U3O8 and
kgU as UF6 must take into account an estimated 0.5% loss
during the conversion process. Taking all this into account, one pound
U3O8 is equivalent to 0.383 kgU as
UF6, and one kgU as UF6 is equivalent to 2.61
pounds U3O8.
Converting between uranium concentrates or conversion services and
enrichment is more difficult because the amount of SWU necessary to
produce a given amount of product depends on the desired product assay,
the feed assay, and the tails assay. An example will serve to
illustrate the significance of different assumptions. Assuming a tails
assay of 0.30%, enriching 1,000 kgU as UF6 of natural
uranium to an assay of 4.50% would require approximately 609.7 SWU and
would yield 97.9 kgU of enriched uranium; if a tails assay of 0.20% is
used instead, enrichment would require approximately 913.9 SWU and
would yield 118.8 kgU of enriched uranium.
DOE typically describes its uranium inventory in terms of MTU for
natural uranium and MTU ``natural uranium equivalent'' for depleted and
enriched uranium. These terms have a slightly different meaning
depending on the form. For natural UF6--i.e. with an assay
of 0.711%--1 MTU would represent 2,610 pounds
U3O8, 1,000 kgU as UF6 of conversion
services, and 0 SWU. For enriched or depleted UF6, the
amount of natural uranium equivalent depends on the assay. For depleted
UF6, DOE calculates natural uranium equivalent as the amount
of natural uranium product that could be produced by re-enriching the
depleted material. For the purposes of this analysis, DOE assumes the
enrichment process would use a tails assay of 0.20%. As an example,
1,000 MTU of DUF6 with an average assay of 0.40% would yield
approximately 390 MTU natural uranium equivalent. For LEU, DOE
calculates natural uranium equivalent as the amount of natural uranium
that would be needed as feed material to produce the LEU, given the
assay of the LEU and assuming a tails assay of 0.20% and a feed assay
of 0.711%. For LEU resulting from down-blending of HEU, DOE then
subtracts out the amount of natural uranium feed--``diluent''--that is
necessary to down-blend the HEU to the desired product assay. The
amount of diluent required is typically equivalent to approximately 10%
of the natural uranium that would be needed as feed for enrichment.
This subtraction is appropriate for purposes of section 3112(d)
analysis to indicate how much natural uranium a given amount of LEU
would displace from the market. Because DOE's contractor procures
diluent on the market (rather than from DOE inventory) in order to
produce the transferred LEU, the transfer displaces that much less
commercially supplied natural uranium.
B. The Uranium Markets
1. The Uranium Markets Are Separate, But Interrelated
Uranium concentrates, conversion services, and enrichment services
are traded in separate markets, with the demand for each tied to both
technical specifications and utility procurement strategies. Prices for
uranium
[[Page 21601]]
concentrates are typically quoted in terms of dollars per pound
U3O8. Prices for conversion services are
typically quoted in terms of dollars per kilogram uranium (kgU). Prices
for enrichment services are typically quoted in terms of dollars per
SWU.
A typical transaction may involve a single purchaser purchasing a
given amount of uranium concentrate through a contract directly with
the mining company. The uranium concentrate is typically delivered
directly to a conversion facility rather than to the purchaser. The
purchaser will also enter into a separate contract for conversion
services. The terms of this contract will require the purchaser to
deliver U3O8 to the converter, and the converter
will provide UF6 in return. The UF6 will then be
shipped directly to an enricher. As with conversion, the purchaser will
enter into a separate contract for SWU from an enricher. Contracts
terms vary, but this contract will likely require the purchaser to
deliver a specific amount of natural UF6 feed and the
enricher to deliver a specific amount of UF6 enriched to the
desired assay. This LEU will typically be delivered directly to the
fabricator to be made into nuclear fuel.
Although there are separate markets for each step in the process,
the different steps are sometimes combined. It is possible to buy
natural UF6, which would reflect both the uranium
concentrate and the conversion services. Similarly, it is possible to
buy enriched UF6--usually known as enriched uranium product
(EUP)--which would reflect all three steps. The price for these
products is typically developed by adding the cost of the various steps
together. Thus, the price of EUP would be based on the price of an
equivalent amount of uranium concentrates, conversion, and enrichment.
In practice, however, the price of a product material, like EUP or
natural UF6, may occasionally differ somewhat from the sum
of the input prices. In addition, the price of a product material
reflects transaction and shipping costs needed to move material through
the various steps.
In addition, even though the three components are traded
separately, there is some interrelationship between the prices. Since
optimal tails assay is a function of the relative price of uranium
concentrates, conversion, and SWU, changes in one price can lead to
shifts in demand and supply in the other markets. Similarly, excess
enrichment capacity used for underfeeding or re-enrichment of tails
increases supply of uranium concentrates and conversion services. Thus,
changes in enrichment supply may contribute to changes in uranium
concentrate and conversion prices.
2. Uranium Is Fungible
Uranium at each stage of the fuel cycle is fungible. As long as the
basic characteristics like form and assay are the same, one kilogram of
material is essentially the same as any other.\8\ Accounting mechanisms
allow the ownership of each kilogram of material to be traceable, and
they also allow ownership to be exchanged freely without physically
manipulating the material.
---------------------------------------------------------------------------
\8\ Other important characteristics include the presence and
concentration of contaminants, some of which can render material
unusable as nuclear fuel. Industry standards specify the acceptable
levels of contamination.
---------------------------------------------------------------------------
A simple example illustrates the types of transaction that this
fungibility enables. After U3O8 is converted into
UF6, it will typically be shipped to a specific enrichment
facility. If the uranium was mined and converted in North America, it
will typically be sent to an enricher in North America. However, the
purchaser is not necessarily required to purchase enrichment services
from the company whose facility the material is shipped to. Instead,
the purchaser may be able to exchange ownership of an amount of
UF6 located at a North American enrichment facility with an
equivalent amount located at a facility in Europe. This is referred to
as a ``book transfer.''
An entity can also sell conversion services or enrichment services
without actually physically converting or enriching any material. A
person that owns enriched UF6 may enter into a contract to
sell SWU whereby it provides the desired amount of enriched
UF6 in exchange for the cost of the SWU and a specific
amount of natural UF6 feed. A person can also use natural
UF6 to sell conversion services by exchanging it for the
cost of the conversion services plus the equivalent amount of
U3O8.
3. The Uranium Markets Are Global
Uranium, conversion, and enrichment markets are generally global in
nature. Purchasers are able to buy from suppliers worldwide and vice
versa. Pricing for uranium concentrates and enrichment are essentially
the same worldwide. Shipping costs are relatively low compared to other
components of the prices, and the fungibility of the material allows
suppliers and purchasers to minimize shipping costs through book
transfers.
Although conversion services also trade on a worldwide market, in
recent years there has been a persistent difference between prices in
North America and those in Europe. DOE believes this stems from a
geographical imbalance in conversion capacity relative to enrichment
capacity. There is more conversion capacity in North America than
enrichment capacity, and conversely in Europe there is more enrichment
than conversion capacity. Consequently, there is a regular net flow of
conversion services from North America to Europe. Meanwhile, it seems
likely that the cost of shipping is larger relative to the conversion
price than it is relative to the price of uranium or enrichment--mainly
because conversion is the least costly input among the three. DOE
believes the price difference between North American conversion and
European conversion reflects simply the additional cost of shipping
converted material from North America to Europe, together with the fact
that net flow is from North America to Europe.
C. The Nature of Demand for Uranium
1. Utility Use and Procurement of Uranium
The vast majority of uranium in commercial use is fuel for
commercial power generation. According to the International Atomic
Energy Agency (IAEA), there are 449 commercial reactors operating
worldwide, 99 of these are in the United States.\9\ The total installed
electricity generation capacity of all reactors worldwide is 392,232
MWe (megawatt electrical), 99,869 MWe of which is
from U.S. reactors. Id.
---------------------------------------------------------------------------
\9\ See IAEA, ``Power Reactor Information System,'' March 2017,
http://www.iaea.org/pris/ (accessed March 24, 2017).
---------------------------------------------------------------------------
Nuclear reactors typically provide what is known as ``baseload''
electricity supply. This means that nuclear reactors generally operate
close to their full practical capacity continuously. Thus, the amount
of uranium needed for each reactor in a given year does not generally
fluctuate with electricity use patterns. It depends instead on the
total capacity of the reactor and the fuel reload schedule. Reload
schedules vary, but reactors typically must reload a portion of the
total fuel in the core every 18 to 24 months.
According to the World Nuclear Association (WNA), a typical 1,000
MWe light water reactor operating today requires
approximately 24 MTU of LEU at an assay of 4% each year. At a tails
assay of 0.25%, this corresponds to approximately 140,000 SWU of
[[Page 21602]]
enrichment, 195,000 kgU of conversion services, and 510,000 pounds
U3O8.\10\
---------------------------------------------------------------------------
\10\ See WNA, ``The Nuclear Fuel Cycle,'' March 2017, http://www.world-nuclear.org/information-library/nuclear-fuel-cycle/introduction/nuclear-fuel-cycle-overview.aspx/ (accessed April 5,
2017).)
---------------------------------------------------------------------------
For a given reactor operator, this predictability enables the
operator to purchase uranium, conversion, and enrichment on long-term
contracts. These contracts often have first delivery as much as five
years in the future and can extend as long as ten or even fifteen years
from the contract date. In addition, because shutting down a reactor
for refueling is a complex and carefully orchestrated process that
requires extensive planning, a reactor operator generally has strong
incentives to ensure well in advance of each refueling that the reactor
will be sufficiently supplied with fuel. Long-term contracts help meet
that goal by providing a reactor operator guaranteed quantities of
supply. Consequently, the vast majority of purchases of uranium
concentrates, conversion, and enrichment are through term contracts.
A utility's procurement goal is to secure supply of nuclear fuel
from reliable sources at competitive prices. When purchasing fuel,
utilities generally seek bids for nuclear fuel products and services
and assess those bids against the current portfolio of contracts and
inventory, balancing a number of objective and subjective criteria
related to security of supply as well as cost. To enhance reliability,
U.S. utilities may seek a diversity of suppliers in uranium, conversion
and enrichment. U.S. utilities are generally able to purchase from
suppliers worldwide, subject to trade and export licensing constraints
or trade remedies such as the Russian Suspension Agreement. Utility
fuel purchase contracts must also be consistent with U.S. non-
proliferation commitments such as those in 123 Agreements and export-
related regulations. There is currently no U.S. policy regarding
reliance on foreign suppliers providing nuclear fuel to U.S. utilities.
2. Uranium Requirements
As noted above, the amount of fuel necessary to keep a reactor
operating is relatively predictable. Although there is always the
possibility of unplanned outages, reactor operators generally know how
much enriched uranium they will need. The amount of uranium needed to
fuel operating reactors is generally referred to as ``requirements.''
Small uncertainties in predictions about requirements are possible in
the short run because an operator can vary its need for fuel to some
degree by changing operating conditions.
Aggregate requirements are also relatively predictable. However,
long-term projections of future requirements must take into account
changes in requirements from short-term outages, permanent shutdowns,
and new reactor construction. Unforeseen events, such as an unplanned
shutdowns, can affect the accuracy of long-term projections. Various
entities develop and publish projections of future uranium requirements
based on different assumptions about the rates of these changes, as
well as different assumptions about operating conditions like reload
schedules and fuel utilization (``burnup''), and about the possibility
of unplanned outages or other temporary fluctuations in nuclear fuel
use. These requirements forecasts typically are based only on the
nuclear fuel expected to be used in operating reactors; they do not
include purchases of strategic or discretionary inventory. Other
forecasts may include these strategic or discretionary purchases--these
may be referred to as ``demand'' forecasts.
3. Requirements Versus Demand
Demand for uranium, conversion, or enrichment is generally not the
same as reactor requirements in a given year. Some sources of demand
are either in excess of or unconnected to reactor requirements. For
example, many reactor operators hold strategic inventories of uranium
beyond their requirements. This material provides flexibility in the
event of a supply disruption. Different operators may have different
strategic inventory policies, and those policies will shift over time.
Changes in the level of strategic inventories held by individual
reactors can produce additional demand or remove demand. Demand from
reactor operators purchasing uranium for strategic inventory is
commonly referred to as ``discretionary demand.''
In addition to reactor operators purchasing in excess of demand,
there are a number of market participants that do not operate reactors
at all. These include traders, brokers, and investment funds. These
entities may purchase uranium when prices are low and resell it under
future delivery contracts. Discretionary purchases are likely to be
driven by spot price considerations and can constitute a large
percentage of spot market purchases and thus can be a large driver of
spot market price indicators. These activities mostly involve only
uranium concentrates. Discretionary purchasing has a larger impact on
uranium demand than demand for conversion and enrichment.
Finally, changes in optimal tails assay can affect demand in a
given year. Estimates of future reactor requirements typically assume a
specific tails assay for enrichment. However, if enrichment prices
change relative to uranium concentrate and conversion prices, some
purchasers may have flexibility to specify a different tails assay for
enrichment. This changes the amount of uranium concentrates,
conversion, and SWU that are necessary to produce a given amount of
fuel.
4. Price Elasticity of Demand
Price elasticity of demand is an economic measure that shows how
the quantity demanded of a good or service responds to a change in
price. If purchasers are highly responsive to changes in price, demand
is relatively elastic. If purchasers are weakly responsive to changes
in price, demand is relatively inelastic. If purchasers demand the same
amount regardless of the price, demand is perfectly inelastic.
In general, demand for uranium, conversion, and enrichment are
relatively inelastic. Since requirements are largely fixed, changes in
price have a weak effect on demand. However, uranium markets exhibit
different degrees of elasticity on different time frames.
i. Short Term
In the short term, DOE expects that demand is more elastic than in
the medium and long terms. Some of the behaviors discussed in the
previous section are responsive to short term changes in price. Traders
and investment funds are more likely to make speculative purchases when
prices are low. Similarly, large-scale strategic buying, as China is
doing, has corresponded with a period of very low prices. It seems
likely that these purchases would decrease if short term uranium prices
increased substantially. Utilities may also make strategic purchases at
times of low spot prices but these rising prices may incent utilities
to look at security of supply and their long-term fuel procurement
plans as rising prices could signal a perception that supplies will be
more scarce in the future.
As mentioned above, these behaviors are much more prevalent in the
uranium concentrates markets. Demand in the conversion and enrichment
markets may therefore exhibit less elasticity in the short term than
the uranium market.
[[Page 21603]]
ii. Medium and Long Term
DOE expects that demand in the medium and long term is less elastic
than in the short term. A change in the relative prices of uranium
versus enrichment will affect the relationships between those markets
by changing the optimal tails assay, potentially affecting demand in
all three markets. A change in price may affect the term and type of
fuel contracts that utilities seek--longer-term contracts versus
shorter-term contracts and the mix of pricing mechanisms in those
contracts--market-based versus fixed price or base price-escalated
contracts. However, in the longer-term, these changes are not likely to
affect overall requirements significantly.
In the long-term, elasticity of demand for nuclear fuel would
reflect decisions about whether to construct new reactors or shut down
existing reactors in response to long-run prices for fuel. This
contribution to elasticity is likely to be small because fuel costs are
a small portion (~19.5 percent)\11\ of the overall cost of nuclear
power. Even a large increase in fuel price would be unlikely to
significantly affect decisions about new reactor construction.
Meanwhile, for existing reactors the capital costs are ``sunk.'' And
ongoing variable fuel costs for nuclear power are, at current prices,
lower than for most other types of generation.\12\ Thus, among existing
plants, it would take a very large increase in the cost of fuel to
influence significantly a decision about whether to shut down a reactor
early.
---------------------------------------------------------------------------
\11\ NEI, Nuclear by the Numbers (2017), p. 9, available at
https://www.nei.org/CorporateSite/media/filefolder/Policy/Wall%20Street/Nuclear_by_the_Numbers.pdf?ext=.pdf. 2015 generating
costs are as follows: Fuel--$6.91/MWh; Capital--$7.97/MWh;
Operations--$20.62/MWh and Total--$35.5/MWh.
\12\ Compared to a hypothetical new advanced nuclear plant,
variable costs are higher for natural gas generation by a factor of
4. The only technologies with lower variable costs are geothermal,
wind, solar, and hydro. Energy Information Administration (EIA),
Levelized Cost and Levelized Avoided Cost of New Generation
Resources in the Annual Energy Outlook 2016, August 2016, at 6,
https://www.eia.gov/outlooks/aeo/pdf/electricity_generation.pdf.
---------------------------------------------------------------------------
Demand for uranium is not constant. However, the changes in long-
term demand are unlikely to be responses to uranium price signals. For
these reasons, the analysis below will assume that medium- and long-
term demand has low elasticity.
D. The Nature of Uranium Supply
1. Primary Versus Secondary Supply
As explained above, supply of uranium concentrates, conversion, and
enrichment includes both primary and secondary supply. According to
ERI, global supply of uranium concentrates in 2016 was approximately
198 million pounds U3O8. 2017 ERI Report, 11.
Secondary supply is expected to total approximately 40 million pounds,
about 20% of the total. Over half of secondary supplies of uranium
concentrates come from enricher underfeeding and tails re-enrichment.
Other sources of secondary supply include DOE inventory, plutonium/
uranium recycle (MOX), and other commercial inventories. 2017 ERI
Report, 10. Prior to 2014, the natural uranium component of LEU
delivered under the Russian HEU Agreement represented a significant
source of secondary supply. This program ended in 2013.
As with enrichment, conversion supply includes both primary
production and secondary supplies. For conversion services, ERI expects
that total supply in 2016 was approximately 60 million kgU as
UF6, with secondary supply representing about 25%. 2017 ERI
Report, 14. As with uranium concentrates, over half of secondary
supplies of conversion come from enricher underfeeding and tails re-
enrichment. Other sources of secondary supply include DOE inventory,
plutonium/uranium recycle (MOX), and other commercial inventories. 2017
ERI Report, 14.
For enrichment services, ERI expects that total supply in 2016 was
approximately 63 million SWU, with secondary supply representing
between 4 and 5 million SWU or about 8%. 2017 ERI Report, 17. Unlike
uranium concentrates and conversion services, underfeeding and tails
re-enrichment do not constitute a secondary supply of enrichment
because those processes utilize enrichment capacity. Sources of
secondary supply of enrichment include DOE inventory, plutonium/uranium
recycle (MOX), and other commercial inventories. Id. However, a
significant portion of excess supply is directed toward uranium
production, reducing enrichment supply by about 10 million SWU.
2. Global Characteristics
Many foreign governments (other than the United States, Canada and
Australia) either own or exert significant control over nuclear fuel
assets. Notably, all operating enrichment plants are fully or partially
owned by foreign governments. U.S. suppliers are generally able to sell
their products and services globally, with the key exceptions of
countries such as Russia and China. For strategic reasons, Russia and
China choose to power their reactors only with their domestic resources
or through carefully curated strategic partnerships.
3. Price Elasticity of Supply
Price elasticity of supply measures how the quantity supplied of a
good or service responds to a change in price. If suppliers are highly
responsive to changes in price, supply is relatively elastic. If
suppliers are weakly responsive to changes in price, supply is
relatively inelastic.
Enrichment services are relatively inelastic, and conversion
services are complicated by pricing phenomena described below. With
respect to uranium concentrates, the level of elasticity in the uranium
markets varies depending on the time frame, just as demand elasticity
does.
i. Short Term
In the short term, supplies of uranium concentrates from primary
producers are relatively inelastic. There is some limited capability
for mines to decrease production. Conventional mines may choose to
continue operation and stockpile uranium ore without milling it into
yellowcake. ISR mines require constant development of new wellfields;
these mines may slow production gradually by slowing wellfield
development. These measures may take many months. Thus, in the short
term, mines will be weakly responsive to changes in price. In contrast,
secondary sources of uranium concentrates may respond more to changes
in price. Underfeeding and tails re-enrichment, for example, depend on
the relationship between SWU and uranium concentrate prices. In the
short-term, enrichers cannot increase or decrease capacity, but they
can quickly shift how much capacity is devoted to underfeeding versus
primary enrichment.
Primary supply of conversion services is relatively inelastic in
the short term. Conversion plants typically have high fixed production
costs. Thus, there is relatively little incentive to change production
in response to changes in price. (As discussed below, conversion supply
has fluctuated in recent years; but those changes were not necessarily
caused by price changes.) Secondary supplies of conversion, however,
are more able to respond to changes in price. Underfeeding and tails
re-enrichment results in natural UF6, which includes both
uranium concentrates and conversion services. Since the price of
uranium concentrates is a larger proportion of the value of that
UF6, secondary supplies of conversion from these two sources
can be expected to respond more strongly to the uranium
[[Page 21604]]
concentrates price than to the conversion price.
Primary supply of enrichment is also relatively inelastic in the
short term. As discussed above, enrichers typically cannot remove
machines from production due to technical concerns. Enrichers also
cannot bring additional machines online in the short term to respond to
changes in price because it takes several years to add new machines.
Secondary supply of enrichment is a smaller proportion of the total
supply than for uranium concentrates or conversion services. In
addition, enrichers can change the amount of capacity devoted to
primary enrichment as opposed to underfeeding. This small proportion of
supply is more able to respond to changes in price.
ii. Medium and Long Term
In the medium and long term, primary supplies of uranium
concentrates and enrichment should be more elastic than in the short
term. Producers can develop and install additional capacity in response
to projections that prices will increase. These decisions, however,
typically involve very long time frames. It may take several years of
active development before a new mine may begin production. New
enrichment and conversion capacity may take on the order of ten
years.\13\ Alternatively, producers can reduce production and
accelerate plans to retire capacity if prices are projected to
decrease. URENCO, for example, has chosen to retire enrichment capacity
at its European facility without replacement. See 2017 ERI Report, 16.
---------------------------------------------------------------------------
\13\ Louisiana Energy Services, LLC, now a subsidiary of URENCO,
submitted a license application for a gas centrifuge enrichment
plant in late 2003. The facility, known as URENCO USA (UUSA), began
operation in mid-2010, almost seven years after the license
application was submitted. Given the licensing process, planning for
the facility would have had to have begun well before the license
application was submitted. Similarly, the timeline for AREVA's
COMURHEX II conversion project included feasibility and design
studies taking place between 2004 and 2007, with full production
capacity reached in 2019. AREVA, ``COMURHEX II: Investing for the
Future,'' Nov. 2010, available at http://www.areva.com/mediatheque/liblocal/docs/activites/amont/chimie/plaket%20CXII%20GB%20MD.pdf.
Also See UxC Conversion Market Outlook, December 2016.
---------------------------------------------------------------------------
E. Uranium Prices
Uranium markets function in two ways, broadly speaking: Short-term
deliveries, called the spot market, and longer-term commitments, called
the term market.
1. Spot and Term Prices
For all three markets discussed here, there is a price for an
immediate delivery, called the spot price, and a price for long-term
contractual commitments, commonly called the term price. The U.S.
Energy Information Administration (EIA) defines spot contracts as
``contracts with a one-time uranium delivery (usually) for the entire
contract and the delivery is to occur within one year of contract
execution (signed date).'' EIA, 2015 Uranium Marketing Report, 1
(2016). EIA considers long[hyphen]term contracts as ``contracts with
one or more uranium deliveries to occur after a year following the
contract execution (signed date) and as such may reflect some
agreements of short and medium terms as well as longer term.'' The vast
majority of purchases on these markets are through term contracts.
According to data from EIA, 79% of purchases of uranium by U.S. owners
and operators of nuclear power reactors in 2015 were through term
contracts. In addition, EIA reports that approximately 92% of
enrichment services purchased by U.S. owners and operators in 2015 were
through term contracts. Id. at 39. EIA does not report data on
conversion contracts, but Ux Consulting Company, LLC (UxC), a private
consulting firm, publishes data on spot and term contract volume for
conversion services. UxC Conversion Market Outlook--Dec 2016 (2016).
Information regarding spot and term contracting activity for conversion
services is described below in section IV.B.1.iii.
Medium-term contracts have increased in importance in recent years.
Such a contract entitles a buyer to delivery of material at a future
date between one and a few years after contract execution. Although
medium term contracts are considered ``term'' contracts, they differ
from traditional term contracts in that they involve one-time-only
deliveries and that buyers ordinarily do not use them to secure long-
term fuel supplies. In that sense, these contracts form an extension of
the spot market to deliveries up to a few years in the future and
affect uncommitted demand in these future years.
2. Price Information
Unlike many other commodities, most uranium contracts are not
traded through a commodities exchange. Instead, a handful of entities
with access to the terms of many bids, offers, and contracts develop
what are called ``price indicators'' based on those transactions. Two
private consulting firms--UxC and TradeTech, LLC (TradeTech)--publish
monthly spot and term price indicators for uranium concentrates,
conversion, and enrichment. Both also publish weekly spot price
indicators for uranium concentrates.\14\ Note, however, that the UxC
and TradeTech indicators do not summarize completed transactions.\15\
The UxC and TradeTech price indicators are influential as market
participants may utilize market-based sales contracts that are based on
one or both of these price indicators.
---------------------------------------------------------------------------
\14\ The Euratom Supply Agency (ESA) also publishes spot and
term price indicators for U3O8 based on
deliveries to EU utilities. These prices are published annually
rather than monthly or weekly. See ESA, ``ESA Average Uranium
Prices,'' http://ec.europa.eu/euratom/observatory_price.html
(accessed April 13, 2017).
\15\ TradeTech's Weekly U3O8 Spot Price
Indicator is TradeTech's judgment of the price at which spot
transactions for significant quantities of natural uranium
concentrates could be concluded as of the end of each Friday. The Ux
U3O8 Price[supreg] indicator is based on the
most competitive offer of which UxC is aware, subject to specified
form, quantity(> = 100,000 pounds), and delivery timeframe (< = 3
months) and origin considerations and is published weekly. It is
thus not necessarily based on completed transactions (although a
transaction embodies an offer and its acceptance).
---------------------------------------------------------------------------
There are also a number of related published prices for
U3O8. These include a Broker Average Price (BAP)
and a Fund Implied Price (FIP), both published by UxC. The former is
based on pricing data from ``commodity style'' brokers that have agreed
to provide information to UxC and the latter is based on the traded
value of the Uranium Participation Corporation (UPC) compared to its
uranium holdings.\16\ UxC Uranium Market Outlook--Q1 2017, 34-36
(2017). Futures contracts for U3O8 are also
traded through CME/NYMEX. Through this platform, futures contracts are
traded with delivery dates ranging from a month to five years.\17\
Other entities, such as Uranium Markets LLC, a uranium brokerage,
provide the markets with a range of pricing data for specific
transactions at specific timeframes and locations in order to
facilitate uranium trade. These types of brokers provide additional
price information to the nuclear fuel marketplace.\18\
---------------------------------------------------------------------------
\16\ UPC is a publicly traded holding company that invests
substantially all of its assets in uranium. UPC's stated investment
strategy is to buy and hold uranium rather than actively trading in
response to short-term shifts in prices. UPC, Investor Update
Presentation, 13 (April 2017), available at http://www.uraniumparticipation.com/i/pdf/ppt/Investor-Update-April-2017.pdf.
\17\ See CME Group, UxC Uranium U3O8
Futures Contract Specs, http://www.cmegroup.com/trading/metals/other/uranium_contract_specifications.html (accessed April 7, 2017).
\18\ http://www.uraniummarkets.com/home.html (accessed April 7,
2017).
---------------------------------------------------------------------------
III. Analytical Approach
A. Overview
Section 3112(d) states that DOE may transfer ``natural and low-
enriched
[[Page 21605]]
uranium'' if, among other things, ``the Secretary determines that the
sale of the material will not have an adverse material impact on the
domestic uranium mining, conversion, or enrichment industry, taking
into account the sales of uranium under the Russian HEU Agreement and
the Suspension Agreement.'' In the 2015 Secretarial Determination and
Analysis, DOE explained in detail its analytical approach to determine
adverse material impact within the meaning of the statute and under the
factual conditions existing at the time of a Secretarial
Determination.\19\ The full explanation is incorporated by reference
and repeated here to the extent necessary to provide an overview of the
analytical approach DOE will use in this Determination.
---------------------------------------------------------------------------
\19\ 2015 Secretarial Determination, 80 FR at 26367; 26379-
26383.
---------------------------------------------------------------------------
Of note, DOE has described transfers as having an ``adverse
material impact'' when a reasonable forecast predicts that an industry
will experience ``material'' harm that is reasonably attributable to
the transfers. As further explained in the 2015 Secretarial
Determination and Analysis, in DOE's view the proper inquiry is to what
degree the effects of DOE's transfers would make an industry weaker
based on an analysis reflecting existing conditions. As a general
proposition, ``adverse material impact'' would be a harm of real import
and great consequence, beyond the scale of normal market fluctuations,
such as those that threaten the viability of any industry. DOE's
understanding of the term ``material'' was shaped by the legislative
history of Section 3112 and the statute's permissiveness for transfers
under the Russian HEU Agreement.
DOE has interpreted the relevant terms in this analysis in
advancement of the purpose of section 3112(d) to help preserve, to the
degree possible, viable mining, conversion, and enrichment capacity in
the United States. DOE interprets the word ``domestic'' to refer to
activities taking place in the United States, regardless of whether the
entity undertaking those activities is itself foreign. Hence, a
facility operating in the United States would be part of ``domestic
industry'' even if the facility is owned by a foreign corporation. DOE
believes that the phrase ``uranium mining, conversion or enrichment
industry'' includes only those activities concerned with the actual
physical processes of mining, converting, and/or enriching uranium.
Thus, acting solely as a broker for material mined, converted, or
enriched by other entities does not constitute part of the domestic
``industry.'' That purpose depends on the actual operation of
facilities. To that end, DOE believes ``domestic industry'' should also
include, to some extent, activities to develop and activate a facility
in the United States, even if the facility has not yet entered
production.
In this analysis, DOE understands transfers to have an ``impact''
where those impacts have a causal relationship to the specific set of
DOE transfers being considered. Thus, in assessing a given transfer,
DOE will essentially evaluate two forecasts: One reflecting the state
of the domestic uranium industries if DOE goes forward with the
transfer, and one reflecting the state of the domestic uranium
industries if DOE does not go forward with the transfer. DOE will
compare these two forecasts to determine the relevant and actual
impacts on the domestic uranium industries.
B. Factors To Be Considered
In the NIPC, and consistent with the 2015 Secretarial Determination
and Analysis, DOE has identified the six factors it will use in this
analysis to arrive at a determination of adverse material impact.\20\
Those six factors are:
---------------------------------------------------------------------------
\20\ Excess Uranium Management: Effects of Potential DOE
Transfers of Excess Uranium on Domestic Uranium Mining, Conversion,
and Enrichment Industries; Notice of Issues for Public Comment, 82
FR 13106, 13109 (Mar. 9, 2017).
1. Prices
2. Production at existing facilities
3. Employment level in the industry
4. Changes in capital improvement plans and development of future
facilities
5. Long-term viability and health of the industry
6. Russian HEU Agreement and Suspension Agreement
As previously explained, while no single factor is dispositive of
the issue, DOE believes that these factors are representative of the
types of impacts that the proposed transfers might have on the domestic
uranium industries. Not every factor will necessarily be relevant on a
given occasion or to a particular industry; this list of factors serves
only as a guide to DOE's analysis.
C. Comments on DOE's Analytical Approach
Throughout the public process initiated by the July 2016 RFI,
several commenters have taken issue with DOE's understanding of what
constitutes an adverse material impact under the USEC Privatization
Act. For example, commenters have suggested that DOE reconsider its
definition of ``adverse material impact'' to encompass scenarios where
DOE transfers are not the primary cause of losses in one of the
domestic uranium industries. See, e.g., RFI Comment of ConverDyn, at 1;
RFI Comment of Energy Fuels, at 1-2; RFI Comment of UPA, at 1. Several
commenters have also suggested that DOE's standard for ``adverse
material impact'' be directly linked to production costs for the
uranium mining, conversion, and enrichment markets. RFI Comment of
ConverDyn, at 2. DOE has addressed these comments questioning whether
this interpretation of the definition of adverse material impact is
sufficient in the NIPC.\21\ In the NIPC, DOE explained its position
that production costs alone should not be used to determine adverse
material impact, but in this analysis, DOE has considered production
costs as a factor in determining whether its uranium transfers are
having an adverse material impact on the market. Comments received in
response to the NIPC inform DOE's understanding about production costs
in the uranium mining, enrichment and conversion industries.
---------------------------------------------------------------------------
\21\ Id.
---------------------------------------------------------------------------
Furthermore, DOE has taken into account the qualitative and
quantitative statements made by UPA and others in evaluating the
current state of the uranium industries. E.g., NIPC Comment of UPA, at
1-2; NIPC Comment of TMRA, at 1; NIPC Comment of URENCO, at 1-3. While
these assertions provide valuable context for DOE's analysis, DOE
maintains that its current interpretation of ``adverse material
impact'' is a clear standard under which DOE ensures that the
Secretarial Determination is in compliance with the USEC Privatization
Act. This analysis accounts for information provided by commenters as
to the six factors in the sections below.
Finally, several commenters cited the ConverDyn litigation (a
lawsuit in which ConverDyn challenged, among other things, the 2014
Secretarial Determination) as requiring DOE to change its definition
and methodology for reaching a determination on adverse material impact
because the court held DOE's method to be in violation of law. See RFI
Comment of Energy Fuels, at 1; NIPC Comment of UPA, at 5-6. As noted in
the NIPC, while DOE is mindful of the results of the litigation, the
ConverDyn litigation does not mandate a change in DOE's method of
determining adverse material impact.\22\
---------------------------------------------------------------------------
\22\ UPA highlights specific findings from the Sept. 2014
Memorandum Opinion in the ConverDyn case. NIPC Comment of UPA, at 5-
6. DOE notes that that opinion considered DOE's approach in the 2014
Secretarial Determination, not the 2015 Secretarial Determination
and Analysis, which the analytical approach described above builds
upon.
---------------------------------------------------------------------------
[[Page 21606]]
IV. Assessment of Potential Impacts
This section assesses the potential impacts of DOE transfers at the
levels and for the purposes described above in Section I.D.1. In
particular, DOE is assessing the impacts of transfers under two
scenarios, which correspond to ERI's Base Scenario and Scenario 2 in
the 2017 ERI Report. The Base Scenario consists of continued transfers
at the current rate of 1,600 MTU per year, and Scenario 2 consists of
transfers at a lower rate of 1,200 MTU per year. This analysis assesses
the impact of continued EM transfers at these rates beginning in May
2017.\23\ Because the impacts of transfers at the 1,200 MTU rate are
expected generally to be lower than those under the 1,600 MTU Base
Scenario rate, unless otherwise specified, in the analysis below, DOE's
conclusions about the effects of transfers under the Base Scenario will
bound the effects of transfers at the lower rate of 1,200 MTU.\24\
Considering the difference in impacts between these two scenarios and
ERI's Scenario 1, where no future EM transfers would be conducted, we
come to the conclusions that transfers under either scenario would not
cause an adverse material impact to the domestic uranium industries.
---------------------------------------------------------------------------
\23\ DOE notes that the lower rate of 1,200 MTU per year
beginning in May 2017 does not precisely follow the assumption in
ERI's Scenario 2, which has the 1,200 MTU per year rate beginning in
January 2017. Nevertheless, DOE considers the impacts of this
scenario to fall within the bounds of, and to be covered by the
impacts forecasted under the Base Scenario and Scenario 2.
\24\ DOE notes that for two years, 2020 and 2021, Scenario 2
involves a larger volume of transfers than the Base Scenario due to
the fact that DOE's natural uranium inventory will be exhausted
sooner with a higher transfer rate. DOE notes that in these two
years, the effects of Scenario 2 may be higher than those under the
Base Scenario. But at least for the near-term, i.e. 2017-2019, the
effects under the Base Scenario should be higher.
---------------------------------------------------------------------------
This assessment assumes that DOE transfers for cleanup at the
Portsmouth Gaseous Diffusion Plant may continue at either the Base
Scenario rate or 1,200 MTU; however, other rates of transfer are
presented to provide comparison and context for the analysis of impacts
on the state of the domestic uranium, conversion, and enrichment
industries with and without the EM transfers. In particular, DOE tasked
ERI with analyzing two additional scenarios, one in which DOE ceases
transfers for EM beginning in 2017, and one in which DOE transfers
uranium at a rate of 2,000 MTU. This assessment makes no conclusion as
to whether transfers at the rates described in these other scenarios
would constitute an adverse material impact on the domestic uranium
industries.
A. Uranium Mining Industry
The domestic uranium mining industry consists of a relatively small
number of companies that either operate currently producing mines or
are in the process of developing projects expected to begin production
at some point in the near future. These projects are mostly
concentrated in the western states--in recent years, there have been
producing facilities in Nebraska, Utah, Texas, and Wyoming. Most
uranium mining facilities are owned and operated by publicly traded
companies based in the United States or Canada. According to EIA, the
preliminary estimate of production from domestic producers in 2016
totaled approximately 2.9 million pounds U3O8.
EIA, Domestic Uranium Production Report Q4 2016, 2 (January 2017). For
comparison, the World Nuclear Association (WNA) reports that worldwide
production in 2015 was approximately 157 million pounds
U3O8.\25\
---------------------------------------------------------------------------
\25\ World Nuclear Association, World Uranium Mining Production,
updated July 2016, http://www.world-nuclear.org/information-library/nuclear-fuel-cycle/mining-of-uranium/world-uranium-mining-production.aspx (accessed April 7, 2017).
---------------------------------------------------------------------------
1. Prices for Uranium Concentrates
The effect of DOE transfers on prices is one of the chief vehicles
through which the transfers can cause impacts on an industry.
Accordingly, DOE has considered numerous inputs to forecast how
continuing transfers at the current level will affect prices. DOE
analyzes both market prices and the prices that, on average, industry
actually realizes for its products. The EIA average delivered price in
the United States is representative of realized prices for the uranium
industry on a global basis. Realized prices may be significant for
assessing the impact of transfers, but they are not necessarily the
same as market prices at any given time.
As discussed in Section II, market prices for uranium concentrates
are described in terms of the spot price and the term price. Although
there are other types of published uranium prices, these two price
indicators are the ones most frequently used as the basis for pricing
terms in contracts for the purchase and sale of uranium concentrates.
In this section, we discuss the potential future impacts of DOE's
transfers on spot and term prices for uranium. For reference, as of
April 17, 2017, UxC's spot price indicator was $23.50 per pound
U3O8. As of March 27, 2017, UxC's term price
indicator was [REDACTED] per pound U3O8.\26\
---------------------------------------------------------------------------
\26\ UxC, Ux Weekly, April 17, 2017 (Volume, 31, Number 16) at
1. UxC publishes a weekly update to its spot price indicator. UxC's
term price indicator for uranium concentrates and the spot and term
price indicators for conversion and enrichment are updated monthly.
---------------------------------------------------------------------------
DOE has reviewed several different estimates of the effect of DOE
transfers on the market prices for uranium concentrates based on
different economic models. These estimates appear in market analyses
from different market consultants: ERI, UPA (citing TradeTech) and
Fluor-BWXT Portsmouth (FBP) (citing Capital Trade, Inc.). DOE has
reviewed and evaluated to the extent possible the methodology,
assumptions, data sources, and conclusions of each of the market
analyses.
i. Energy Resources International Report
DOE tasked ERI with estimating the effect of DOE transfers on the
market prices for uranium concentrates for the period 2017 through
2026. Specifically, DOE tasked ERI with estimating the effects under
four scenarios, explained below. In all four scenarios NNSA would
transfer 500 MTU natural uranium equivalent of LEU from 2017 to 2019,
after which NNSA would halt uranium barters. As noted above, the two
scenarios assessed in this analysis correspond to ERI's Base Scenario
and ERI's Scenario 2, and this assessment makes no conclusion as to
whether transfers under the other scenarios would constitute an adverse
material impact on the domestic uranium industries. Nevertheless, ERI's
estimates of the effect of DOE transfers under these other scenarios
has aided DOE's analysis.
Base Scenario: EM would transfer 1,600 MTU in the form of natural
UF6 in 2017 and 2018, 1,569 MTU in 2019 and 559 MTU in 2020.
Scenario 1: EM would halt uranium transfers for services between
2017 and 2026. (``No Transfer Scenario'')
Scenario 2: EM would transfer 1,200 MTU in the form of natural
UF6 per year until 2020 and 528 MTU in 2021, when
UF6 supplies are exhausted.
Scenario 3: EM would transfer 2,000 MTU in the form of natural UF6
per year in 2017 and 2018 and 1,328 MTU in 2019, when UF6
supplies are exhausted.
The varying transfer rates in these scenarios refer only to the
level of uranium transfers for cleanup at the Portsmouth Gaseous
Diffusion Plant; the amount transferred for down-blending of LEU is
constant across the scenarios. For each scenario, ERI also analyzes the
[[Page 21607]]
impacts of transfers under the following programs: past releases of
depleted uranium to Energy Northwest, future sale of depleted uranium
to GLE, and potential future transfer of off-specification uranium. The
level of transfers across these three programs is the same in all three
scenarios, and ERI's predictions about market price reflect these
transfers as well as the cleanup services and down-blending transfers.
As in previous analyses, ERI notes that uranium transfers do not
necessarily impact the market at the time of transfer. In general, the
market impact will take place at the point in time where the transfer
displaces commercial supply. This can be estimated based on the
expected schedule for delivery as reactor fuel. Thus, even though most
of the Energy Northwest transfers have already taken place, ERI
estimates that these transfers will affect the market at various times
in the future based on the expected delivery schedule. 2017 ERI Report,
22.
In the 2017 ERI Report, as in previous analyses, ERI estimated this
effect by employing two different types of models that rely on somewhat
different assumptions and methods: A market clearing price model and an
econometric model to establish a correlation between the spot market
price for uranium concentrates and active supply and demand. For its
market clearing price model, ERI constructs individual supply and
demand curves and compares the clearing price with and without DOE
transfers. In any particular year, the market clearing price for
uranium concentrates, for example, is based on the cost of production
of the last increment of uranium that must be supplied by the market in
order to provide the total quantity of uranium concentrates that is
demanded by the market during that year. 2017 ERI Report, 2. To develop
its supply curves, ERI gathers available information on the costs
facing each individual supply source. ERI then uses that information to
estimate the marginal cost of supply for each source using a discounted
cash flow analysis, when possible. 2017 ERI Report, 44 n.33. ERI's
market clearing price methodology assumes a perfectly inelastic demand
curve based on its Reference Nuclear Power Growth forecast. ERI assumes
that secondary supply is utilized first, followed by primary production
because in an over-supplied market, such as the current market, ``the
amount of primary production required to meet requirements, including
normal strategic inventory building, is well below actual production.''
2017 ERI Report, 45.
Distinct from previous analyses, in the 2017 ERI Report, ERI
applied its clearing price methodology on an annual and cumulative
basis. The annual clearing price methodology is similar to past
analyses conducted by ERI; the cumulative methodology represents a new
approach by ERI to assess market price impacts. It is important to
emphasize that, under either approach, the estimates do not constitute
a prediction that prices will decrease by the specified amounts
following DOE transfers under a new determination and, further, that
the impact of prior transfers is already taken into account by the
market in the current spot prices.
ERI's annual methodology assumes that the supply curve in a given
year is independent of the DOE inventory releases in prior years. 2017
ERI Report, 49. The cumulative clearing price methodology takes into
account inventory releases from prior years in the supply curve. While
both methodologies account for past DOE transfers in current prices,
they differ in approaches to estimating the supply side of the
equation. 2017 ERI Report, 52. According to ERI, the cumulative
methodology, when applied retroactively, takes into account that the
reduction in one supply source can influence the behavior of other
suppliers. Consequently, the cumulative methodology may show a more
substantial effect than what is indicated by the annual methodology.
ERI presents the impact of historical and scenario-based transfers of
uranium under both the annual or cumulative methodologies. Note that
ERI states that the price effects attributed to DOE inventory releases
are already built into current market prices. This means that if no DOE
inventory releases took place since 2009, then future market prices
would be higher by the amount estimated as the DOE price effect for
that given year. 2017 ERI Report, 50, 54. DOE has considered the 2017
ERI Report and ERI's explanation of its market clearing price
methodology. Most aspects of ERI's market clearing approach are
essentially the same as those used in the 2015 ERI Report except that
they have been updated to include recent information. With respect to
the annual clearing price approach and to ERI's general approach to
developing supply curve information, DOE adopts and incorporates by
reference its conclusion from the 2015 Secretarial Determination and
Analysis that ERI's market clearing approach methodology is reasonable
for estimating the impact of DOE transfers. For this reason, DOE
continues to rely on ERI's annual market clearing price approach in
this Determination.
DOE has also considered ERI's explanation of its cumulative market
clearing price approach. According to ERI, this approach takes account
of the fact that the reduction in one supply source affects the
behavior of other suppliers. In general, DOE believes that the
methodology underlying ERI's cumulative model is reasonable because it
takes account of the possibility that DOE uranium transfers may not in
fact displace primary production in the year of the transfer.\27\
Certain market actors maintain uranium inventories above requirements
and may strategically hold these inventories depending on market prices
in a given year. Since these inventories may add to supply in a given
year, the total volume of strategic inventories potentially available
to enter the market can be looked to as a proxy for expectations about
market prices--likely as a supplement to published market price
predictions. Thus, to the extent that DOE inventories do not displace
primary production, it is reasonable to assume that they may affect
decisions of uranium suppliers not just in the year of initial entry
into the market, but also in future years. ERI does not detail how it
predicts how supplier behavior would change, however. Nevertheless, DOE
believes that ERI's predictions are reliable because they are based on
ERI's production costs estimates, which are based on ERI's extensive
collection of data about the production costs for various aspects of
supply.\28\
---------------------------------------------------------------------------
\27\ In UPA's comment in response to the NIPC, UPA criticizes
the ERI cumulative analysis for presenting an average impact rather
than adding the price effects in each year to arrive at a total
price effect as TradeTech did. Had ERI taken this approach, UPA
asserts, the total cumulative impact between 2014 and 2016 would be
$15.40 per pound according to ERI's analysis. For the same reasons
that DOE disagrees with TradeTech's cumulative figure, explained
below in section IV.A.1.ii, DOE disagrees that it is appropriate to
simply add up ERI's average effect from separate years to arrive at
a ``cumulative impact.''
\28\ In addition, as noted in the 2015 Secretarial Determination
and Analysis, DOE also believes that the future year supply curves
that ERI utilizes in its annual market-clearing price model are
reasonable because they are based on ERI's estimates of production
cost for various aspects of supply. 2015 Secretarial Determination,
80 FR at 26386-88.
---------------------------------------------------------------------------
Using the market clearing price model, under the annual and
cumulative methodologies, ERI estimates of the level of price
suppression attributable to DOE transfers are listed in Tables 2 and 3,
respectively. Again, these numbers do not constitute a prediction that
prices
[[Page 21608]]
will decrease by the specified amounts following DOE transfers under a
new determination and, further, that the impact of prior transfers is
already taken into account by the market in the current market prices.
2017 ERI Report, 50, 54.
Table 2--ERI's Estimate of Effect of DOE Transfers on Uranium Concentrate Spot and Term Prices in $ per Pound
U3O8
[Annual market clearing approach]
----------------------------------------------------------------------------------------------------------------
ERI Scenario 1-- ERI Base Scenario ERI Scenario 2 ERI Scenario 3
no EM Transfers current level lower level higher level
(1,600 MTU/year) (1,200 MTU/year) (2,000 MTU/year)
----------------------------------------------------------------------------------------------------------------
2017................................ $0.30 $1.40 $1.10 $1.60
2018................................ 0.30 0.80 0.70 1.00
2019................................ 0.60 1.40 1.20 1.30
2020................................ 0.40 0.60 0.90 0.40
2021................................ 0.80 0.80 2.40 0.80
2022................................ 1.10 1.10 1.10 1.10
2023................................ 0.90 0.90 0.90 0.90
2024................................ 1.70 1.70 1.70 1.70
2025................................ 2.10 2.10 2.10 2.10
2026................................ 2.60 2.60 2.60 2.60
Average (2017-2026)................. 1.10 1.30 1.50 1.30
----------------------------------------------------------------------------------------------------------------
Table 3--ERI's Estimate of Effect of DOE Transfers on Uranium Concentrate Spot and Term Prices in $ per Pound
U3O8
[Cumulative market clearing approach]
----------------------------------------------------------------------------------------------------------------
ERI Scenario 1-- ERI Base Scenario ERI Scenario 2 ERI Scenario 3
no EM Transfers current level lower level higher level
(1,600 MTU/year) (1,200 MTU/year) (2,000 MTU/year)
----------------------------------------------------------------------------------------------------------------
2017................................ $4.40 $5.50 $5.30 $5.50
2018................................ 3.20 4.70 4.50 5.30
2019................................ 2.80 5.00 4.30 5.30
2020................................ 1.10 3.70 3.50 3.70
2021................................ 0.40 2.70 2.70 2.70
2022................................ 0.10 1.40 1.40 1.40
2023................................ 0.00 2.10 2.10 2.10
2024................................ 1.60 1.70 1.70 1.70
2025................................ 2.00 2.30 2.30 2.30
2026................................ 0.70 1.30 1.30 1.30
Average (2017-2026)................. 1.60 3.00 2.90 3.10
----------------------------------------------------------------------------------------------------------------
Although DOE believes that ERI's cumulative method is a reasonable
approach to predicting the effect of future DOE uranium transfers, the
specific figures listed in ERI's Tables 4.4, 4.5, and 4.6, do not
isolate the effects of EM transfers in future years. It is possible to
isolate the effects of these transfers based on the difference in
market clearing price in any given year between a scenario with zero EM
releases of uranium (Scenario 1) compared to the scenarios where EM
uranium is released at different rates. In other words, we present the
price effects on a marginal or incremental basis as this price effect
reflects the state of the domestic uranium industry with the EM future
transfers, and the state of the industry without the EM future
transfers. This calculation is significant because the analysis for
this Determination, at its core, answers the question of the effect on
the uranium industry from future DOE transfers for EM cleanup work.
That effect is evaluated by comparing the effects on markets with those
future DOE inventory releases, and without those future DOE inventory
releases. DOE believes it is reasonable to rely on this marginal price
effect because it is itself derived from and based on ERI's cumulative
market clearing methodology, which as explained above, provides a
reasonable prediction of the effect of uranium transfers on market
prices.
To determine the marginal price effect, DOE has used Scenario 1 as
the point of reference because Scenario 1 includes the price effects
from prior DOE uranium inventory releases plus an increment for the
NNSA transfers. The price effects attributable to only the different
levels of EM releases under the cumulative method can be found by
calculating the difference between the price effect in Scenario 1--the
No EM Transfers scenario--and the price effect in these other
scenarios. For example, the marginal price effect attributable to DOE
transfers under the Base Scenario in 2017 would be $1.10, the
difference between the cumulative price effect under the Base Scenario
($5.50) and the cumulative price effect under Scenario 1 ($4.40).
Because DOE is currently transferring at 1,600 MTU per year, the
current market prices already reflect the level of price suppression
predicted by ERI's Base Scenario. Thus, if DOE were to transfer 0 MTU
for EM in 2017, the price in 2017 would be expected to be higher by
$1.10 compared to continued transfers at 1,600 MTU. Similarly, were DOE
to transfer 1,200 MTU in 2017, the price in 2017 would be expected to
be higher by $0.20 compared to continued transfers at 1,600 MTU (the
difference between the marginal effect under the Base Scenario and the
marginal effect
[[Page 21609]]
under the 1,200 MTU Scenario).\29\ Table 4 provides the price effects
estimated by ERI for the varied scenarios of EM transfers under the
cumulative method expressed as the marginal price effect.
---------------------------------------------------------------------------
\29\ DOE acknowledges that these two calculations are
hypothetical because DOE has already conducted several transfers in
the early part of 2017. Thus, it would not be possible for DOE to
transfer 0 MTU in 2017. Further, as explained above, transfers at
the lower rate of 1,200 MTU would not begin until May 2017. Due to
the transfers in early 2017, the total amount of EM transfers in
calendar year 2017 under the 1,200 MTU scenario would actually be
somewhat higher than 1,200 MTU.
Table 4--Marginal Price Effect of Varied Rates of Uranium Transfers--Cumulative Method
----------------------------------------------------------------------------------------------------------------
ERI Base Scenario ERI Scenario 2 ERI Scenario 3
current level lower level higher level
(1,600 MTU/year) (1,200 MTU/year) (2,000 MTU/year)
----------------------------------------------------------------------------------------------------------------
2017................................................... $1.10 $0.90 $1.10
2018................................................... 1.50 1.30 2.10
2019................................................... 2.20 1.50 2.50
2020................................................... 2.60 2.40 2.60
2021................................................... 2.30 2.30 2.30
2022................................................... 1.30 1.30 1.30
2023................................................... 2.10 2.10 2.10
2024................................................... 0.10 0.10 0.10
2025................................................... 0.30 0.30 0.30
2026................................................... 0.60 0.60 0.60
Average (2017-2026).................................... 1.40 1.30 1.50
----------------------------------------------------------------------------------------------------------------
Illustrating the marginal price effect under the cumulative
methodology is useful in isolating the price effect of only the EM
transfers. While useful, this approach does not account for the added
effect of other future uranium transfers that will impact the market--
the NNSA transfers for down-blending, the ENW transfers of LEU, and the
depleted uranium transfers to GLE and potential transfers of off-spec
uranium. The annual clearing price methodology, however, does provide
the combined effect of future DOE transfers in the year they are
transferred. In theory, DOE could perform the same marginal or
incremental analysis to the annual clearing price effects, to isolate
the effects of only the EM transfers. DOE considers both approaches,
which present different but complimentary perspectives on how to
estimate future price effects, to be reasonable and informative.
Looking at price effects from both perspectives adds an additional
dimension to the analysis, and assists DOE in understanding forecasted
price impacts.
As yet another means to understand the price effect, ERI presented
information on the cumulative clearing price effect relative to ``No
DOE'' clearing prices for uranium, where the ``No DOE'' clearing price
assumes that DOE releases from 2009 onward were zero. 2017 ERI Report,
58. Table 4.7 in the ERI Report provides an assessment of price impacts
going forward, for the period 2017 to 2026, and the estimated change in
the uranium clearing price attributable to the DOE inventories under
the four scenarios relative to the ``No DOE'' market prices. As in the
discussion above, understanding the price impacts of the ``No DOE''
cumulative clearing price analysis requires a calculation of the
marginal percentage change with and without the EM releases. Using the
percentages from ERI's Table 4.7, Scenario 1, and comparing those
percentage in each year to the other EM release scenarios. Table 5
presents the marginal price effect expressed as a percentage of market
price.
Table 5--Cumulative Marginal Price Effects as Percentage of ``No DOE'' Clearing Price
----------------------------------------------------------------------------------------------------------------
ERI Base Scenario ERI Scenario 2 ERI Scenario 3
current level lower level higher level
(1,600 MTU/year) (1,200 MTU/year) (2,000 MTU/year)
marginal % marginal % marginal %
----------------------------------------------------------------------------------------------------------------
2017................................................... 3 2 3
2018................................................... 4 3 5
2019................................................... 6 4 7
2020................................................... 7 6 7
2021................................................... 6 6 6
2022................................................... 3 3 3
2023................................................... 5 5 5
2024................................................... 1 1 1
2025................................................... 1 1 1
2026................................................... 2 2 2
Average (2017-2026).................................... 3 3 3
----------------------------------------------------------------------------------------------------------------
For example, as ERI notes, under Scenario 1, where EM transfers are
halted starting in 2017, average uranium prices for the period 2017-
2026 would be expected to be 3% higher than under the Base Scenario
(the difference between 7%, the average price suppression over the ten
year period under the Base Scenario and 4%, the
[[Page 21610]]
average price suppression over the ten year period under Scenario 1).
Stated otherwise, the percentage price effect for each scenario other
than Scenario 1 is the difference between the cumulative percentage for
the Scenario in question and the cumulative percentage change for
Scenario 1. E.g., in year 2020, prices would be 6% higher under
Scenario 2 (9%-3%).
In addition to its market clearing price models, ERI also used an
econometric model to estimate the effect of DOE transfers on spot
market price.\30\ ERI calculated a correlation between the monthly spot
prices published by TradeTech with the active spot market supply and
active spot market demand, also published by TradeTech. ERI used the
correlation to estimate how the spot market prices would respond to the
availability of new supply from DOE. 2017 ERI Report, 61-62.
---------------------------------------------------------------------------
\30\ In its comment in response to the NIPC, UPA criticizes
ERI's econometric model, noting that it is not used in ERI's overall
analysis. NIPC Comment of UPA, at 8. Although it is unclear what UPA
means in referring to ERI's ``overall analysis,'' DOE notes that ERI
has presented the results of its econometric model in past reports.
As noted below, DOE believes ERI's econometric model is similar in
certain respects to the TradeTech model.
---------------------------------------------------------------------------
Compared to the market clearing analysis, the econometric model
deals mostly with short-term supply and demand and spot prices.
Applying the correlation results in an estimated spot market price
effect of $5.30 per pound U3O8 over the last
three years and a projected spot market price effect of $3.5 per pound
U3O8 over the next 10 years. 2017 ERI Report, 61-
62. This model shows a DOE price effect being higher in the near-term
(2017-2020), because the price effect is on future spot market prices,
which are projected to eventually rise with or without DOE inventory
releases. Because this regression is based on historical trends in the
spot market price series, it is most useful to provide an understanding
of recent years' price effect, and provides limited reliable
information about future price effects. The econometric model makes
calculations based on a functional relationship between published
prices and certain supply and demand variables representing, in
essence, uncommitted supply and demand, to predict future prices based
on the future course of the supply and demand variables. Forecasts of
uncommitted supply and demand require assumptions not only about how
supply and uranium requirements will evolve, but also about how
suppliers and purchasers will vary their mix of long-term and short-
term purchasing. In the short-term, the mix of long- and short-term
purchasing can be predicted based on the mix in recent years and on the
estimates of uncovered supply. Such forecasts become significantly less
reliable for later years. DOE therefore relies on ERI's market clearing
price methodology as the more reasonable approach to forecasting future
price effects.
ii. TradeTech Analysis
The Uranium Producers of America (UPA) attached to its comment in
response to the RFI, and re-incorporated in its comments in response to
the NIPC, an analysis it commissioned from TradeTech, LLC, a uranium
market consultant. RFI Comment of UPA, Attachment, ``TradeTech UPA DOE
Request for Information Response'' (2016) (hereinafter ``TradeTech
Analysis''). UPA also included in its comments on the NIPC additional
critique of the ERI Report.
The TradeTech Analysis provides information on spot prices for
uranium since 2011, after Fukushima, indicating a decline in prices of
60 percent as of mid-July 2016. TradeTech Analysis, at 4. TradeTech
presents an estimate of the cumulative impact of DOE transfers on the
Exchange Value (TradeTech's monthly U3O8 spot
price) over the period of 2012-2015. TradeTech presents the median
impact in each year of this period as follows: $2.79 in 2012, $3.81 in
2013, $4.18 in 2014, and $6.17 in 2015. TradeTech then presents the
``total cumulative impact from DOE transfers 2012-2015'' as $16.95 per
pound, a figure evidently calculated by adding together the median
impact for each year in the time period. More generally, TradeTech
explained there is a downward trend in recent years for uranium
production and demand, producer profit margins, and long-term
contracting practices. Without citing to any additional quantitative
analysis or modeling, TradeTech concludes that DOE material transfers
entering the spot market will continue to have a measurable adverse
material impact on uranium market prices and, by extension, uranium
producers. TradeTech believes that if DOE were to cease its transfers,
producers would see improvement in the market. TradeTech Analysis, at
8.
TradeTech does not explain the methodology it used to estimate the
impact of DOE transfers. For the purposes of this analysis, DOE assumes
that the estimate is based on the same Dynamic Pricing Model described
in a 2015 TradeTech report submitted in response to the 2015 Request
for Information on the 2015 Secretarial Determination. To the extent
that the 2017 TradeTech Analysis is based on a similar model, DOE
adopts its conclusions with respect to that model from the 2015
Secretarial Determination and Analysis. That is, the TradeTech model is
similar to the methods ERI uses in its econometric approach, which may
provide a reasonable estimate of the price response under short-term
conditions, but it is not an accurate prediction of the effect of
future DOE transfers. Although TradeTech does not forecast the effects
of future transfers, UPA suggests that future transfers will have an
impact equal to at least the median impact in 2015--i.e. $6.17.
Alternatively, UPA suggests that that impact can be expected to
continue rise at rate of roughly 30% each year--i.e. $8.10 in 2016,
$10.64 in 2017, and $13.97 in 2018. See RFI Comment of UPA, 5. DOE does
not believe these numbers are accurate, and that UPA incorrectly
assumes that trends evident in TradeTech's model of past transfers
would automatically carry forward into future years. In any case, even
if TradeTech had prepared a forecast of the impacts of future DOE
transfers, DOE believes that ERI's market clearing model is a more
reasonable approach to estimating medium- and long-term effects.
With respect to the ``cumulative'' figure presented in Figure 3 of
the TradeTech Analysis, neither TradeTech nor UPA attempts to justify
the economic principles behind this approach. DOE does not believe it
is appropriate to simply add the median impacts in successive years to
determine the ``cumulative'' impact for at least three reasons. First,
it is unclear why the time period should be divided by year rather
than, say, quarterly, monthly, or even weekly or daily. If it is
appropriate to add the median impact in successive years, it follows
logically that it is also appropriate to add the median impacts across
other time periods. This would lead to the illogical result that the
``cumulative'' impact could be the sum of the average price impacts for
each individual day in the study period.
Second, TradeTech's own chart does not support the assertion that
DOE transfers have suppressed the market price by $16.95. Figure 3 of
the TradeTech Analysis charts in linear form the actual market price
versus the expected price with no DOE transfers. At the end of the
study period, the difference between the lines on the figure appear to
be roughly the same as the 2016 median impact--i.e. roughly $6.00--
rather than the larger number presented as the cumulative impact.
[[Page 21611]]
Third, the figures cited by TradeTech and UPA do not align with
recent market dynamics. Considering that DOE transfers are less than 5%
of worldwide requirements, this number is unrealistically large.
Applying the approach suggested by UPA and TradeTech of adding together
the expected price suppression in 2015 and 2016 based on ERI's price
forecast would yield a ``cumulative'' price effect of $10.50 per pound
compared to the overall price decline in that same period reported by
ERI of roughly $17 per pound. If this were correct, it would mean that
DOE's transfers alone accounted for over 50% of the price decline, even
though DOE's transfers in that same period made up only about 15% of
the total domestic uranium requirements and 5% of worldwide
requirements. Furthermore, UPA claims that the cumulative impact of DOE
transfers from 2012 to 2018 will reach $49.64. These numbers are simply
too large to be realistic. While DOE understands that in an
oversupplied market, as has been the case in recent years, secondary
supply sources may be used before primary supply sources, it is not
reasonable to conclude without further support that the total
cumulative effect of DOE transfers account for more than half of the
market price decline, given other market factors at play, e.g., the
early closure of nuclear power plants in the U.S. and Western Europe,
and the reduction of nuclear energy in France based on legislation
passed in 2015. 2017 ERI Report, 4. For these reason, DOE believes the
cumulative approach of UPA and TradeTech of simply adding each median
annual effect together does not present an accurate assessment of price
effects from DOE transfers.
iii. Capital Trade Inc. Analysis
FBP attached to its comments in response to the NIPC an analysis it
commissioned from Daniel Klett, an economist and principal with Capital
Trade, Inc. NIPC Comment of FBP, Attachment, ``Review of ERI Price
Effect Estimates for Uranium Associated with DOE Inventory Releases,''
(2017) (hereinafter ``Capital Trade Analysis''). As explained by FBP,
ERI's use of the cumulative price clearing methodology found larger
price effects by including not only inventories sold into the market by
DOE each year, but also ``inventory overhang'' price effects associated
with DOE inventories held by users. NIPC Comment of FBP, at 3. The
Capital Trade Analysis commissioned by Fluor argues that this approach
is flawed for numerous reasons and is without a theoretical basis in
economics. Capital Trade Analysis, 5. The Capital Trade Analysis
concludes that DOE should continue to rely on ERI's annual methodology
for estimating the price effects of DOE inventory releases. Capital
Trade Analysis, 7.
The Capital Trade Analysis makes three essential arguments. DOE
believes Capital Trade has misunderstood ERI's cumulative approach. DOE
continues to believe that ERI's cumulative method is reliable, and
therefore, that DOE's use of ERI's cumulative market clearing price
information to calculate the marginal price effect of future EM
transfers is reasonable. DOE also continues to believe, and agrees with
Capital Trade, that ERI's annual methodology is a reasonable approach
and should be relied upon for estimating price effects.
First, Capital Trade argues that ERI's cumulative methodology
``violates'' the principle that price equals marginal cost. This
position appears to be based on a misunderstanding of ERI's cumulative
methodology. ERI's cumulative methodology, as compared to the annual
methodology, involves adjusting the supply curve in each year to take
account of supply and demand conditions in prior years. This accounts
for the possibility that the volume a particular supplier may be able
to supply at a given price is dependent on investment decisions made in
prior years. In this manner, a change in supply in one year can affect
the supply curve in later years to the extent that it influences the
investment decisions of the suppliers that would otherwise make up the
supply curve in future years. ERI's cumulative approach simply takes
this elasticity of supply into account in developing estimates of
future supply curves. In all cases, the market clearing price would
continue to be determined by the intersection of the demand curve and
the supply curve, i.e. the marginal cost of production of the last unit
supplied.
Second, Capital Trade argues that the ``inventory overhang'' effect
may affect the timing of price effects but not the magnitude. As
explained above, DOE believes that in referring to ``inventory
overhangs,'' ERI is taking account of the possibility that not all DOE
transfers displace primary production. Certain market actors may hold
uranium inventories in excess of reactors requirements for reasons such
as strategic investment or to guarantee security of supply. These
strategic inventory holders decide how much to hold in reserve based at
least in part on market prices. Because inventories held in excess of
requirements can potentially reenter the market in future years,
perceptions about the total size of such inventories may affect
supplier (and purchaser) investment decisions. To the extent that DOE
transfers do not displace primary production and instead add to the
total volume of reserves in excess of reactor requirements that are
potentially available to enter the market in future years, that
addition to secondary supply could conceivably have price effects that
are both delayed and magnified to the extent that suppliers look to the
total volume of reserves held in excess of requirements in making
investment decisions.
Third, Capital Trade states that ERI is unclear and inconsistent
with regard to when and how a particular volume has an effect on market
price and that ERI does not explain how the shutdown of primary mines
factor into the cumulative methodology. DOE acknowledges that ERI has
declined to provide specific information regarding its estimates of
supply curves in future years. ERI explains that it develops its
proprietary supply curves based on available information on costs
facing each individual supply source from publicly available sources,
including public filings from various mining companies, and evidence of
how suppliers have responded to changes in the past. DOE believes that
ERI's approach to estimating production costs would yield reliable
predictions of supplier behavior. To the extent that ERI predicts
primary mine shutdowns, these would be accounted for in the supply
curves that ERI builds for each year in order to determine market
clearing price.
For these reasons, DOE believes that ERI's cumulative method is
reasonable, and therefore, it is appropriate for DOE to rely on the
cumulative marginal price effects of EM transfers predicted by ERI's
cumulative method.
iv. Effect of DOE Transfers on Market Prices
Based on the foregoing discussion of market analyses and DOE's
consideration of the information, DOE concludes that pursuing the level
of EM transfers under the Base Scenario will suppress the market price
of uranium concentrates in the next decade by an average of either
$1.30 or $1.40 per pound U3O8, based on the
annual clearing price approach or the marginal cumulative clearing
price approach, respectively.
As described in Section II.a.i, both the annual and the marginal
cumulative clearing price projections provide valuable and
complementary insight into the future price effects of DOE transfers.
As in the past, DOE relies on
[[Page 21612]]
ERI's annual market-clearing approach to assess the impact of future
DOE transfers. Now, DOE also relies on the marginal cumulative market-
clearing approach to assess the effect of future EM transfers. After
analyzing these estimates, DOE bases its conclusions here on the larger
projected price effect of the transfers on average over the next
decade--the cumulative marginal market-clearing price effect of $1.40
per pound U3O8. This estimate is close to the
average price effect for the near-term time period--from 2017 through
2019--of $1.20 (annual) or $1.60 (cumulative marginal) per pound
U3O8. Further, if DOE transfers are conducted at
the lower Scenario 2 rates, this would create a lesser suppression on
market prices as compared to transfers under the Base Scenario in the
near-term of roughly $1.00 (annual) or $1.20 (cumulative marginal) per
pound U3O8, the difference from 2017 to 2019
between the Base Scenario and Scenario 2 under the annual and marginal
cumulative methods, respectively.
The significance of price suppression at this level depends, in
part, on current and forecasted market prices. Recent spot and term
price indicators published by UxC for the first quarter of 2017, were
$23.50 per pound U3O8 on the spot market as of
April 17, 2017 and [REDACTED] per pound U3O8 on
the term market.\31\ The forecast price effect reasonably attributable
to DOE transfers under the Base Scenario based on the marginal
cumulative approach ($1.40) represents 6% and 4% of current spot and
term prices, respectively. This percentage change is similar to the
percentage change anticipated in the 2015 Determination for prices
relative to the existing spot and term prices at that time--6.8% and
5.5%, respectively. And, a similar result is shown in Table 4, which
reflects in 2017 a 3% marginal cumulative price effect for DOE
transfers in the Base Scenario under the ``No DOE'' clearing price
approach.
---------------------------------------------------------------------------
\31\ UxC Nuclear Fuel Price Indicators, Weekly Spot Ux
U3O8 Prices as of March 27, 2017, https://www.uxc.com/p/prices/UxCPrices.aspx (accessed April 5, 2017).
---------------------------------------------------------------------------
Moreover, this price effect is within the range of market
fluctuations experienced in the uranium industry in recent years. ERI's
statistical model of price volatility on an annualized basis (as shown
in Figures 4.34 and 4.35) illustrates the conclusion that historical
price volatility is noticeably higher for the uranium and conversion
markets than for the enrichment market over the long term, although
enrichment term price volatility has been higher and conversion term
price volatility has been lower in recent years. 2017 ERI Report, 94-
96. Even in the last three years, the U3O8 price
has experienced significant volatility, with annual price volatility
increasing during 2014 and 2016. For example, the spot prices of
uranium from January 2015 to December 31, 2016, went from a 46% decline
to a 21% increase from December 31, 2016, to the current March 2017.
Term prices for uranium also have experienced a range of price changes,
with a decrease of 40% between January 2015 and December 31, 2016, to
an increase of 3% from December 31, 2016, to March 2017. Price effects
that are in the range of 6 and 4 percent are not substantial or outside
historical experience in the uranium markets.
DOE believes that it is appropriate to compare the price effect in
future years to forecasted market prices in those years. Using near-
term projected market clearing prices from ERI's Nuclear Fuel Cycle and
Price Report December 2016 Update (at 4-17) [REDACTED] DOE calculates
that the average price effect of planned DOE transfers under the Base
Scenario assuming a price effect of $1.40 per pound would cause an
average percent decrease in the near-term of 6% per year. Looking at a
10-year average of forecasted prices from this same report yields a 4%
impact from the DOE transfers' projected price effect. While ERI's
market-clearing price effect is not intended to be a direct price
forecasting tool, using the ERI Reference Case price forecasting data
allows us to derive an approximate percentage future effect. This is
also another mechanism to compare the average percentage cumulative
marginal effect projected by ERI for the same time period.
v. Effect on Realized Prices
A principal mechanism through which a change in market price could
impact the domestic uranium mining industry is through the effect on
the prices that various production companies actually receive for the
uranium they sell--the ``realized price.'' The market price indicators
published by TradeTech and UxC are based on information about recent
offers, bids, and transactions. This information includes activity that
does not involve the domestic uranium producers--i.e. transactions
involving international producers, traders, and brokers. In addition,
the current market prices do not reflect the fact that many uranium
producers actually achieve prices well above the market prices due to
the prevalence of long-term contracts that lock in pricing terms over a
period of several years.
As previously noted, most deliveries of uranium concentrates take
place under term contracts. According to data from EIA, 79% of
purchases of uranium by U.S. owners and operators of nuclear power
reactors in 2015 were through term contracts. EIA, 2015 Uranium
Marketing Report, 1 (2016). UxC data indicates that spot contracts made
up [REDACTED] of total contracting volume in 2016, and term contracts
[REDACTED].\32\ U.S. utilities, in particular, have increasingly tended
toward mid-term contracts. UxC Uranium Market Outlook--Quarter 1
(2017), 27.
---------------------------------------------------------------------------
\32\ [REDACTED] UxC Uranium Market Outlook--Quarter 1 (2017),
ii.
---------------------------------------------------------------------------
ERI assumes that 50% of the NU that EM transfers is introduced
through spot markets and 50% through term market contracts. 2017 ERI
Report, 38. If this assumption is not exact and more or less than 50%
of DOE transfers for Portsmouth cleanup are not sold through term
contracts--in that they do not affect the term price indicators
published by UxC and TradeTech--such an error in ERI's assumptions
would simply decrease the reliability and certainty of ERI's
econometric forecast in the mid- to long-term. As described above, DOE
concludes that ERI's econometric analysis is likely to be less reliable
over the longer term anyway, because predictions about uncommitted
supply and demand in future years are uncertain.
The actual effect experience by a primary producer would be the
proportionate change in its realized prices. FBP and UPA, in comments,
have provided information on realized prices. In its comment on the
RFI, FBP noted that Peninsula Energy, parent of Strata Energy, signed
four contracts from 2011 through 2016 for a total of 8.2 million pounds
at an average price of over $54 per pound; UR Energy reported contracts
with deliveries from 2016 through 2021 with average prices of $49.81
per pound, and Energy Fuels reported sales of 1.1 million pounds in
2015 at an average price of $56 per pound. NIPC Comment of FBP, at 13.
Conversely, TradeTech reported that in 2015, 21 percent of uranium
concentrates was purchased under spot contracts at a weighted average
price of $36.80 per pound. RFI Comment of UPA, at 5. TradeTech cites
EIA figures showing that 6 percent of U.S, utility purchases were of
U.S.-origin in 2015, at a weighted-average price of $43.86 per pound, 5
percent below the weighted-average price for all purchases. RFI Comment
of UPA, at 6. TradeTech opines that this decline is part of a
[[Page 21613]]
larger trend in realized prices, and is expected to continue as legacy
contracts signed over the last 10 years are fulfilled. Id. EIA reported
in 2015 realized prices of $42.91 per pound. Id. at 7.
Table 6 provides data on sales and realized prices for U.S. uranium
producers in 2016 from public filings. The data in Table 6 demonstrate
that several of the producers obtained a realized price above the 2015
realized price cited by EIA. Although realized price data was not
available for Energy Fuels, a statement from its SEC 10-K form
indicates that ``[t]hree of our four supply contracts contain favorable
pricing above current spot prices.'' Energy Fuels Inc., Management's
Discussion and Analysis, Year Ending December 31, 2016, at 119 (Dec.
2016). New long-term and mid-term contracts among all U.S. uranium
producers are likely to have similarly high prices relative to the spot
market.
Table 6--Reported Sales and Realized Price by U.S. Producers
------------------------------------------------------------------------
Information from public filings
-------------------------------------------------------------------------
2016 Sales
Producer (lbs U3O8) Realized
price
------------------------------------------------------------------------
Uranium One \33\............................... 56,100 $27
Ur-Energy \34\................................. 22,191 41.38
Cameco \35\.................................... N/A N/A
Energy Fuels \36\.............................. 1,147,933 47.42
Uranium Energy Corp.\37\....................... N/A N/A
------------------------------------------------------------------------
To the extent that contracts have floor price provisions, the
prices realized by producers may not fully reflect any market decline.
2017 ERI Report, 71. [REDACTED] UxC Uranium Market Outlook--Quarter 1
(2017), at 31. Realized prices and the exposure to the spot market in
the U.S. uranium industry vary between companies. ERI reports that the
share of U.S. production coming from companies that are effectively
unhedged (no long-term contracts with higher fixed prices) has declined
from about 25% in 2012 and 2013 to about 3% in 2015 and 2016. 2017 ERI
Report, 73. ERI emphasizes, however, that it does not appear that
removing the DOE inventory from the market and adding back the
cumulative price effect attributed to the DOE inventory material in
2016 in the Base Scenario would necessarily increase current prices
enough to markedly change the realized prices for new production
centers in the U.S. 2017 ERI Report, 73-74.
---------------------------------------------------------------------------
\33\ These figures represent sales through Dec. 31, 2016.
Uranium One operates the Willow Creek mine in Wyoming. Uranium One
Inc., Operating and Financial Review, 4, 16 (Dec. 2016), available
at http://www.uranium1.com/index.php/en/investor/financial-reports-and-filings/annual-reports.
\34\ UR-Energy operates the Lost Creek ISR mine in Wyoming. UR-
Energy Inc. Form 10-K, Securities and Exchange Commission, at 49
(Mar. 3, 2017) https://www.sec.gov/Archives/edgar/data/1375205/000155837017001345/urg-20161231x10k.htm (accessed April 11, 2017).
\35\ Cameco operates the Smith Ranch-Highland (Wyoming) and Crow
Butte (Nebraska) ISR mines. Cameco, Annual Report 2016, Management's
Discussion and Analysis, at (Feb. 9, 2017), https://www.cameco.com/invest/financial-information/annual-reports/2016.
\36\ Energy Fuels operates the White Mesa conventional mill in
Utah, the Nichols Ranch ISR mine in Wyoming, and the Alta Mesa
Project in Texas. Energy Fuels Inc., Management's Discussion and
Analysis, Year Ending December 31, 2016, at 4 (Dec. 2016), available
at http://www.energyfuels.com/wp-content/uploads/2017/03/2016.12.31-10K-FINAL-Reduced-Size.pdf
\37\ Uranium Energy Corp. (UEC) operates the Hobson/Palanga ISR
mine in Texas. UEC reports that as of July 31, 2016, it had no
uranium supply or ``off-take'' agreements in place. UEC states that
future uranium concentrates sale are expected to occur at the spot
price. Uranium Energy Corp. Form 10-K, Securities and Exchange
Commission, at 6, 72 (Dec. 2016), available at https://www.sec.gov/Archives/edgar/data/1334933/000127956916004485/v449966_10k.htm.
---------------------------------------------------------------------------
EIA provides data about sales using different pricing mechanisms.
EIA reports that of the approximately 19 million pounds
U3O8 equivalent purchased by U.S. reactor
operators from domestic sources \38\ and delivered in 2015, 13.9
million pounds were purchased based on fixed or base-escalated
pricing--approximately 73%--with a weighted-average price of $40.34.
Approximately 876,000 pounds were purchased based purely on spot-market
pricing--approximately 5%--with a weighted-average price of $38.22. The
remaining 3.9 million pounds--approximately 21%--was sold based on some
other pricing mechanism with a weighted average price of $53.59. EIA,
2015 Uranium Marketing Annual Report, 22-24 (2016). DOE understands
that the realized prices received for natural uranium in the last year
have been lower than in the several previous years. However, the long-
term forecasts do not indicate that this steep decline will continue.
---------------------------------------------------------------------------
\38\ Note that EIA's figure includes purchases of U.S.-origin
uranium as well as purchases from a firm located in the United
States. Therefore, this number includes uranium from sources other
than the domestic uranium industry. EIA, 2015 Uranium Marketing
Annual Report, 22 (2016).
---------------------------------------------------------------------------
Given that ERI reports that essentially all U.S. producers have at
least some long-term contracts with fixed prices above the spot market
price \39\ and that the average realized price continues to be above
the current spot price, it appears that the domestic uranium industry
is somewhat insulated from the impact of DOE transfers on uranium
prices. In particular, price suppression attributable to DOE transfers
under either scenario does not have a significant effect on
preexisting, long-term contracts that were entered into at higher
prices. That said, DOE transfers will have an effect on the contract
price for spot and term contracts entered into in the future. For those
contracts, and as explained above, the anticipated effect of EM
transfers is expected to be relatively small--approximately 6% of
expected near-term prices--and well within the range of normal market
price fluctuations.
---------------------------------------------------------------------------
\39\ 2017 ERI Report, 121.
---------------------------------------------------------------------------
2. Production at Existing Facilities
DOE believes that primary producers consider a range of different
inputs in determining whether to decrease, continue, or increase
production at currently operating facilities. Market prices are
certainly one element of this calculation, but producers also consider
contractual obligations (and what these contracts may mean for realized
prices), projections about future prices, and the various costs
associated with changing production levels. In order to forecast how
DOE transfers will affect production levels, DOE has considered how
producers have responded to price changes in the past, and the
relationship between market prices and production costs.
EIA reports data on production levels in the domestic uranium
industry on a quarterly and annual basis. According to EIA, U.S.
primary production in 2015 stood at 3.34 million pounds
U3O8. EIA's most recent quarterly report provides
preliminary data for 2016. EIA's preliminary figures for 2016 indicate
that U.S. production of uranium concentrates declined 13% from 2015
production to 2.92 million pounds U3O8. ERI's
projection that 2016 U.S. production was expected to decline below 3.0
million pounds is consistent with EIA's preliminary data. 2017 ERI
Report, 68. U.S. uranium production peaked in 2014 at 4.9 million
pounds. Although there were a number of new starts that were spurred by
the price run-up in 2006 and 2007, a number of these facilities have
limited production in response to the decline in prices since that
time.
In 2016, Cameco halted new wellfield development at its Crow Butte
and Highland/Smith Ranch centers, which resulted in a production
decline of 36% from 2015 levels. Production at the Highland/Smith Ranch
center is expected to further decline by more than 50% in 2017.
Cameco's curtailment at its U.S. properties follows Willow Creek,
Palangana, and Alta Mesa halting new wellfield installation in 2013 and
[[Page 21614]]
2014, resulting in minimal or no production from these facilities in
2015 and 2016. ERI reports that Energy Fuels' White Mesa mill operated
at low levels, processing alternative feed material and stockpiled ore
from prior conventional mining in Arizona. ERI further reports that
newer in-situ recovery projects at Nichols Ranch and Lost Creek held
production steady rather than continue to ramp up to planned levels.
Peninsula's Lance ISR project (part of the Ross permit area) began
operation in late 2015 and began shipping drummed uranium for
conversion services in mid-2016. ERI suggests that these production
trends will continue into 2017 although Lance is expected to add some
production. 2017 ERI Report, 7.
EIA reports that the same number of uranium concentrate processing
facilities--seven--operated in 2016 as in 2015. In 2016, production
from Hobson/Palangana ceased, while production from the Ross Central
Processing Plant/Lance began. EIA Domestic Uranium Production Report Q4
2016, 4-6 (January 2016).
ERI presents a figure (Figure 4.24) showing various industry
contracting and production events as compared to both the spot and term
price of uranium. 2017 ERI Report, 74. That figure shows that most new
U.S. production was supported by long-term contracts in the range of
$55 to $70 per pound. However, one producer entered into contracts when
long-term prices were in the $45 to $50 per pound range in late 2014 to
early 2016, which allowed new operations to begin. ERI notes that, ``At
least one of these companies has stated that the project would not have
been able to proceed if the initial contracts had been made at then-
current price levels ($45 to $50 per pound long-term).'' 2017 ERI
Report, 73. In March 2017, Energy Fuels Resources received all
licenses, permits and approvals permits to allow wellfield development
at its Jane Dough property, an expansion of its currently-producing
Nichols Ranch property. Energy Fuels opined that, ``Uranium spot prices
are up over 40% since early December 2016, and we are optimistic that
we will continue to see positive market catalysts as the year goes on.
As uranium prices continue to rise on a sustained basis, we expect to
resume wellfield construction at Nichols Ranch, which is expected to
include the Jane Dough wellfields in the future.'' It has been reported
that a company official said that Energy Fuels will consider production
from Jane Dough after spot prices reach the $40/pound
U3O8 level.
ERI's Figure 4.24 also shows the price levels at the time cutbacks
were announced by various U.S. suppliers. This graphic depicts price
points for cutbacks at select operations: $45 per pound in the spot
market for conventional mines in Utah; $40 per pound in the spot market
for an-situ-leach operations; and $35 per pound in the spot market for
an additional in-situ leach operation and conventional mines, as well
as a uranium mill. As prices declined to less than $30/pound in early
2016, Cameco halted all new U.S. well field development, as noted
earlier in this section. 2017 ERI Report, 74.
ERI estimates average production costs for existing mines by
referring to EIA's published data on production expenditures across the
uranium industry. Using a three-year average to smooth out year-to-year
differences, ERI notes that average production costs remained fairly
constant from 2009 to 2012 at about $40 per pound. However, EIA reports
that average production costs have declined since that time as U.S.
producers curtailed operations at some higher cost mines. Using the EIA
data, ERI calculates a three-year average production cost for $31/pound
in 2015. 2017 ERI Report, 75. ERI further reports that it estimates
average production costs at U.S. in-situ-leach facilities, which
includes exploration and development drilling costs needed to keep the
mine producing, at $37/pound in 2015, and expects that this will
decline further to $35/pound in 2016. 2017 ERI Report, 76.
UxC has developed and reported upon production cost data in its
Uranium Market Outlooks and a 2015 Production Cost Study. UxC Uranium
Market Outlook, Q1 2016 (2016); UxC Uranium Production Cost Study
(2015). UxC developed a production cost curve for operating projects
that assumes a [REDACTED] return. UxC describes the forward costs
estimates as ``the minimum sales price a producer might accept under a
new contract if recovery of sunk costs is not required.'' UxC divides
the various production centers into cost bands. [REDACTED] UxC, 2015
Production Cost Study, 92.
Actual production levels and costs are usually proprietary
information, so DOE must generally rely on estimates. ERI's estimates
and UxC's estimates are generally consistent, given what we know about
efficiency improvements at some facilities and operational changes in
others as wellhead development slowed or ceased. In 2015, DOE found
that the production cost estimates from TradeTech, NAC, and UxC were
all generally consistent with ERI's conclusions. ERI utilized the same
methodology in 2017. We consider that ERI's analysis is likely in line
with other market experts.
ERI also reports that while the spot uranium price averages $36.76/
pound in 2015, it averaged less than $26/pound in 2016. The term and
spot prices reported by UxC at the end of March 2017 are below the
estimated production cost for in-situ properties as well as the U.S.
average for all properties. However, the relationship between current
production decisions and prices is also affected by the contract
portfolios of various uranium producers and how much they are exposed
to the spot market. ERI estimates that the share of U.S. production
coming from companies that are effectively unhedged, with no long-term
contracts at higher prices, has declined from about 25% in 2012 and
2013 to just 3% in 2015 and 2016. 2017 ERI Report, 121.
In addition to prices, production decisions are also related to
company-specific production strategies such as Cameco's decision to
limit its production to its three most efficient large mines in Canada
and Kazakhstan. One commenter opined that even if EM's transfers are
eliminated, that the level of U.S. production would not increase
because U.S. uranium production is less competitive than other mines so
producers would ramp up production at their most efficient mines
outside the U.S. first. That commenter also noted that if the 2015
percentage of U.S. to non-U.S. supply is applied--EIA reports that 94%
of the uranium delivered to U.S. utilities in 2015 was foreign origin--
to replace supply displaced by DOE inventory, then the resulting
increase in U.S. sales would be a very small amount. RFI Comment of
FBP, at 6-8.
Based on the spot price at the end of March 2017, it does not
appear that adding the estimated incremental $1.40 impact of EM
transfers at the Base Scenario levels as compared to no EM transfers
back to that spot price would incentivize additional U.S. production.
ERI states that term prices would still be below the level required for
new conventional production to move forward, but notes that some lower
cost in situ production may be able to move forward at current term
prices.
In addition, realized prices of U.S. producers were presented in
the previous section. It does not appear that the incremental $1.40
change in spot price between no uranium transfers by EM and transfers
at the current rate would cause realized prices to be below production
costs at any particular facility, especially with the limited number of
companies that remain unhedged. DOE recognizes that
[[Page 21615]]
receiving prices barely above production costs would not provide enough
return to justify investing in production, as a producer requires a
certain amount of expected margin. Even considering a small effect on
the margin, DOE concludes that ceasing EM transfers entirely would not
cause U.S. producers to increase production levels substantially in the
near-term.
Some NIPC commenters reported that they had to reduce production
levels in response to low uranium market prices. UPA indicated that
domestic production had declined from 4.9 million pounds in 2014 to 2.9
million pounds in 2016. Comment of UPA, at 13. DOE recognizes that
production levels are lower but not in their entirety attributable to
DOE transfers. DOE believes that it is an appropriate implementation of
the analytical approach discussed above to compare the likely state of
affairs with the considered transfers and without the considered DOE
transfers in order to understand the impact reasonably attributable to
its transfers. DOE has drawn this comparison in concluding that
continuing transfers under the Base Scenario would not result in U.S.
production being markedly lower than it would in the absence of DOE
transfers.
3. Employment Levels in the Industry
DOE has considered information from EIA reports relating to
employment in the domestic uranium production industry. EIA's most
recent Uranium Production Report states that employment stood at 625
person-years in 2015, a 21% decrease from the 787 person-years in 2014.
EIA, 2015 Uranium Production Report, 10 (May 2016). EIA notes that this
is the lowest level since 2014. Exploration employment was 58 person-
years, down from 86 in 2014 and 149 in 2013, a 33% and 61% drop
respectively. Mining employment was 251 person years, an increase of 2%
from the 246 level of 2014 but a 36% decline from the 2013 level of 392
person-years. Milling and processing employment decreased 32% from
2014. EIA further reports that reclamation employment declined 28% to
116 person-years from the 2014 level of 161 person-years, and 42% from
the 199 employed in reclamation in 2014, a 12-year high. Employment for
2015 was in nine states: Arizona, Colorado, Nebraska, New Mexico,
Oregon, Texas, Utah, Washington, and Wyoming.
In its analysis, ERI compared EIA's employment figures with changes
in uranium spot and term prices. Based on a statistical correlation,
ERI infers that employment responds to changes in price, observing that
mining, milling and processing employment was more closely correlated
with term price and exploration employment with spot price. 2017 ERI
Report, 64-65. ERI then uses this correlation to estimate that the
decrease in uranium prices over the course of 2012-2015 resulted in
employment lowered by an average of 30 person-years or that employment
was 3.1% lower in those four years than if no releases had occurred.
Using the cumulative methodology, the correlations indicate than the
DOE transfers lowered employment by an average of 73 person-years
during 2012-2015, or lowered by 7.2%. 2017 ERI Report, 66.
Looking forward, ERI correlates employment and price over the 10-
year period 2017-2026 for the Base Scenario, which represents the
current rate of EM transfers, and estimates an average loss of 19
person-years or a 2.9% reduction in employment over the ten-year
period. The cumulative method yields an employment loss of 40-person-
years or 6.0% over the 10-year period. Using the cumulative
methodology, under Scenario 1 (halting EM transfers), employment would
still be lowered by an average of 31 person years or 4.7%. Thus, the
marginal employment effect based on the cumulative methodology between
EM transferring uranium at current levels versus not transferring
uranium is a change in average employment over the next ten years is 9
person-years, or 1.3%. It is important to note the cumulative effect of
past releases is already in place and that transfers that occurred in
past years will continue to have an impact in future years.
Using their employment-spot price correlation, ERI estimates that
uranium industry employment is expected to decline by an additional 111
person-years from the 2015 level. ERI opines that this is consistent
with announcements that have been made in the domestic industry. 2017
ERI, 65.
Some commenters stated that the uranium production industry has
lost half its workforce since May 2012. RFI Comment of Energy Fuels, at
3; RFI Comment of Uranium Producers of America, at 4. EIA figures
demonstrate a 48% loss in employment from 2012 to 2015. EIA Uranium
Production Report (May 2016), 9. However, for predicting the effect of
DOE's transfers it is important to understand what portion of recent
employment decreases is reasonably attributable to past DOE transfers.
No commenter attempted such an estimation. While it is difficult to
infer causal connections between employment and any particular market
phenomenon, DOE thinks it is likely that most of the reduction in
employment in the mining industry since 2011 can reasonably be
attributed to the downturn in the demand for uranium, primarily due to
the Fukushima events and premature closure of nuclear plants.
DOE believes that ERI's method for attributing an employment effect
to DOE transfers is reasonable. ERI's method is based on an empirical
observation that prices (particularly the two-year moving average of
price) have been strongly correlated with employment over the last
decade. This correlation exists despite the fluctuations in market
conditions that have taken place in that period. The relatively small
price effects likely to result from DOE's transfers are much smaller
than the price variations of the past decade. Therefore, the
correlation ERI observes should hold true for these small price
effects. In addition, it is reasonable to expect that prices and
employment will continue to correlate in such a way, because the
correlation reflects persistent market phenomena. DOE expects that a
producer increases or decreases employment in order to increase or
decrease production, and it does so in response to increases or
decreases in the price it will receive. For any given producer the
relationship between employment and price will depend on multiple
factors such as the producer's cost of production and its cost
structure (e.g. what proportion of cost depends on employee numbers)
and the producer's sales/contracting structure and realized prices.
Aggregated over producers, the result would be the sort of correlation
between prices and employment that ERI observes.
Several NIPC commenters indicated that they had been forced to
reduce employment levels due to continued weakness in the uranium
markets. UPA in their comment at 15 noted that employment fell by 45.9%
(531 jobs) from 2013 to 2015 and that in 2016 several UPA members
announced they were anticipating further employment cuts. While
industry did not predict the impact of future DOE transfers, as noted
above, based on ERI's cumulative methodology, the marginal effect of EM
transfers on employment is expected to average 9 person-years or 1.3%
over the next 10 years. Given the size of recent employment
fluctuations and the size of future expected changes (in the 100s of
person-years), this effect is well within the range of existing
fluctuations. Further, the employment effect of DOE transfers is not
expected to be large enough to negatively affect the retention of
intellectual experience and ``know-how'' in the industry.
[[Page 21616]]
4. Changes in Capital Improvement Plans and Development of Future
Facilities
As stated above, ERI reports that five new production centers began
operation since 2009: Two in 2010, one in 2013, one in 2014, and one in
2015. 2017 ERI Report, 67. ERI explains that the new production centers
may have been able to begin operations only because they were supported
by fixed price term contracts that were signed when prices were
substantially higher than they are currently--i.e. $55 to $70 per pound
term price. At least one of these companies has directly stated that
its project would not have been able to proceed if the initial
contracts had been made at the then current price levels--$45 to $50
per pound term price. ERI also reports that some owners of proposed
conventional mines outside the U.S. have stated that prices in the
range of $60 or more per pound would be necessary for further
development. 2017 ERI Report, 73.
EIA reports that U.S. uranium production expenditures were $119
million in 2015, down by 14% from the 2014 level. EIA reports that
uranium exploration expenditures were $5 million and decreased 56% from
the 2014 level. EIA, 2015 Domestic Uranium Production Report, 2 (2016).
ERI looked at the average production cost plus development drilling
costs, to show that ongoing costs have declined from $49/pound in 2012
to $37/pound in 2015. Production plus development costs for U.S.
facilities are expected by ERI to average about $35/pound in 2016. 2017
ERI Report, 76.
Based on the above, ERI concludes, ``it does not appear that
removing the DOE inventory from the market and adding back the $5 per
pound cumulative price effect attributed to the DOE inventory material
in 2016 . . . in the Base Scenario would necessarily increase current
prices enough to change the situation regarding the viability of new
production centers in the U.S., that is, current spot prices would
remain less than $30 per pound and current term prices would still be
less than $40 per pound.'' ERI goes on to suggest that higher price
signals appear to be required to move forward with the development of
new conventional mines in the U.S but notes that some lower cost ISL
projects may still be able to move forward at current term prices
(which include the DOE inventory price effect). '' 2017 ERI Report, 73-
74.
In the UxC Uranium Production Cost Study (2015), UxC refers to
facilities that are ``planned'' and that are ``potential.'' UxC notes
that, [REDACTED]. UxC also notes that planned projects have higher
risks than operating projects, which would necessitate higher rates of
return. UxC Uranium Production Cost Study, 60. UxC states that there is
a lower level of confidence in estimates about potential facilities. In
addition, UxC states that [REDACTED]. UxC Uranium Production Cost
Study, 62, (2015). As an example of some of the difficulties facing
potential facilities versus planned facilities, UxC refers to a
potential project in Virginia, where there is a statewide ban on
uranium production.
UxC divides the planned and potential projects into cost bands.
According to UxC, [REDACTED]. We believe that some of the differences
between ERI and UxC may be attributable to the assumptions regarding
the construction of production cost factors, such as reclamation costs,
and the fact that UxC's 2015 report does not take account of efficiency
improvements at some facilities in the last 18 months.
DOE's task is to assess what the state of affairs would be with and
without the planned transfers. DOE believes that industry reports such
as UxC's, which provide data about the expected costs of actual
projects, provide an additional foundation upon which to conduct its
analysis. Since uranium prices decreased in the recent past, it is not
surprising that producers have reduced their activities to develop new
resources, as reflected in the EIA data. However, consistent with the
analytical approach described above, the relevant question is what will
be the effect on these activities of DOE transfers in the future.
DOE believes that one approach is to compare the expected market
price with and without DOE transfers to estimated production costs at
potential new production centers. The incremental impact of $1.40 per
pound under the Base Scenario as assessed by DOE does not appear to
markedly change decisions whether to develop future production centers.
On this basis, DOE agrees with ERI's conclusion that whether DOE makes
these transfers is not likely to affect the economic viability of new
U.S. production centers in development.
Furthermore, DOE believes that future capital projects and
production decisions are more likely to be based on future expectations
about market prices, which we believe are tied closely to an expected
increase in demand and the impact of recent production cutbacks, as
well as contracting trends, rather than on a straightforward comparison
of current market prices to production cost. New production centers are
a long-term investment, and new facilities require several years of
lead-time before production can begin. Many producers are unwilling to
bring a new facility into production without long-term supply contracts
in place that reflects expected market conditions.
Additionally, as a long-term investment, the outlook for financing
any development or expansion of uranium projects should be tied to the
long-term expectations for growth in nuclear power. However, the
current outlook for certain plants facing premature closure, due in
part to electricity market challenges, has colored the near-term
outlook of investors and may have made financing these projects more
challenging. Market capitalization is representative of a company's
ability to raise funds needed to move a project through licensing,
which can take many years, as well as through initial project
development. ERI observed that the market capitalization of the smaller
mining companies is more sensitive to changes in the spot market price
compared to the larger companies. 2017 ERI Report, 70.
Some NIPC commenters indicated the necessity to suspend development
plans or to limit production expansion. One indicated it was deferring
well-field development. Another commenter noted a drop in EIA's
reported development and exploration expenditures and suggested these
numbers be used as a proxy to measure corporate decisions on capital
expenditures. DOE believes the overall market pricing condition is the
most significant driver for capital development plans. Based upon our
analysis of price effect of future transfers, DOE does not believe that
its near-term future transfers will have an adverse material impact on
uranium mining industry development plans.
DOE concludes that transfers at the Base Scenario level, which
represent about 4% of global supplies in 2017-2019, seem unlikely to
change whether a uranium project proceeds as the other market forces
and expectations will have significant influence on these longer-term
decisions.
5. Long-Term Viability and Health of the Industry
ERI reports that five new production centers began operation since
2009: Two in 2010, one in 2013, one in 2014, and one in 2015. 2017 ERI
Report, 67.
ERI also presents its future expectations regarding demand for
uranium. ERI's most recent Reference Nuclear Power Growth forecasts
project global requirements to grow to
[[Page 21617]]
approximately 190 million pounds annually by 2025. ERI attributes this
increase in global requirements to an expansion of nuclear generation
in China, India and South Korea, as well as new nuclear power entrants.
While global demand for uranium is expected to increase, projected U.S.
requirements will remain generally steady. 2017 ERI Report, 18-19.
Overall, ERI's Reference Forecast for total world nuclear power
generation capacity is consistent with a steady average annual nuclear
capacity growth rate of 2% through 2035. A 9% decline is projected in
the U.S. by 2035, with a 30% decline in Western Europe. 2017 ERI
Report, 7. ERI notes that its Reference Forecast for nuclear fuel
requirements in its 2017 Report is lower than its Reference Forecast in
its 2015 Report due to assumptions of a slower pace of restart of
Japanese reactors and the announced and projected premature closing of
nuclear power plants in the U.S. and Western Europe. A reduction in
nuclear power in France and slower than previously projected growth of
nuclear power in Russia contribute to the lesser increase in nuclear
capacity growth between 2020 and 2026. 2017 ERI Report, 4-5.
There are a number of important market factors that have influenced
the relationship between supply and demand (hence price) since DOE
inventory transfers began. These other factors include: Demand losses
due to the Japanese reactor shutdowns following the Fukushima Daiichi
accident, demand losses due to changes in German energy policy,
increased uranium production in Kazakhstan, increased secondary supply
created using excess enrichment capacity (both underfeeding and upgrade
of Russian enrichment tails), the planned ramp-up of Russian uranium
under the Suspension Agreement, and the end of the U.S. Russian HEU
Agreement in 2013. The effect of DOE inventory can be considered in the
broader context of other market factors. ERI notes that DOE inventory
was equivalent to about 6% of all the uranium market factors (including
DOE) in 2012, rising to 9% in 2013-2014 before declining back to 7% in
2016. ERI predicts that the total of all the non-DOE uranium market
factors is expected to remain fairly constant over the next decade as
the slow increase in Japanese reactor restarts is offset by additional
retirements in Germany. The Base Scenario DOE share remains in the 7%-
8% range with the exception of 2020 and 2021 when it drops to 5% and
1%, respectively. If Scenario 1 DOE inventory is assumed, the DOE share
declines to just 1% over the next decade. Scenario 2 averages 6% while
Scenario 3 averages 8% in 2017-2026. 2017 ERI Report 100-101.
The TradeTech Report in the UPA RFI comments cites many of the same
market factors which ERI has accounted for, including persistent
oversupply in the uranium market and reduced demand as a result of
premature plant closures, as well as the DOE supplied uranium.
Several commenters in response to the July 2016 RFI predict a
recovery in either spot or term uranium prices. Cameco, in its comment,
states that while ``the long-term future of the uranium industry is
strong, the market remains oversupplied due in part to the slow pace at
which Japanese reactors have come back on line since the Fukushima
accident and the closure of a number of U.S. reactors.'' RFI Comment of
Cameco, at 1.
DOE recognizes that, as with any prediction, the future course of
events may differ from forecasts. However, as explained in this
analysis as well as in the 2015 Secretarial Determination and Analysis,
DOE believes it is possible to forecast reactor requirements with a
fairly high degree of precision. The various sources DOE has consulted,
including the ERI report, offer similar forecasts, and DOE concludes it
is appropriate to rely on those forecasts.\40\ Alternately, forecasts
of production may be somewhat more uncertain. DOE draws similar
conclusions in this Determination as in 2015: In aggregate, overall
forecasts of aggregate supply are appropriate predictions of the
likeliest course of events, and the various sources DOE has consulted
offer similar forecasts, and DOE concludes it is appropriate to rely on
them.
---------------------------------------------------------------------------
\40\ DOE notes that even though the 2015 Secretarial
Determination and Analysis described an expected price recovery
predicted by various market forecasts, uranium prices have decreased
since May 2015. Despite that decrease, it is notable that those same
market forecasts continue to forecast an increase in price, although
they have adjusted the expected timeline for such a recovery. As
emphasized in the 2015 Determination and Analysis, this is to be
expected given the uncertainty of future market predictions,
especially in the short-term. Nevertheless, DOE continues to believe
that over the long-term, the rough course of future supply can be
predicted with a reasonable degree of certainty.
---------------------------------------------------------------------------
Commenters note that DOE transfers have affected and will affect
the industry in other ways. ConverDyn stated that uncertainty related
to DOE uranium transfers adds to the difficult conditions currently
facing the industry. RFI Comment of ConverDyn, Enclosure 1, at 2.
Energy Fuels Resources (Energy Fuels), in its comment, hypothesizes
that the value of domestic uranium mines and projects has diminished
due to declining uranium prices since 2011 and an oversupplied market.
RFI comment of Comment of Energy Fuels, at 2. Energy Fuels notes that
``persistent oversupply from price insensitive sources and limited
uncommitted demand.'' RFI Comment of Energy Fuels, at 3. This view is
reiterated in RFI comments by the New Mexico Mining Association, noting
that ``DOE's material effectively consumes any available uncommitted
demand available to (potential New Mexico) producers.'' RFI Comment of
New Mexico Mining Association, at 1.
Additionally, a number of commenters have pointed out that excess
inventory needs to be absorbed before a market recovery can occur.
Commenters point to EIA data showing an increase in U.S. utility
inventory. Energy Fuels and the Uranium Producers of America state
that, ``the excess supply is absorbed primarily by the trading
community that then finances the material for forward sales. As a
result, this delays the prospects for a price recovery by ``stealing''
future uncommitted demand that would otherwise be available in upcoming
years.'' RFI Comment of Energy Fuels, at 5; RFI Comment of UPA, at 7.
Energy Fuels also remarks, ``[a]s more reactors go offline and
higher priced long-term pre-Fukushima legacy contracts expire, along
with DOE material continuing to enter the market, conditions will
continue to deteriorate for the production industry.'' Comment of
Energy Fuels, at 5. Additional commenters shared this view. FBP
commented that U.S. producers are ``far less competitive than available
non-U.S. supply'' and that non-U.S. producers are better poised to meet
any increase in demand because they can provide material at production
costs that are below those of U.S. producers. RFI Comment of FBP, at 5.
UxC's Uranium Production Cost Study supports the view that [REDACTED].
Regarding supply, FBP notes the increase in global production since
2007, despite falling prices and reduced reactor demand. RFI Comment of
FBP, at 5. ``The failure of primary supply to reduce production to
match needs is encouraged by long-term contracts at higher than current
spot market prices and the significant supply controlled by Sovereign
governments.'' Citing the NAC International Fuel-Trac data base, FBP
notes that ``it is estimated that around 60% of the 2016 production was
controlled by Governments,'' and suggests that, ``[d]ue to the large
excess worldwide production increases, neither spot market prices, nor
U.S.
[[Page 21618]]
production competitiveness are expected to improve appreciably in the
near-term.'' RFI Comment of FBP, at 8. DOE notes that the largest
producer in the world--Kazakhstan--has indicated that it will reduce
production by 10% in the coming years. This will help bring supply and
demand into balance sooner than if they had continues to produce at
prior levels. FBP also suggests that exchange rates have affected
competitiveness resulting in lower effective production costs for non-
U.S. suppliers. RFI Comment of FBP, at 10. [REDACTED] UxC in their
Uranium Market Outlook, Q1 2016, 6 and Uranium Production Cost Study,
107-108.
The Wyoming Mining Association suggests that the Department
consider drilling as a ``harbinger metric for the uranium recovery
industry's maintenance and growth.'' RFI Comment of Wyoming Mining
Association, at 2. EIA reports that the number of holes drilled for
exploration and development in the U.S. in 2015 was 1,218, down from
11,082 in 2012 and 5,244 in 2013, declines of 86% and 71%,
respectively. Similarly, EIA reports 878 thousand feet drilled in 2015,
down from 7,156 thousand feet in 2012 and 3, 845 thousand feet drilled
in 2013, declines of 88% and 77%, respectively. EIA, 2015 Domestic
Uranium Production Report (2016), at 3. UxC points out that during
periods of sustained low prices, development is discouraged and higher
price mines may be forced to close. [REDACTED] UxC Uranium Market
Outlook, Q1 2016, 6.
Even if existing production centers continued producing uranium at
their current rates, prices could be expected to increase as
requirements increase. Consistent with the ordinary operation of supply
and demand, higher prices would be necessary to bring additional
supplies into the market. In fact, as existing production centers are
depleted, the predicted replacements will have slightly higher
production costs. Thus, higher prices will be necessary in the future
even to maintain production at current levels. For these reasons the
price of uranium is likely to increase over the coming decade.
Based on the incremental impact of DOE EM transfers on price, and
the predicted future increases in price, these DOE EM transfers will
not prevent new facilities from coming online, but could potentially
affect the timing of such supply additions. DOE does not believe that
this impact is significant enough to appreciably affect the long-term
viability and health of the industry.
FBP, in its NIPC comments at 3 noted that FBP's subcontractor
Traxys has sold DOE-FBP-Traxys material to a Wyoming uranium production
who is using the purchased material to deliver on high-priced
contracts. FBP notes that ``this support was a direct result of the
U.S. miners calling upon the Department and FBP to make DOE uranium
available to U.S. producers that they could then deliver into their
long-term contracts.'' FBP notes that this offset foreign imports and
that Traxys has extend this offer to other U.S. producers as well. Thus
the bartered material, in some cases helps support U.S. industry. FBP
NIPC comment, 3.
In addition, some NIPC commenters stated that the uranium market
remains oversupplied due to a number of factors. Those factors include
the slow pace of return of Japanese reactors after the Fukushima
accident, early permanent shutdown of a number of existing U.S.
reactors and delayed construction of new U.S. reactors. While UPA noted
that this oversupply is an unhealthy situation threatening the long-
term viability of the domestic market Cameco stated that they believe
that the long-term future of the uranium industry is strong. NIPC
Comment of UPA, at 16. DOE believes the world-wide construction of new
reactors, return of many of the Japanese reactors and construction of
new reactors in the United States will be positive for the uranium
market and that the long term viability of the industry.
6. Russian HEU Agreement and Suspension Agreement
Section 3112(d) of the USEC Privatization Act requires DOE to
``take into account'' the sales of uranium under the Russian HEU
Agreement and the Suspension Agreement. Consistent with this
instruction, DOE believes this assessment should consider any sales
under these two agreements that are ongoing at the time of DOE's
transfers.
Under the Russian HEU Agreement, upon delivery of LEU derived from
Russian HEU, the U.S. Executive Agent, USEC Inc., was to deliver to the
Russian Executive Agent, Techsnabexport (Tenex), an amount of natural
uranium hexafluoride equivalent to the natural uranium component of the
LEU. The USEC Privatization Act limited the volume of that natural
uranium hexafluoride that could be delivered to end users in the United
States to no more than 20 million pounds U3O8 in
each year after 2009. ERI has in the past analyzed material from the
Russian HEU Agreement as part of worldwide secondary supply. DOE notes
that the Russian HEU Agreement concluded in December 2013. Thus, there
are no ongoing transfers under this agreement.
The current iteration of the Suspension Agreement, described above
in Section I.D.3.ii, sets an annual export limit on natural uranium
from Russia. 73 FR 7705 (Feb. 11, 2008). That agreement provides for
the resumption of sales of natural uranium and SWU beginning in 2011.
While the HEU Agreement remained active (i.e., 2011-2013), the annual
export limits were relatively small--equivalent to between 0.4 and 1.1
million pounds U3O8. After the end of the Russian
HEU Agreement, restrictions range between an amount equivalent to 11.9
and 13.4 million pounds U3O8 per year between
2014 and 2020. 73 FR 7705, at 7706 (Feb. 11, 2008). As mentioned above,
in September 2016, the Department of Commerce proposed to adjust the
export limits under the agreement to take account of changes in
projected reactor demand. The proposed adjusted limits would allow an
additional 429,000 pounds U3O8 from Russia into
the United States between 2016 and 2020. The additional amount varies
by year, but on average, the proposed limits are 6.6% higher than
current limits.
Material imported from Russia in accordance with the Suspension
Agreement is derived from primary production rather than from down-
blended HEU. The 2017 ERI Report takes account of uranium entering the
United States under the current Suspension Agreement limits as part of
total worldwide primary supply. The 2017 ERI Report does not consider
the effect of the additional amount that would be allowed into the
United States were the Department of Commerce to adopt the adjusted
limits as proposed.
DOE believes that it is still appropriate to rely on ERI's analysis
without adjusting for the proposed changes to the Suspension Agreement
quota limits. As an initial matter, it bears emphasis that the volume
of the proposed adjustment is small relative to the current limits
under the Suspension Agreement, to United States requirements, and
worldwide requirements. Nominally, the adjustment adds no more than
180,000 pounds U3O8 in any given year. Further,
it is not clear that Russia would increase production of uranium
concentrates to take advantage of this additional quota. Even without
the change to the Suspension Agreement, Russia is still free to seek
buyers for its uranium in other countries. More important, there is
reason to believe that Russian suppliers would not take full advantage
of the adjusted quota with respect to natural uranium. DOE understands
that a
[[Page 21619]]
significant portion of Russian uranium entering the United States under
the agreement enters via SWU-only contracts.\41\ Unlike EUP, which
contain the Russian uranium component, SWU-only imports do not. This is
because the purchaser would be required under the contract to deliver
to the seller an amount of natural uranium equivalent to that contained
in the enriched uranium. That natural uranium would need to be
purchased on the open market, i.e., from non-Russian sources.
---------------------------------------------------------------------------
\41\ Taking information from the ERI Report on the proportion of
material supplied under the Suspension Agreement in the form of EUP
sales, DOE assumes at least 20% of material going to SWU-only
contracts. 2017 ERI Report, 102.
---------------------------------------------------------------------------
For these reasons, DOE's analysis takes sales of uranium under the
Suspension Agreement into account as part of overall supply available
in the market, and the proposed adjustments are small enough that even
if they are adopted, the adjusted figures would not significantly alter
DOE's analysis.
7. Mining Industry Conclusion
After considering the factors discussed above, DOE concludes that
transfers under either the Base Scenario, which represents the current
rate of EM transfers, or the lower transfer rate of 1,200 MTU per year
beginning in May 2017 will not have an adverse material impact on the
domestic uranium mining industry. As explained above, DOE transfers
under the Base Scenario will continue to exert some downward pressure
on the market price for uranium concentrates. However, the forecasted
price effect of $1.40 per pound U3O8 reasonably
attributable to DOE transfers is somewhat smaller than the effect
attributable to transfers in the past few years. DOE believes that
transfers at the lower rate will have a slightly lower effect on market
prices.
Because the majority of deliveries of uranium concentrates take
place under long-term contracts that allow producers to realize prices
based on term prices prevailing at the time the contracts were entered
and because essentially all U.S. producers have at least partially
hedged from the spot price, DOE concludes that the average effect on
the realized price of U.S. producers under current contracts is less
than that amount. For future term contracts, price suppression
associated with DOE transfers would decrease the base price of future
long-term contracts, potentially decreasing the average realized price
over the life of each contract. However, DOE concludes that this type
of effect will be minimal because the impact of the transfers under
either scenario is small and within the range of normal market
fluctuations.
DOE transfers are expected to have a small effect on employment in
the domestic industry, but the magnitude of this effect is well within
the range of employment fluctuations the industry has experienced in
the past due to market conditions unrelated to DOE transfers.
Even focusing on the entities most likely to be impacted--i.e.,
producers that sell primarily on the spot market and are thus not as
protected from fluctuations in the spot price--it is not likely that
removing the price effect attributable to DOE transfers would be enough
to materially change the relationship between price and cost for any
producer with respect to production levels at currently operating
facilities or decisions whether to proceed with developing new
production centers. Both types of decisions involve considerations
beyond current spot prices, and they likely will be based on
expectations about future trends in market price. DOE concludes that,
given the expected increases in future demand for uranium concentrates
and, more importantly, the expected increases in market prices, the
price effect attributable to DOE might delay decisions to expand or
increase production capacity but would not change the eventual
outcomes. DOE does not believe that these effects have the substantial
importance that would make them ``adverse material impacts'' within the
meaning of section 3112(d).
B. Uranium Conversion Industry
The domestic uranium conversion industry consists of a single
facility, the Metropolis Works (MTW) in Metropolis, Illinois. This
facility is owned and operated by Honeywell International Inc. MTW has
a nameplate capacity of 15,000 MTU as UF6. ConverDyn, Inc.
(ConverDyn) is the exclusive marketing agent for MTW. MTW and ConverDyn
may be referred to interchangeably, because the two appear to have
essentially the same interests in uranium markets.
1. Prices for Conversion Services
Prices in the conversion markets are generally described in terms
of spot and term price, like the uranium concentrates market. The
following discusses the potential impact of DOE transfers on these two
prices. For reference, as of April 17, 2017, UxC spot price indicator
was $5.85 per kgU as UF6, and the [REDACTED].\42\ DOE
obtained information about conversion services prices from Energy
Resources International. In its NIPC comment, ConverDyn shared that
conversion services spot prices are 30% lower and long-term prices 22%
lower than compared with the prices used in the 2015 Secretarial
Determination. NIPC Comment of ConverDyn at 1.
---------------------------------------------------------------------------
\42\ UxC, Ux Weekly, April 17, 2017 (Volume, 31, Number 16) at
1.
---------------------------------------------------------------------------
i. Energy Resources International Report
In the 2017 ERI Report, like the 2015 ERI Report, ERI estimated the
effect of DOE transfers on the market prices for conversion services
using a market clearing price methodology. As with the uranium
concentrates, ERI conducted the clearing prices analysis on both an
annual and cumulative basis, constructing individual supply and demand
curves for conversion services and estimating the clearing price with
and without DOE transfers. 2017 ERI Report, 44. ERI's clearing price
effect on conversion services represents a change in the market-
clearing price for spot prices. The same DOE transfer scenarios
described in Section IV.A.1 were used in the analysis.
Like the uranium concentrates analysis, we first present the
estimates of the price impacts in the market clearing models using the
two different supply side approaches. It is important to emphasize
that, under either approach, these numbers do not constitute a
prediction that prices will decrease by the specified amounts following
DOE transfers under a new determination and, further, that the impact
of prior transfers is already taken into account by the market in the
current spot prices.
To gain additional perspective, we then assess the impact of future
DOE transfers under the cumulative methodology based on the difference
in market clearing price in any given year between a scenario with zero
EM releases of uranium (scenario 1) compared to the scenarios where EM
uranium is released at different rates.
Using the market clearing price model, on an annual and cumulative
basis, ERI estimates that DOE transfers will have the price effects on
the conversion services industry listed in Tables 7 and 8,
respectively.
[[Page 21620]]
Table 7--ERI's Estimate of Effect of DOE Transfers on Conversion Prices in $ per kgU as UF6
[Annual market clearing approach]
----------------------------------------------------------------------------------------------------------------
ERI Base
ERI Scenario 1-- Scenario current ERI Scenario 2 ERI Scenario 3
no EM transfers level (1,600 MTU/ lower level higher level
year) (1,200 MTU/year) (2,000 MTU/year)
----------------------------------------------------------------------------------------------------------------
2017................................ $0.10 $0.40 $0.30 $0.40
2018................................ 0.00 0.10 0.10 0.10
2019................................ 0.20 0.60 0.50 0.50
2020................................ 0.20 0.30 0.40 0.20
2021................................ 0.00 0.00 0.10 0.00
2022................................ 0.10 0.10 0.10 0.10
2023................................ 0.10 0.10 0.10 0.10
2024................................ 0.40 0.40 0.40 0.40
2025................................ 0.50 0.50 0.50 0.50
2026................................ 0.50 0.50 0.50 0.50
Average (2017-2026)................. 0.20 0.30 0.30 0.30
----------------------------------------------------------------------------------------------------------------
Table 8--ERI's Estimate of Effect of DOE Transfers on Conversion Prices in $ per kgU as UF6
[Cumulative market clearing approach]
----------------------------------------------------------------------------------------------------------------
ERI Base
ERI Scenario 1-- Scenario current ERI Scenario 2 ERI Scenario 3
no EM transfers level (1,600 MTU/ lower level higher level
year) (1,200 MTU/year) (2,000 MTU/year)
----------------------------------------------------------------------------------------------------------------
2017................................ $0.90 $1.10 $1.10 $1.10
2018................................ 1.10 1.10 1.10 1.20
2019................................ 1.60 2.30 2.10 2.30
2020................................ 1.50 1.90 1.90 1.80
2021................................ 0.10 0.70 0.80 0.70
2022................................ 0.20 0.20 0.20 0.20
2023................................ 0.10 0.10 0.10 0.10
2024................................ 0.40 0.40 0.40 0.40
2025................................ 0.50 0.50 0.50 0.50
2026................................ 0.50 0.50 0.50 0.50
Average (2017-2026)................. 0.70 0.70 0.90 0.90
----------------------------------------------------------------------------------------------------------------
We next determine the marginal price effect under the cumulative
methodology. For the same reasons described in Section IV.A.1, the
impact of future DOE transfers is best understood and expressed as the
marginal or incremental difference between zero EM transfers compared
to scenarios with EM transfers. Scenario 1 serves as the point of
reference for the analysis of price effects from the other scenarios of
DOE releases because it includes the price effects from prior DOE
uranium inventory releases plus an increment for the NNSA transfers but
no EM transfers.
Table 9 provides the price effects estimated by ERI for the varied
scenarios of EM transfers under the cumulative method expressed as the
marginal price effect.
Table 9--Marginal Price Effect of Varied Rates of DOE Transfers on Conversion Prices in $ per kgU as UF6--
Cumulative Method
[Cumulative market clearing approach]
----------------------------------------------------------------------------------------------------------------
ERI Scenario 1-- ERI Base scenario ERI Scenario 2 ERI Scenario 3
no EM transfers current level lower level higher level
(1,600 MTU/year) (1,200 MTU/year) (2,000 MTU/year)
----------------------------------------------------------------------------------------------------------------
2017................................ $0.00 $0.20 $0.20 $0.20
2018................................ 0.00 0.00 0.00 0.10
2019................................ 0.00 0.70 0.50 0.70
2020................................ 0.00 0.40 0.40 0.30
2021................................ 0.00 0.60 0.70 0.60
2022................................ 0.00 0.00 0.00 0.00
2023................................ 0.00 0.00 0.00 0.00
2024................................ 0.00 0.00 0.00 0.00
2025................................ 0.00 0.00 0.00 0.00
2026................................ 0.00 0.00 0.00 0.00
Average (2017--2026)................ 0.00 0.20 0.20 0.20
----------------------------------------------------------------------------------------------------------------
[[Page 21621]]
Table 9 illustrates that, for example, the price effect
attributable to DOE transfers under the Base Scenario in 2017 would be
0.20, the difference between the cumulative price effect under the Base
Scenario ($0.30) and the cumulative price effect under Scenario 1
($0.10). In other words, prices would be suppressed by the marginal or
incremental amount of $0.20 if DOE pursues the EM transfers under the
Base Scenario, not $0.30, as the current price already includes the
price suppression of $0.10 (Scenario 1 point estimate price) from
previous DOE releases.
ERI also presented information on the cumulative clearing price
effect relative to ``No DOE'' clearing price for uranium, where the
``No DOE'' clearing price assumes that DOE releases from 2009 onward
were zero. 2017 ERI Report, 60. Table 4.8 in the ERI Report provides
assessment of price impacts going forward, for the period 2017 to 2026,
and the estimated change in the conversion clearing price attributable
to the DOE inventories under the four scenarios relative to the ``No
DOE'' market prices. The cumulative percentage change in prices noted
in ERI's Table 4.8 also can be expressed as a marginal effect to better
represent how future EM inventory releases would affect prices.
Table 10 presents the marginal price effect expressed as a
percentage of market price.
Table 10--Cumulative Marginal Price Effects as Percentage of ``No DOE'' Clearing Price
----------------------------------------------------------------------------------------------------------------
ERI Base scenario ERI Scenario 2 ERI Scenario 3
current level lower level higher level
(1,600 MTU/year) (1,200 MTU/year) (2,000 MTU/year)
marginal % marginal % marginal %
----------------------------------------------------------------------------------------------------------------
2017................................................... 2 2 3
2018................................................... 1 1 2
2019................................................... 5 4 5
2020................................................... 3 3 2
2021................................................... 5 5 5
2022................................................... 0 0 0
2023................................................... 0 0 0
2024................................................... 0 0 0
2025................................................... 0 0 0
2026................................................... 0 0 0
Average (2017--2026)................................... 3 3 3
----------------------------------------------------------------------------------------------------------------
For example, under Scenario 1, where EM transfers are halted
starting in 2017, average conversion prices for the period 2017-2016
would be 3 higher (7% - 4%) than under Scenario 1. Stated otherwise,
the percentage price effect for each scenario other than Scenario 1 is
the difference between the cumulative percentage for the Scenario in
question and the cumulative percentage change for Scenario 1. E.g., in
year 2020, under the Base Scenario prices would be 3% (15% - 12%)
higher than under Scenario 1.
As with uranium concentrate pricing, DOE has considered the 2017
ERI Report and ERI's explanation of its market clearing price
methodology with respect to the conversion market. With respect to the
spot market, DOE's conclusions regarding ERI's methodology apply
equally to conversion as they do to uranium concentrates. However, for
the reasons explained in the 2015 Secretarial Determination and
Analysis, DOE believes that the clearing price model will greatly
overestimate the effect of DOE transfers on the conversion term price.
In essence, ERI's market clearing approach--either annual or
cumulative--assumes that the conversion price arises from a competitive
market price-setting mechanism. This does appear to be the case for the
spot market, which has a large number of suppliers and appears to
quickly respond to changes in supply in demand. The term price,
however, does not appear to arise from a competitive price-setting
mechanism. Certain aspects of the conversion services market lend
support to this conclusion. For one, the term conversion market is
highly concentrated and consists of a very small number of primary
suppliers. Highly concentrated markets such as these may be susceptible
to parallel pricing such that pricing decisions may be unresponsive to
changes in supply and demand. In addition, demand for nuclear fuel is
relatively inelastic in the mid-term--this is particularly true for
conversion services given that conversion makes up a smaller proportion
of the price of enriched uranium product than enrichment or uranium
concentrates. Meanwhile, conversion is a necessary step in the fuel
cycle, and conversion facilities operate with a relatively high degree
of investment compared to their variable costs. To ensure that
conversion capacity remains available, it could be rational for
utilities to accept and commit to higher prices than a free price
mechanism reflecting available supply and demand would produce.
This is consistent with how the conversion term price has reacted
in recent years to changes in supply in demand. The 2015 Secretarial
Determination and Analysis described the response of the conversion
term price to market changes prior to 2015. Since then, although the
conversion term price has fallen, it still remains at more than twice
the current spot price. Furthermore, there is reason to believe that
the recent decline in conversion term price does not necessarily
reflect a decrease in the price that primary converters are able to
command for long-term contracts. As reported by UxC, [REDACTED]. UxC
Conversion Market Outlook at 33. [REDACTED] Id. at 32. [REDACTED] Id.
at 51. This supports the notion that utilities have been willing to
accept and commit to higher prices than a competitive price mechanism
would produce. For these reasons, although ERI's market clearing
approach provides a reasonable estimate of the effect of DOE transfers
on the conversion spot price, it likely significantly overstates the
effect on the conversion term price.
ii. Effect of DOE Transfers on Market Prices
Based on the foregoing discussion of market analyses and DOE's
consideration of the different
[[Page 21622]]
methodologies, DOE concludes that pursuing the level of transfers under
the Base Scenario will suppress the spot market price of uranium
conversion on average in the next decade in either $0.20 or $0.30 per
kgU, based on the marginal cumulative clearing price approach and the
annual clearing price approach, respectively. After analyzing all of
the estimates available, DOE bases its conclusions here on the largest
possible price effect of the transfers in any given year, in this case
the annual market-clearing price effect of $0.30 per kgU. This estimate
is approximately the same as the average price effect for the near-
term--from 2017 through 2019--of $0.30 (cumulative) or $0.36 (annual)
per kgU. Further, DOE transfers will be conducted at rates even lower
than the Base Scenario, closer in effect to those posited in Scenario
2, creating a positive effect on market prices of roughly $0.10 in 2017
as compared to the Base Scenario, the difference between the Base
Scenario price effect ($0.40) and Scenario 2 price effect ($0.30) under
the annual method. DOE further concludes that its transfers will have
essentially no effect on the term price for conversion.
Similar to uranium concentrates, the significance of price
suppression at this level depends, in part, on current and forecasted
market prices. UxC's Nuclear Fuel Price Indicators, showed $5.85 per
kgU as the spot market price at the end of March 2017. The forecast
price effect reasonably attributable to DOE transfers ($0.30 per kgU)
represents about 5% of these current market values. This result is more
conservative than that shown in Table 10, which reflects in 2017 only a
2% marginal cumulative price effect for DOE transfers in the Base
Scenario under the ``No DOE'' clearing price approach. However, in any
case, most conversion is sold under long-term contracts not using spot
prices, and the sole domestic converter makes most of its sales that
way.
Moreover, the price effect of $0.30 is within the range of market
fluctuations experienced in the conversion industry in recent years. As
previously noted, ERI's statistical model of price volatility on an
annualized basis (as shown in 2017 ERI Report, Figures 4.34 and 4.35)
illustrates the conclusion that historical price volatility is
noticeably higher for the uranium and conversion markets than for the
enrichment market over the long term, although enrichment term price
volatility has been higher and conversion term price volatility has
been lower, relatively, in the last two years. 2017 ERI Report, 94-96.
For example, the spot prices of conversion from January 2015 to
December 31, 2016 declined by 30%, and from December 31, 2016 to the
March 2017, declined by 2.5%. For term prices, the change from January
2015 to December 31, 2016 was 19%. Price effects that are about 5% are
not substantial or outside historical experience in the conversion
markets.
It is also appropriate to compare the price effect in future years
to forecasted market prices in those years. Using near-term projected
spot market prices from UxC's Conversion Market Outlook--Dec 2016, at
78, [REDACTED], DOE calculates that the average price effect of planned
DOE transfers under the Base Scenario assuming a price effect of $0.30
per kgU would cause an average percent decrease in the near-term of 5%
per year. Looking at UxC's 10-year average price projections yields a
[REDACTED] price change. While ERI's market-clearing price effect is
not intended to be a direct price forecasting tool, using the ERI
Reference Case price forecasting data allows us to derive an
approximate percentage future effect. This is also in line with the
average percentage cumulative marginal effect calculated based on ERI's
projected percentage changes.
iii. Effect on Realized Prices
A principal mechanism through which a change in market price could
impact the domestic conversion industry is through the effect on the
prices that they actually receive for the uranium they sell--the
``realized price.'' As with uranium concentrates, market prices would
affect MTW chiefly through their effect on the price it actually
realizes for its services. Since the domestic conversion industry
consists of only one producer, the effect of DOE transfers depends on
the mix of contracts on which MTW's services are sold: the proportion
of spot and term contracts, and the extent to which these contracts
lock in prices higher (or lower) than current market prices or
conversely expose MTW to spot prices. ERI projects that global uranium
conversion services requirements will average 58.7 million kgU/year
between 2017 and 2019. U.S. requirements are expected to average about
17.2 million kgU in the same timeframe. 2017 ERI Report, 84. Based on
transfers at the Base Scenario level, ERI projects that DOE transfers
will constitute approximately 4% of the global requirements for
conversion services in 2017-2019. 2017 ERI Report, 43.
No commenter provided specific information about the current
realized prices achieved in the conversion industry, and no commenter
directly estimates the effect of DOE's transfers on realized prices. As
stated above, DOE understands that the conversion market generally
relies on mid- and long-term contracts. UxC Conversion Market Outlook--
December 2016, 30-31. [REDACTED] 43 44 45Id. at 33.
[REDACTED] Id. at 29. [REDACTED] Id. at 29.\46\ Assuming this spot
contracting activity was divided proportionately by production among
the Western converters based on UxC's estimated production levels over
that time period, ConverDyn's share would have been roughly 1,000,000
kgU spread out over three years.\47\ If trends continue at this rough
rate, DOE conservatively estimates that ConverDyn's exposure to the
spot market price could be no more than 350,000 kgU per year, or less
than 4% of estimated production over that period.\48\
---------------------------------------------------------------------------
\43\ UxC Conversion Market Outlook, December 2016, 68.
\44\ UxC Conversion Market Outlook, December 2016, 51.
\45\ UxC Conversion Market Outlook, December 2016, 71.
\46\ [REDACTED], Id. at 29.
\47\ The converters are typically divided into two groups, the
``Western'' converters and the ``non-Western'' converters in Russia
and China. The Western converters consist of MTW, Cameco's Port Hope
facility in Ontario, Canada, and AREVA's Comurhex facility in
France. There is also a very small conversion facility in Sao Paulo,
Brazil, with a capacity of approximately 100,000 kgU as UF6.
\48\ DOE believes this is a conservative estimate for several
reasons. First, as mentioned above, the primary converters have been
a significant purchaser in the spot market in recent years; in fact,
[REDACTED]. Second, 2016 spot contracting activity was lower than in
previous years, a trend that may continue into 2017 and 2018. Third,
it appears that not all spot contracting for conversion in 2015 and
2016 were filled by primary supply, even when the seller was a
primary converter. [REDACTED] Id. at 29
---------------------------------------------------------------------------
To the extent that ConverDyn engages in spot sales, they represent
no more than 4% of its total sales, and likely represent significantly
less. Considering this in combination with ConverDyn's past statements
about its contracting practices, namely that ConverDyn's long-term
contracts are priced at the prevailing term price (with some escalation
for inflation), and that [REDACTED], DOE concludes that ConverDyn has
virtually no exposure to the spot price.
As explained above, the Department concludes that the term price
will remain relatively stable despite DOE's transfers. Therefore, DOE
concludes that planned uranium transfers under the Base Scenario will
not appreciably affect ConverDyn's realized price for its services.
2. Production at Existing Facilities
There is only one existing conversion facility in the United
States, the Metropolis Works facility (MTW) in Metropolis, Illinois,
operated by
[[Page 21623]]
Honeywell International. ConverDyn is the exclusive marketing agent for
conversion services from this facility. RFI Comment of ConverDyn, at 1;
2015 ERI Report, 64. This section focuses on the potential effects of
DOE transfers on production at MTW, including the impact on sales
volumes and changes in average production costs.
ERI estimated the effect of DOE transfers on production at MTW
based on a series of assumptions about ConverDyn's production volume
and market share derived in part from various statements from
ConverDyn.\49\ Based on publicly available information, including a
declaration presented by ConverDyn in support of litigation against
DOE, DOE's 2015 Secretarial Determination and Analysis, and an estimate
by another converter, ERI estimates that ConverDyn's annual production
volume is 10 million kgU. 2017 ERI Report, 81.
---------------------------------------------------------------------------
\49\ The analysis below differs from the discussion above
regarding production by the domestic mining industry. The two
industries and markets have different characteristics. With respect
to mining, the presence or absence of DOE transfers is expected to
result in a small change in uranium prices. The result of a price
increase or decrease would be to motivate a production increase or
decrease, respectively, by the producers with marginal costs in the
relevant range. By contrast, as discussed below, converters
generally have relatively low variable costs. DOE estimates that
ConverDyn's marginal cost is substantially lower than the current
spot price for conversion. Thus, changes in price do not motivate
production in the same way as in the uranium markets, and a
different approach is warranted for estimating production changes.
---------------------------------------------------------------------------
In estimating the effect of DOE transfers on ConverDyn's sales
volume, ERI assumes that 50% of the material EM transfers in exchange
for cleanup services and 100% of all other DOE material enters the U.S.
market. 2017 ERI Report, 82. Based on statements from ConverDyn, ERI
assumes that ConverDyn's current share of the U.S. market for
conversion services is 25% and that its share of the international
market is 24%. 2017 ERI Report, 86.
ERI also estimates the effect of DOE transfers on ConverDyn's
production costs. To calculate this effect, ERI assumes that
ConverDyn's production cost would be $15 per kgU if DOE material was
not being introduced into the market. ERI further assumes that 80% of
Metropolis Works' costs are fixed. ERI then applies these assumptions
to its estimate, described above, of the effect of DOE transfers on
ConverDyn's sales volume. The reasoning being, if MTW produced
additional conversion in the quantities estimated, the 80% fixed cost
would be spread over a greater sales volume, and only 20% of the costs
would scale to match production.
A summary of ERI's estimates of the effect of DOE transfers on
ConverDyn's sales volume and production costs appears in Table 11.
Applying ConverDyn's U.S. market share of 25% and the remaining world
market share of 24% to the volume of DOE inventory expected to be
introduced into the market in 2018, results in a volume effect of 0.4
million kgU in the U.S. market and 0.2 million kgU effect in the
remaining world market for a total of 0.6 million kgU, under the Base
Scenario, for an increase in production costs of 5%.
In Scenario 1, in which UF6 associated with prior
releases of DUF6 to ENW enter the market, the introduction
of DOE inventory results in a decreased volume of 0.6 million kgU and
increased production costs of 1%. The introduction of DOE inventory
into the conversion market results in a decreased volume of 0.5 million
kgU and increased production costs of 4% in Scenario 2 and a decreased
volume of 0.7 million kgU and increased production costs of 5% in
Scenario 3. 2017 ERI Report, 85-89.
As with ERI's price estimates discussed above, these estimates do
not suggest that were DOE to transfer uranium in accordance with the
Base Scenario, ConverDyn would lose the predicted volume of sales or
that its production cost would increase. DOE has been transferring at
or above the rate of the Base Scenario for nearly three years, and
therefore these effects--or a similar level of effect--are currently
being experienced by MTW due to transfers in prior years. Continued
transfers at the Base Scenario rate would only continue these effects
at the estimated levels.
Table 11--ERI's Estimate of Impact of DOE Transfers on ConverDyn's Sales Volume and Estimated Production Cost
Increase
----------------------------------------------------------------------------------------------------------------
Estimated change in Production cost
ConverDyn volume increase (percent
(million kgU) change)
----------------------------------------------------------------------------------------------------------------
Base Scenario................................................. 0.6 5.0
Scenario 1.................................................... 0.2 1.0
Scenario 2.................................................... 0.5 4
Scenario 3.................................................... 0.7 5
----------------------------------------------------------------------------------------------------------------
DOE believes that ERI's approach to estimating lost sales volume
based on market share is reasonable. DOE also believes that ERI's
approach to estimating the change in average per unit production costs
that volume decrease is straightforward. Average per unit production
cost can be calculated by dividing the total production cost by the
number of units produced. If MTW's costs were 100% variable, then
average production costs would not change, regardless of the volume
produced. However, if some portion of MTW's costs are fixed, then a
decrease in the number of units produced would lead to increased
production costs, and vice versa. If the proportion of fixed costs,
current production volume, and current per unit production cost are all
known, the change in average production cost can be easily calculated.
ERI looked to various public sources and estimates to provide a basis
for its assumptions. DOE believes that this a reasonable approach for
estimating the effect of DOE transfers on production cost at MTW. That
said, DOE has other available information that suggest that certain of
ERI's assumptions may be outdated. To account for this information, DOE
has developed its own estimate for sales volume loss and change in
production cost based on ERI's methodology but utilizing the slightly
different assumptions described below.
ERI bases its estimate of MTW production levels at least in part on
DOE's 2015 Secretarial Determination and Analysis. DOE has revisited
and updated this information. In 2015, DOE relied on UxC's Conversion
Market Outlook, [REDACTED]. UxC's most recent Conversion Market Outlook
estimates [REDACTED]. UxC, Conversion Market Outlook, Dec. 2016, at 44.
In addition, ConverDyn states in its comment in response to the NIPC
[[Page 21624]]
that it has halved its production capacity. ConverDyn NIPC Comment, at
1. Honeywell's Web site similarly notes that ``Honeywell plans to
reduce the production capacity of the Metropolis plant to better align
with the demands of nuclear fuel customers.'' \50\ ConverDyn does not
state the numerical capacity of MTW after the announced production
capacity reduction. However, another commenter refers to an
announcement from Honeywell that the nameplate production capacity of
MTW--previously reported at 15 million kgU--will be permanently reduced
to 7 million kgU through ``physical changes to the conversion plant as
well as through workforce reductions.'' FBP at 3. Other sources have
also reported the reduction in MTW's capacity to 7 million kgU.\51\
Given that this capacity reduction has been reported in multiple
sources, DOE believes it is likely to be an accurate reflection of the
upper bound of MTW capacity in the coming years.
---------------------------------------------------------------------------
\50\ Statement from Honeywell, http://www.honeywell-metropolisworks.com/ (accessed Apr. 13, 2017).
\51\ UxC has noted the reduction in capacity in a recent weekly
report, UxC Weekly, April 10, 2017, at 3, and the World Nuclear
Association has adjusted its world capacity information to reflect
the decrease in capacity. http://www.world-nuclear.org/information-library/nuclear-fuel-cycle/conversion-enrichment-and-fabrication/conversion-and-deconversion.aspx (accessed Apr. 13, 2017).
---------------------------------------------------------------------------
Therefore, DOE has applied ERI's approach to estimating reduction
in sales volume and production costs with the assumption that MTW
capacity has a maximum of 7 million kgU. Using this figure, MTW can be
expected to experience a reduction in sales volume of about 400,000 kgU
in 2017, 500,000 kgU in 2018, and 600,000 kgU in 2019.\52\ Using ERI's
assumptions about fixed cost to variable cost ratio and ConverDyn's
total production cost with DOE transfers, production costs would be
expected to be higher by $0.80 on average between 2017 and 2019.
---------------------------------------------------------------------------
\52\ DOE notes that ConverDyn has maintained that its capacity
reduction is permanent. If this is true and ConverDyn is producing
at or close to its maximum capacity, ConverDyn would not be able to
increase primary production to absorb additional production volume.
Nevertheless, DOE will assume for the sake of this analysis that
ConverDyn could increase production to account for the additional
sales volume.
---------------------------------------------------------------------------
In addition, ConverDyn's comment in response to the RFI includes an
enclosure with an estimate of its domestic cost of production for
conversion services. ConverDyn RFI comment, Encl. 2. ConverDyn explains
[REDACTED] Id. Altering this assumption in the above calculations would
have a very minor effect on the estimates described above, regardless
of which production level is assumed.\53\ Therefore, DOE believes it is
reasonable to rely on the estimate described above that DOE transfers
will affect ConverDyn's marginal production cost by roughly $0.80
between 2017 and 2019.
---------------------------------------------------------------------------
\53\ In at least one of the calculations, the change is not
evident after the estimated change in production cost is rounded to
the nearest $0.10.
---------------------------------------------------------------------------
In recent years MTW has experienced several significant disruptions
in its business that are not attributable to DOE transfers. These
disruptions have caused MTW's annual production to vary significantly
[REDACTED].\54\ Based on available information, it appears that MTW
capacity may be permanently limited to an annual production of 7
million kgU, a figure that is less than half of MTW's previously
reported nameplate capacity. DOE notes that the predicted decrease in
volume reasonably attributable to DOE under either set of assumptions--
about 600,000 kgU based on ERI's assumptions and as low as 400,000 kgU
if MTW capacity is limited to 7 million kgU--are substantially smaller
than the production decreases at MTW from these other disruptions. The
production swings experienced at MTW in recent years have been as much
as 7 times the magnitude of the sales volume decreases attributable to
DOE. Given that ConverDyn has a significant proportion of fixed costs,
these swings in production would be expected to alter ConverDyn's
marginal production cost in a similar manner. Thus, the expected change
in production cost--$0.80--is also well within the range of
fluctuations experienced at MTW in recent years.
---------------------------------------------------------------------------
\54\ UxC Conversion Market Outlook, December 2016, 44.
---------------------------------------------------------------------------
3. Employment Levels in the Industry
ERI assumes in its analysis a staffing level of 242 employees in
2017 \55\ for a production level of 10 million kgU. Previously, as in
2015, ERI had estimated that Metropolis Works staffing would remain at
270 employees, with an annual production rate of 10 million kgU. In the
2015 Report, ERI noted that Metropolis Works restarted after an
extended shutdown in summer 2013 with approximately 270 employees,
which was a decrease from the previous employment of 334 people. 2015
ERI Report, 72-73; 2014 ERI Report, 71. Information on the Honeywell/
Metropolis Works Web site \56\ indicates that the plant employs 250
full-time employees. In January 2017, Honeywell announced a workforce
reduction: ``Due to the significant challenges of the nuclear industry
globally and the oversupply of uranium hexafluoride (UF6),
Honeywell plans to reduce the production capacity of the Metropolis
plant to better align with the demands of nuclear fuel customers.
Because of this, the company intends to reduce its full-time workforce
by 22 positions, as well as a portion of the plant's contractor team.
We are taking this action to better position the plant moving
forward.'' \57\ In its NIPC comments, ConverDyn noted that it has
eliminated 87 positons since the last Secretarial Determination. NIPC
Comment of ConverDyn at 1.
---------------------------------------------------------------------------
\55\ ERI arrives at the 242 full-time employee (FTE) using
information from press reports of staffing levels prior to the
January 2017 reduction. 2017 ERI Report, 90.
\56\ http://www.honeywell-metropolisworks.com/ (accessed April
13, 2017).
\57\ http://www.honeywell-metropolisworks.com/message-from-the-plant-manager/ (accessed April 13, 2017).
---------------------------------------------------------------------------
ERI makes estimates regarding the impact of DOE uranium transfers
on employment using the assumption that staffing is proportional to
production rate but notes the limitations of such estimates. ERI
suggests that it is unlikely that staffing is directly proportional to
production volume, thus characterizes their assessment as conservative.
2017 ERI Report, 90.
Based on ERI's assumed staffing level of 242 FTE and a production
of 10 million kgU, assuming that staffing is proportional to
production, then for every 100,000 kgU reduction in annual production,
there would be a 2.4 FTE loss in staff. Under the Base Scenario, ERI
attributes a 0.6 million kgU reduction in production volume to DOE
sales, which results in a 14 FTE loss. This compares to a 0.2 million
reduction in production volume attributable to DOE sales with no EM
uranium transfers, which would result in a 5 FTE loss. Therefore, the
impact on employment would be the difference between the impact under
the Base Scenario and the impact under Scenario 1, with no EM
transfers, or 9 FTE (14 FTE -5 FTE).
A reduction in employment of 9 person-years is relatively small,
particularly in comparison to MTW's reduction of approximately 64 after
the 2012-2013 shutdown, and the 87 FTEs that ConverDyn has eliminated
since the 2015 Determination. The industry has been able to weather
employment losses much larger than any that could reasonably be
attributed to DOE transfers. In addition, it is clear that other
factors, in addition to production volumes will affect employment
levels.
[[Page 21625]]
4. Changes in Capital Improvement Plans and Development of Future
Facilities
Neither ERI nor any of the commenters provide an estimate of the
effect of DOE transfers on new facility development or capital
improvement plans. While DOE's task is to assess the state of the
domestic uranium conversion industry with and without DOE transfers, we
believe that activities in the global conversion industry may in some
cases be relevant for assessing how DOE transfers will affect the
domestic conversion industry.
The Department is aware of limited uranium conversion development
projects that are currently planned or underway outside the United
States. AREVA's COMURHEX II facilities are under construction with full
transition to the new COMURHEX II facility in the 2018-2021 period. In
May 2016, Cameco and Kazatomprom announced that they are undertaking a
feasibility study for a uranium conversion plant that will convert
6,000 metric tons to U3O8 annually. That
agreement provides that if the joint refinery is built, Kazatomprom
will have the option to obtain UF6 conversion services at Cameco's
Ontario, Canada -based Port Hope conversion facility.\58\ ERI also
notes that expansion of Chinese conversion capacity is expected to meet
indigenous requirements. Finally ERI notes that Russia's Rosatom
Siberian Chemical Combine center is expected to add new capacity to
come on line in 2019. 2017 ERI Report, 13.
---------------------------------------------------------------------------
\58\ Cameco and Kazatomprom Sign Agreement to Restructure JV
Inkai, (2016), https://www.cameco.com/media/news/cameco-and-kazatomprom-sign-agreement-to-restructure-jv-inkai (accessed April
5, 2017).
---------------------------------------------------------------------------
DOE is not aware of any conversion development or expansion plans
in the United States. However, press articles report that the Wyoming
Business Council is looking at permitting changes that may be needed to
allow for the construction of a uranium conversion facility in the
State to allow for upgrading of uranium mined in Wyoming before leaving
the state. The goal appears to situate Wyoming as a potential uranium
conversion site when the market will support another facility.\59\
---------------------------------------------------------------------------
\59\ Uranium conversion potential for Wyoming, some say, Casper
Star Tribune, Oct. 15, 2016, http://trib.com/business/energy/uranium-conversion-potential-for-wyoming-some-say/article_b0f1fb8b-4ad6-5dfd-8358-60b1e69cf2ea.html, (accessed April 5, 2017)
---------------------------------------------------------------------------
The Honeywell/Metropolis Web site notes that Honeywell has spent
over $177 million in capital improvements over the last 10 years,
including $50 million for safety upgrades required by the U.S. Nuclear
Regulatory Commission (NRC).\60\ In a message from the Metropolis Works
Plant manager, the company notes that it intends to invest $10 million
per year on projects that directly support health, safety and the
environment.\61\ ConverDyn has not stated in its Comment in response to
the RFI or NIPC whether they have any intentions to make updates and
capital improvements to the Metropolis facility. As mentioned above,
Honeywell recently apparently announced that they will permanently
reduce capacity to 7 million kgU, this reduction will be at least
partially be achieved by workforce reductions. Based on this
information, it does not appear that there are any plans to expand
capacity at MTW in the near future, but presumably, production could
theoretically be ramped up again with additional capital improvements.
Honeywell's current NRC operating license for MTW expires in May
2017. In a November 1, 2016 meeting with NRC, Honeywell indicated that
it would file an application in January 2017 for a renewal of its
license for 40 years.\62\ However, UxC in its December 2016 Market
Outlook reports that [REDACTED].\63\ It is not clear what capacity
Honeywell will seek to relicense. However, with Honeywell's intent to
seek a 40-year license renewal, DOE believes that it is likely that
even if MTW will not invest in improvements aimed at increasing
production capacity, MTW will continue to make capital improvements and
refurbishments that are necessary to maintain current capacity for the
foreseeable future. As noted earlier, Honeywell has invested a
substantial amount in such capital improvements in recent years.
---------------------------------------------------------------------------
\60\ http://www.honeywell-metropolisworks.com/about-us/,
(accessed April 5, 2017)
\61\ http://www.honeywell-metropolisworks.com/message-from-the-plant-manager/ (accessed April 5, 2017).
\62\ Honeywell Presentation, NRC license discussion (Nov. 1,
2016), https://www.nrc.gov/docs/ML1630/ML16309A092.pdf, (accessed
April 5, 2017).
\63\ UxC Conversion Market Outlook, December 2016, page 51.
---------------------------------------------------------------------------
In any case, DOE does not believe that the price effect associated
with DOE transfers would make a significant difference in plans for new
facilities or other capital improvements at existing facilities. DOE
transfers are expected to decrease ConverDyn's sales volume, but even
without EM's transfers, ConverDyn's total sales would still be below
MTW's previous maximum nameplate capacity. In addition, transfers under
the Base Scenario will represent only about 4% of total global
requirements in coming years. DOE concludes that eliminating this
amount of conversion would not make a difference to the assessment that
new capacity in the United States is not warranted.
5. Long-Term Viability and Health of the Industry
ERI's November 2016 Reference Nuclear Power Growth forecasts
project global requirements for conversion services to grow to
approximately 62 million kgU by 2020, approximately 9% higher than
current requirements. Global requirements are expected to continue to
rise to a level of 80 million kgU by 2032 to 2035, approximately 40%
higher than current requirements. 2017 ERI Report, 14.\64\ ERI presents
a graph comparing global requirements, demand, and supply from 2016-
2035. That graph forecasts that global secondary supply and supply from
primary converters will continue to exceed global demand until at least
2035. ERI notes that the supply excess will average nearly 13 million
kgU as UF6 annually over the next ten years (2017-2026),
which they note is equivalent to 20% of requirements. 2017 ERI Report,
13. ERI projects that global uranium conversion services requirements
will average 58.7 million kgU/year between 2017 and 2019. U.S.
requirements are expected to average about 17.2 million kgU in the same
timeframe. 2017 ERI Report, 84. Under the Base Scenario, DOE inventory
represents 4% of world conversion requirements in 2017-2019 and 3% of
world conversion requirements in the 2017 to 2026 timeframe. ERI
Report, 42. DOE uranium inventories represented 15% of secondary supply
affecting the global conversion market in 2015 and 2016. 2017 ERI
Report, 13. If markets that are deemed not to be accessible to U.S.
producers are examined, DOE EM transfers under the Base Scenario
represent 6% of accessible world conversion requirements in 2017 to
2019 and 4% of world conversion requirements in the ten years 2017 to
2026. 2017 ERI Report, 43.\65\
---------------------------------------------------------------------------
\64\ ERI's reference requirements include anticipated future
reactor shutdowns, both in the United States and elsewhere, due to
reasons such as competition with natural gas and other energy
sources.
\65\ ConverDyn suggests that Russian, Chinese, and Indian demand
should be excluded because these markets are closed to sales from
the domestic conversion industry. DOE notes that even if North
American converters lack access to these markets, converters in
those countries have access to markets worldwide. ConverDyn does not
contest the notion that conversion is essentially a global
commodity. Thus, increased demand in Russia, China, and India will
consume capacity with which ConverDyn would otherwise compete in
markets that it can access.
---------------------------------------------------------------------------
[[Page 21626]]
In its December 2016 Conversion Market Outlook, UxC predicts that
demand is generally expected to increase over the next decade.
[REDACTED] The above figures include reactor requirements as well as
inventory building. Without inventory building, UxC's base demand in
2016 [REDACTED].\66\
---------------------------------------------------------------------------
\66\ UxC Conversion Market Outlook, December 2016, 40.
---------------------------------------------------------------------------
Like ERI, UxC predicts that [REDACTED].\67\
---------------------------------------------------------------------------
\67\ Id. at 44.
---------------------------------------------------------------------------
Further UxC notes that [REDACTED]. UxC says, [REDACTED].\68\
Separately, UxC reports that [REDACTED].\69\ In the longer-term, UxC
believes that [REDACTED].'' \70\
---------------------------------------------------------------------------
\68\ Id. at 68.
\69\ Id. at 51.
\70\ Id. at 71.
---------------------------------------------------------------------------
Given that conversion demand in North America is expected to remain
relatively steady, and that UxC predicts [REDACTED], as well as the
indication that Honeywell plans to operate for the long-term as
indicted by their announced intent to apply for a 40-year license
renewal, it is likely that the domestic uranium conversion industry
will retain its capacity, either through continuing refurbishments at
MTW or through the development of one or more new conversion
facilities. As with uranium concentrates, DOE recognizes that the
predictability of transfers from its excess uranium inventory over time
is important to the long-term viability and health of the uranium
conversion industry.
Although DOE transfers may not have a large effect on the
conversion term price, displaced production volume increases average
production costs for primary producers. However, DOE does not believe
this effect is significant enough to appreciably affect the long-term
viability and health of the domestic uranium conversion industry.
6. Russian HEU Agreement and Suspension Agreement
Section 3112(d) of the USEC Privatization Act requires DOE to
``take into account'' the sales of uranium under the Russian HEU
Agreement and the Suspension Agreement. As discussed above, DOE
believes this assessment should consider any transfers under these two
agreements that are ongoing at the time of DOE's transfers.
Under the Russian HEU Agreement, upon delivery of LEU derived from
Russian HEU, the U.S. Executive Agent, USEC Inc., was to deliver to the
Russian Executive Agent, Technabexport (Tenex), an amount of natural
uranium hexafluoride equivalent to the natural uranium component of the
LEU. DOE notes that the Russian HEU Agreement concluded in December
2013. Thus, there are no ongoing transfers under this agreement.
The current iteration of the Suspension Agreement, described above
in Section I.D.3.ii, sets an annual export limit on natural uranium
from Russia. 73 FR 7705 (Feb. 11, 2008). That agreement provides for
the resumption of sales of natural uranium and SWU beginning in 2011.
While the HEU Agreement remained active (i.e., 2011-2013), the annual
export limits were relatively small--equivalent to between 170,000 and
410,000 kgU as UF6. After the end of the Russian HEU
Agreement, restrictions range between an amount equivalent to 4,540,000
and 5,140,000 kgU as UF6 per year between 2014 and 2020. 73
FR 7705, at 7706 (Feb. 11, 2008).
As mentioned above, in September 2016, the U.S. Department of
Commerce proposed to adjust the export limits under the agreement to
take account of changes in projected reactor demand. The proposed
adjusted limits varies by year, but on average, the proposed limits are
6.6% higher than current limits.
Material imported from Russia in accordance with the Suspension
Agreement is derived from primary production rather than from down-
blended HEU. The 2017 ERI Report takes account of enrichment entering
the United States market under the current Suspension Agreement limits
as part of total worldwide primary supply. The 2017 ERI Report does not
consider the effect of the additional amount that would be allowed into
the United States were the Department of Commerce to adopt the adjusted
limits as proposed.
DOE believes that it is still appropriate to rely on ERI's analysis
without adjusting for the proposed changes to the Suspension Agreement
quota limits. It bears emphasis that the volume of the proposed
adjustment is small relative to the current limits under the Suspension
Agreement, to United States requirements, and worldwide requirements.
DOE's analysis already takes into account the amount of conversion
services entering the United States from Russia under the current
limits, and DOE does not believe that the adjusted limit would
significantly alter DOE's analysis even if adopted.
7. Conversion Industry Conclusion
After considering the six factors as discussed above, DOE concludes
that transfers under either the Base Scenario or the lower rate of
1,200 MTU per year will not have an adverse material impact on the
domestic uranium conversion industry. The sole conversion provider in
the United States, ConverDyn, continues to sell nearly exclusively on
term contracts. Although the move towards more mid-term contracts has
affected the term market, it is not clear that this has affected
ConverDyn's realized price under its existing or new term contracts.
DOE believes that price suppression of $0.30/kgU in the spot market
will not be material for the domestic conversion industry.
DOE forecasts that over time, MTW's production will be smaller than
it would have been in the absence of DOE transfers by between 400,000
kgU and 600,000 kgU. DOE conservatively estimates such a reduction
would increase MTW's average production costs by about $0.80 between
2017 and 2019. The reduced production may also lead to a decrease in
employment, which is estimated to be 9 FTE. DOE does not believe these
changes would constitute a material impact, within the meaning of
section 3112(d), because they are well within the range of fluctuations
that MTW has experienced in recent years independent of DOE transfers.
Honeywell, the owner and operator of MTW, continues to invest in
maintaining and refurbishing the MTW facility, has indicated that it
will be applying for license renewal for a 40-year term and Even taking
account of Honeywell's recent announcement to reduce MTW's capacity,
DOE transfers are unlikely to appreciably change MTW's capital
improvement and refurbishment plans. Furthermore, DOE transfers are
unlikely to affect the decision whether to invest in new conversion
capacity in the United States.
DOE does not believe that any of the effects described above
constitute an impact on the domestic uranium conversion industry of the
substantial importance that would rank as ``material'' within the
meaning of section 3112(d).
C. Uranium Enrichment Industry
The domestic uranium enrichment industry consists of a relatively
small number of companies. There is only one currently operating
enrichment facility in the United States, the URENCO USA (UUSA) gas
centrifuge facility in New
[[Page 21627]]
Mexico. DOE is also aware of additional planned enrichment facilities
in Ohio, and North Carolina. The Paducah Gaseous Diffusion Plant closed
in 2013. Centrus, formerly USEC Inc., the former operator of the plant,
no longer produces enriched uranium but does sell uranium. The uranium
sold by Centrus comes from its inventory, SWU purchased from other
suppliers, and SWU purchased under a Transitional Supply Contract with
TENEX. 2017 ERI Report, 92. The SWU purchased from Russia can be sold
in limited quantities in the U.S., with the rest sold to non-U.S.
customers. Id.
According to URENCO's comments in response to the RFI and NIPC, the
current capacity of the UUSA facility is 4.8 million SWU. For
comparison, the World Nuclear Association reports that worldwide
capacity in 2015 was approximately 59 million SWU and is expected to
grow to almost 67 million SWU by 2020, with the vast majority of that
growth in Russia and China.\71\ UxC reports a base case nameplate
capacity of [REDACTED]. UxC projects [REDACTED]. UxC Enrichment Market
Outlook, Quarter 1 2017, 46. Some of the capacity additional may be to
maintain centrifuge manufacturing capabilities and some of it will be
offset by slight capacity reductions in Europe. URENCO is reducing its
capacity slightly by not replacing aging centrifuges at its European
sites. 2017 ERI Report, 16.
---------------------------------------------------------------------------
\71\ World Nuclear Fuel Report 2015, available at http://www.world-nuclear.org/information-library/nuclear-fuel-cycle/conversion-enrichment-and-fabrication/uranium-enrichment.aspx
(accessed April 6, 2017). DOE believes that the Chinese capacity is
being built for indigenous needs and that Russia's enrichment plans
have slowed down since the WNA numbers were compiled.
---------------------------------------------------------------------------
1. Prices for Enrichment Services
Like prices in the uranium concentrates and conversion markets,
prices in the enrichment market are described in terms of spot and term
price. The following section discusses the potential impact of DOE
transfers on these two prices. For reference, as of April 17, 2017, the
spot price indicator was $47 per SWU and the term price indicator was
[REDACTED] per SWU.\72\ DOE obtained information about enrichment
services prices from ERI and the UxC Enrichment Market Outlook Report
for Quarter 1 of 2017. URENCO also provided information on prices in
comments in response to the NIPC. NIPC Comment of URENCO, at 2. URENCO
noted price declines since its comments to DOE in September 2016 on the
RFI, from a spot price of $55/SWU and term price of $64/SWU to an April
2017 spot price of $47/SWU and term prices of $50/SWU. Id.
---------------------------------------------------------------------------
\72\ UxC, Ux Weekly, April 17, 2017 (Volume, 31, Number 16) at
1.
---------------------------------------------------------------------------
Like uranium and conversion markets, the enrichment market includes
significant sources of secondary supply. The enrichment market is also
characterized by excess capacity and very limited near-term demand.
Finally, there is not a large gap between spot and term prices for
enrichment, as there is for conversion. On the other hand, buyers may
be more sensitive to enrichment prices because enrichment constitutes a
larger portion of the total cost of enriched uranium product.\73\
---------------------------------------------------------------------------
\73\ DOE believes the magnitude of any effect of DOE transfers
on the uranium or enrichment price that is transmitted through the
interaction with the enrichment or uranium price, respectively, is
small.
---------------------------------------------------------------------------
To be conservative, DOE will assume that a competitive price-
setting mechanism does determine enrichment prices. On that assumption,
ERI's market-clearing price methodology should provide an appropriate
forecast for the effects of DOE's transfers. To the extent that
enrichment prices are uncompetitive, the price effect will tend to be
smaller than what ERI forecasts.
i. Energy Resources International Report
In the 2017 ERI Report, like the 2015 ERI Report, ERI estimated the
effect of DOE transfers on the market prices for enrichment services
using a market clearing price methodology. Like uranium concentrates
and conversion, ERI conducted the clearing prices analysis on both an
annual and cumulative basis, constructing individual supply and demand
curves for enrichment services and estimating the clearing price with
and without DOE transfers. ERI Report, 44. The same DOE transfer
scenarios described in Section IV.A.1 were used in the analysis.
Unlike the uranium concentrates and conversion prices, however,
there is no difference in ERI's estimated price effect between any of
the four scenarios because EM transfers of natural uranium do not
include an enrichment component. Instead, the price effects indicated
in the analyses are attributable to the planned NNSA transfers of LEU
for national security purposes and past transfers of LEU that continue
to displace supply in the market. The price effects are presented here
and included as part of DOE's consideration and analysis of whether or
at what level to conduct EM uranium transfers. Because there is no
difference in price effects between the scenarios, there is no marginal
or incremental price effects to be considered.
Using the market clearing price model, on an annual and cumulative
basis, ERI estimates the market clearing price with and without DOE
inventory and the difference is the effect that DOE transfers will have
on the market clearing price for the enrichment services industry
listed in Tables 12 and 13, respectively. The ``No DOE Transfers''
market clearing methodology models the market as though no transfers
have taken place since 2009, so the price effects attributed to DOE
inventory are already built into the current market prices. If no DOE
inventory release had taken place, then future market prices would be
higher by the amounts stated. 2017 ERI Report, 54.
Table 12--ERI's Estimate of Effect of DOE Transfers on Enrichment Prices
in $ per SWU
[Annual market clearing approach]
------------------------------------------------------------------------
ERI--all
scenarios
------------------------------------------------------------------------
2017.................................................... $1.40
2018.................................................... 1.80
2019.................................................... 1.70
2020.................................................... 0.10
2021.................................................... 1.70
2022.................................................... 1.70
2023.................................................... 0.10
2024.................................................... 0.10
2025.................................................... ..............
2026.................................................... ..............
Average (2017-2026)..................................... 0.90
------------------------------------------------------------------------
Table 13--ERI's Estimate of Effect of DOE Transfers on Enrichment Prices
in $ per SWU
[Cumulative market clearing approach]
------------------------------------------------------------------------
ERI--all
scenarios
------------------------------------------------------------------------
2017.................................................... $9.70
2018.................................................... 8.80
2019.................................................... 7.30
2020.................................................... 8.80
2021.................................................... 14.90
2022.................................................... 10.50
2023.................................................... 10.10
2024.................................................... 2.60
2025.................................................... 7.50
2026.................................................... 1.30
Average (2017-2026)..................................... 8.20
------------------------------------------------------------------------
As noted above, ERI also presented information on the cumulative
clearing price effect relative to ``No DOE'' clearing price for
enrichment services, where the ``No DOE'' clearing price assumes that
DOE releases from 2009 onward were zero. 2017 ERI Report, 58. Table 14
presents the price effect as a percentage of ``No DOE'' clearing price
from Table 4.9 in the 2017 ERI Report, which provides an assessment of
price
[[Page 21628]]
impacts for the period 2017 to 2026 as an estimated percent change in
enrichment clearing price attributable to the DOE inventories under the
four scenarios relative to the ``No DOE'' market prices. As with Tables
12 and 13, there is no difference in the percentage of the price effect
among the four scenarios, and therefore a calculation of the marginal
or incremental effect is not conducted.
Table 14--Cumulative Enrichment Price Effects as Percentage of ``No
DOE'' Clearing Price
------------------------------------------------------------------------
ERI--all
scenarios
(percent)
------------------------------------------------------------------------
2017.................................................... 12
2018.................................................... 11
2019.................................................... 9
2020.................................................... 10
2021.................................................... 16
2022.................................................... 11
2023.................................................... 11
2024.................................................... 3
2025.................................................... 8
2026.................................................... 1
Average (2017-2026)..................................... 9
------------------------------------------------------------------------
DOE also notes that ERI's analysis assumes demand for enrichment to
be perfectly inelastic. This assumption is a reasonable approximation
because nuclear utilities have predictable requirements that must be
filled. In reality, demand may have some small degree of elasticity
and, as such, the price effect would be smaller than what ERI
forecasts.
ii. Effect of DOE Transfers on Market Prices
Based on the foregoing discussion of market analyses and DOE's
consideration of the information, DOE concludes that the level of EM
transfers will not have a direct effect on the market price for
enrichment. ERI's market clearing price analysis shows no difference in
price between the scenario with no EM transfers and the scenarios with
different levels of EM transfers. Separate and apart from the EM
transfers that are the subject of this determination, DOE's transfers
for NNSA down-blending and historical transactions involving LEU that
continue to displace market supply will affect the SWU price because
they contain an enrichment component. ERI estimates that DOE transfers
of LEU will suppress the market price of enrichment on average in the
next decade either $.90 or $8.20 per SWU, based on the annual and
cumulative clearing price approach, respectively. We note that the
average near-term effect using both methodologies is somewhat larger,
$1.63 (annual) or $8.60 (cumulative) per SWU. This is understandable,
since the near-term includes the NNSA transfers for LEU down-blending
that will cease by 2019. The price effect significantly diminishes
toward the end of the decade, when past transactions in addition the
NNSA LEU down-blend transfers are no longer entering the market.
As in the uranium concentrates and conversion industries, the
significance of price suppression at this level depends, in part, on
current and forecasted market prices. As stated above, the April 17,
2017 spot price indicator was $47 per SWU and the term price indicator
was [REDACTED] per SWU. UxC Weekly, Volume 31, Number 16 at 1. Using
the annual method forecast, the price effect in the next decade
reasonably attributable to DOE transfers represents about 2% of these
current market values; the price effect in the near-term is about 3.5%.
According to UxC's Quarter 1 Enrichment Market Outlook, 112, spot
prices for SWU dropped [REDACTED]. Similarly, term price fell from
$[REDACTED] by year's end. These represent declines of 22% and
[REDACTED]%, respectively. Compared to these large overall price
swings, price effects of 2-3.5% are well within the normal range of
market fluctuations. Even under the cumulative method, with an average
decline over the decade of $8.20/SWU would yield a price decline of
17%, still within the range of recent market fluctuations.
To reiterate, while DOE has considered here the projected price
effect of the NNSA and other LEU transfers under all scenarios, the
effect of only the EM transfers is the question this analysis must
address. As noted earlier, EM transfers would have a small price effect
on both the uranium and conversion markets. There is the possibility
that DOE transfers of natural uranium could still have an effect on SWU
prices indirectly due to the prevalence of ``underfeeding'' or re-
enrichment of tails. The amount of enrichment devoted to underfeeding
at any given time depends in part on the relative prices of natural
uranium hexafluoride and enrichment. Because EM transfers suppress the
price of natural uranium without directly affecting the enrichment
market, they tend to indirectly suppress the SWU price as well due to
this interaction. Although ERI does not attempt to quantify this
indirect effect on the SWU price, DOE notes that in the 2015
Secretarial Determination and Analysis, DOE estimated that transfers at
levels equivalent to the Base Scenario would cause enrichers to devote
less primary supply to underfeeding by about 200,000 SWU. Based on
available information, DOE cannot attribute a specific price effect to
this interplay, but given the size of the effect compared to URENCO's
nameplate capacity--4.8 million SWU at UUSA and between 13-15 million
SWU in the EU--DOE believes that this effect is small enough not to
affect the conclusion that continuing the EM transfers of natural
uranium at either the Base Scenario rate or the 1,200 MTU per year rate
beginning in May 2017 would not have an adverse material impact on the
U.S. enrichment industry.
iii. Effect on Realized Prices
As with uranium concentrates and conversion, the principal
mechanism through which a change in market price would impact the
domestic uranium enrichment industry is through the effect on what
prices an enricher actually receives for its services. The market price
indicators published by TradeTech and UxC are based on market
information about recent offers, bids, and transactions, and are thus a
snapshot of contracting activity at the time of the publication.
Enrichment, like uranium concentrates and conversion, is primarily sold
on long-term contracts. In 2015, of the total 54.5 million pounds
U3O8 equivalent purchased by owners and operators
of U.S. civilian nuclear power reactors, 78% was sold on long-term
contracts. The price paid for enriched UF6 under the long-
term contracts versus spot contracts was $43.28 and $33.37,
respectively. EIA Uranium Marketing Annual Report, 26 (2016).
Consequently an enricher's actual revenues are somewhat insulated from
short-run fluctuations in price.
URENCO's Full-Year Audited Financial Results for 2016, which was
submitted to the Department as part of URENCO's NIPC comments, reports
a contract backlog that with a value of [euro]15.5 billion that extends
into the latter half of the next decade. URENCO states that it will
experience lower profit margins and reduced cash flow if pricing
pressures persist in the middle and long-term. Specifically, URENCO
states it will feel the impact of lower SWU prices ``primarily from the
second half of the next decade, as until such time the majority of our
revenues are at contracted prices.'' NIPC Comment of URENCO, Enclosure
1, at 1. [REDACTED]. UxC Enrichment Market Outlook, Quarter 1 2017, 21.
Based on this information, DOE concludes that URENCO is currently
producing SWU to
[[Page 21629]]
fulfill its existing contracts, but it is unlikely to enter into new
term contracts for significant volumes in the near future. Therefore,
it does not appear that the SWU price suppression attributable to DOE
transfers will have an appreciable effect on URENCO's realized price in
the near-term.
EM transfers are expected to have an effect on the uranium
concentrate and conversion prices, as described in Sections IV.A.1 and
IV.B.1. URENCO notes that a portion of UUSA's capacity is dedicated to
underfeeding and re-enrichment of depleted tails but does not provide
data regarding its sales in these markets. ERI notes that URENCO
estimated in 2013 that it uses 10-15% of its capacity for underfeeding
or re-enrichment of tails. 2017 ERI Report, 93. To the extent that
URENCO sells the natural uranium that is the result of its underfeeding
and re-enrichment on the spot market, it will receive a realized price
that is lower by the level of the price suppression described above--on
average over the next decade, $1.40 per pound
U3O8 for uranium concentrates and $0.30 per kgU
for conversion services. Based on available information, DOE is unable
to determine the specific volume of natural uranium that URENCO sells
on the spot market, but DOE reiterates its conclusions from the
sections above that the price effects are within the range of those
exhibited by normal market fluctuations.
2. Production at Existing Facilities
As discussed above, the only existing U.S. enrichment facility is
the UUSA gas centrifuge facility in New Mexico. URENCO reports a
current capacity of 4.8 million SWU and notes that the regulatory
approvals are in place to expand capacity.\74\ ERI reported that UUSA
capacity is projected to increase to 5.7 million SWU by 2022, which we
understand to be the completion of UUSA's Phase 3. 2017 ERI Report, 16.
[REDACTED]. UxC Enrichment Market Outlook, 54. As noted earlier, the
capacity expansion will serve to support an ongoing centrifuge
manufacturing capability. URENCO's NIPC comments at 3 note that URENCO
has cancelled Phase 4 of its construction plans at its plant in New
Mexico, which would have added 2 million SWU capacity, because of
market conditions. ERI also reports that, in 2016, URENCO reduced its
production capacity at the Capenhurst site when it mothballed two
production halls (out of 15). URENCO has also made small capacity
reductions by not replacing aging centrifuges at its European sites
when centrifuges go out of service. 2017 ERI Report, 16.
---------------------------------------------------------------------------
\74\ URENCO, 2015 Annual Results Presentation, http://www.urenco.com/_/uploads/results-and-presentations/160301_URENCO_end_of_year_results_presentation_FINAL.pdf (Accessed
February 7, 2017).
---------------------------------------------------------------------------
ERI's November 2016 Reference forecast for enrichment services
requirements projects that annual world requirements for enrichment
services in 2016 are 45.4 million SWU, but are then projected to
increase to 49 million SWU in 2017. 2017 ERI Report, 14. U.S.
requirements are projected to be essentially flat, averaging almost 15
million SWU per year between 2016 and 2035. The updated projections for
average U.S. requirements for uranium and conversion services are lower
than those used in the February 2015 ERI market analysis, although
enrichment requirements have increased somewhat due to lower tails
assay assumption. Projected U.S. uranium and conversion requirements
have declined by 2% while U.S. enrichment requirements increased by 4%.
URENCO's internal estimates suggest that global SWU inventories
represent nearly two-year's worth of 2016 global SWU requirements. RFI
Comment of URENCO, at 3. URENCO also notes very limited uncommitted
demand in the next few years and notes that DOE inventories compete for
these very limited pools of demand. Further, URENCO opines that the
combination of low demand and excess supply is placing downward
pressure on prices for uranium enrichment services, pointing out that
prices have fallen considerably from the $79/90 spot/term prices at the
time of the May 2015 Secretarial Determination. URENCO's 2016 Annual
Results state that ``URENCO anticipates continued short to medium term
pricing pressures until worldwide fuel inventories are reduced which
may impact future profit margins.'' The 2016 Annual Results also note
that the company is confident that global nuclear industry will
continue to grow.\75\ Finally, these financial results note that URENCO
is benefitting by the strength of the U.S. dollar in that two-thirds of
its revenue is in U.S. dollars. The projections for increasing
requirements for U.S. enrichment are expected to generate increased
production at the UUSA facility.
---------------------------------------------------------------------------
\75\ Id.
---------------------------------------------------------------------------
DOE does not believe that its uranium transfers will not have a
significant effect on production at the only existing U.S. uranium
enrichment facility.
3. Employment Levels in the Industry
ERI does not provide an estimate of the change in employment due to
DOE transfers in the enrichment industry. However, URENCO shared in its
NIPC comments that it expects to reduce our 2016 workforce of 280 by 50
employees ``in the near-term.'' URENCO NIPC comment at 3. URENCO does
not state what proportion of this employee reduction it believes is
attributable to DOE transfers. DOE is not able to independently assess
what, if any, portion of this 18% workforce reduction is attributable
to DOE transfers, but believes it is reasonable to conclude that the
DOE transfers do not contribute in significant part given other market
conditions and factors.
4. Changes in Capital Improvement Plans and Development of Future
Facilities
As noted above, ERI reports that URENCO USA capacity increased to
4.6 million SWU by the end of 2015, with plans to slowly increase to
5.7 million SWU by 2022. 2017 ERI Report, 25. Another planned
enrichment facility was announced by Global Laser Enrichment, a venture
of GE-Hitachi and Cameco. The proposed facility will use laser
enrichment technology developed by Silex Systems to enrich depleted
uranium tails to the level of natural uranium, at a proposed location
near Paducah, KY.\76\
---------------------------------------------------------------------------
\76\ Energy Department Announces Agreement to Sell Depleted
Uranium to be Enriched for Civil Nuclear Power, (Nov. 11, 2016),
https://energy.gov/pppo/articles/energy-department-announces-agreement-sell-depleted-uranium-be-enriched-civil-nuclear (accessed
February 22, 2017).
---------------------------------------------------------------------------
The U.S. Nuclear Regulatory Commission granted two additional
licenses for centrifuge enrichment plants. Centrus holds a license for
the American Centrifuge Plant in Piketon, Ohio, while AREVA Enrichment
Services holds a license for the Eagle Rock Enrichment Facility,
planned for Bonneville County, Idaho. However, on March 10, 2017, AREVA
informed the NRC that it does not plan to construct the Eagle Rock
Enrichment Facility and asked that its license be terminated. The
American Centrifuge Plant is not currently being developed; Centrus'
Web site indicated that the company ``is continuing to explore
technology refinements and other ways to deploy the most cost effective
commercial enrichment capacity taking advantage of the current period
of time when capacity expansion is not needed in the market.'' \77\ NRC
also issued a license to GE-Hitachi for a laser enrichment facility in
Wilmington, North Carolina. Development of that facility is also on-
hold and GE-Hitachi has announced its
[[Page 21630]]
plans to sell its shares and exit that venture.
---------------------------------------------------------------------------
\77\ CentrusEnergy.com, http://www.centrusenergy.com/what-we-do/national-security/american-centrifuge/ (accessed April 14, 2017).
---------------------------------------------------------------------------
As outlined above, planning for improvements or development of
future enrichment facilities has slowed significantly due to market
conditions. As previously noted, URENCO is currently working on Phase 3
of its New Mexico plant, which is expected to bring capacity to 5.7
million SWU but has cancelled the previously planned 2 million SWU
Phase 4.
5. Long-Term Viability and Health of the Industry
URENCO indicates that pressures on pricing and on competition for
limited demand ``present significant challenges for the United States'
only enrichment plant.'' The comments also indicate that some of UUSA's
capacity is being directed towards underfeeding and for re-enrichment
of its depleted tails so that URENCO is therefore affected by market
pressures in the uranium and conversion markets. NIPC Comment of URENCO
at 3.
With total world enrichment supply currently projected to exceed
requirements for enrichment services by a significant margin over the
long term, it is expected that enrichers will continue to redirect
excess enrichment capacity to underfeeding and re-enrichment of tails.
The uranium market will continue to be of interest to enrichers as
unfilled requirements in the uranium market increase in the future.
Note, however, that this does put additional pressure on uranium
producers. Unfilled requirements in the enrichment market are also
projected to increase in the future. The sole U.S. enricher is
currently benefitting from a strong U.S. dollar exchange rate. URENCO
indicated that these pricing pressures have ``a direct impact'' on UUSA
and pointed to a non-cash impairment charge against its UUSA operation
of more than $800 million ([euro] 760 million) on its Full-Year 2016
Audited Financial Statement. URENCO's Full-year 2016 Audited Financial
Statement takes note of the pricing pressures facing the parent company
and the enrichment market, but note that `we believe that the
combination of our current robust finances coupled with our new
strategic direction will enable us to remain a reliable and sustainable
partner in the global nuclear industry. . . .''
As noted in Section IV.A. 5 above, nuclear power requirements are
expected to grow in the future. Increases in demand will minimize the
need for enrichers to underfeed and/or re-enrich tails, which will also
take pressure off the uranium and conversion markets. To the extent
that enrichers have significant backlog of long-term contracts, some of
which were likely signed prior to the 2011 Fukushima Daiichi accident
that significantly changed market dynamics, the impact of DOE uranium
transfers on the U.S. enrichment industry's will not have an adverse
material impact on the long-term viability and health of that industry.
6. Russian HEU Agreement and Suspension Agreement
Section 3112(d) of the USEC Privatization Act requires DOE to
``take into account'' the sales of uranium under the Russian HEU
Agreement and the Suspension Agreement. As discussed above, DOE
believes this assessment should consider any transfers under these two
agreements that are ongoing at the time of DOE's transfers.
Under the Russian HEU Agreement, Russian HEU was down-blended to
LEU and then delivered to USEC Inc. for sale to end users in the United
States. DOE notes that the Russian HEU Agreement concluded in December
2013. Thus, there are no ongoing transfers under this agreement.
The current iteration of the Suspension Agreement, described above
in Section I.D.3.ii, sets an annual export limit on natural uranium
from Russia. 73 FR 7705 (Feb. 11, 2008). That agreement provides for
the resumption of sales of natural uranium and SWU beginning in 2011.
While the HEU Agreement remained active (i.e., 2011-2013), the annual
export limits were relatively small--equivalent to between 100,000 and
250,000 SWU. After the end of the Russian HEU Agreement, restrictions
range between an amount equivalent to 2,750,000 and 3,110,000 SWU per
year between 2014 and 2020. 73 FR 7705, at 7706 (Feb. 11, 2008).
As mentioned above, in September 2016, the Department of Commerce
proposed to adjust the export limits under the agreement to take
account of changes in projected reactor demand. The proposed adjusted
limits would allow an additional 990,000 SWU from Russia into the
United States between 2016 and 2020. The additional amount varies by
year, but on average, the proposed limits are 6.6% higher than current
limits.
Material imported from Russia in accordance with the Suspension
Agreement is derived from primary production rather than from down-
blended HEU. The 2017 ERI Report takes account of enrichment entering
the United States market under the current Suspension Agreement limits
as part of total worldwide primary supply. The 2017 ERI Report does not
consider the effect of the additional amount that would be allowed into
the United States were the Department of Commerce to adopt the adjusted
limits as proposed.
DOE believes that it is still appropriate to rely on ERI's analysis
without adjusting for the proposed changes to the Suspension Agreement
quota limits. It bears emphasis that the volume of the proposed
adjustment is small relative to the current limits under the Suspension
Agreement, to United States requirements, and worldwide requirements.
Nominally, the adjustment adds no more than 410,000 SWU in any given
year--and as low as 70,000 SWU in 2017 and 2019. DOE's analysis already
takes into account the amount of SWU entering the United States from
Russia under the current limits, and DOE does not believe that the
adjusted limit would significantly alter DOE's analysis even if
adopted.
7. Enrichment Industry Conclusion
In this analysis, DOE has considered the above six factors and the
effect of all DOE transfers on the U.S. enrichment industry, including
the NNSA transfers which are not the subject of this determination. DOE
is cognizant of the challenges in the enrichment market.
The NNSA LEU transfers for down-blending are the only forward
looking transfers that would have a direct impact on the U.S.
enrichment industry and are not the subject of this Determination. EM
transfers have no direct effect on enrichment prices, but even if they
did, URENCO currently realizes prices under its existing contract book
of long-term contracts and is not expected to enter into an appreciable
volume of new long-term contracts in the near future without a very
significant increase in SWU prices. Thus, even if EM transfers did
directly affect the enrichment prices and price suppression from DOE
LEU transfers were included, there would not be any appreciable effect
on URENCO's current realized price for enrichment services, employment
at UUSA, or plans for capital improvement or expansion. Similarly,
other potential entrants into the domestic enrichment market would
require prices so much higher than current prices that DOE transfers,
even including LEU, would not affect investment decisions with respect
to new plants.
That said, due to the enrichment industry practice of underfeeding
and re-enriching tails, DOE concludes that the EM transfers of natural
uranium will have a small impact on the U.S. enrichment industry due to
the price
[[Page 21631]]
suppression in the uranium and conversion markets attributable to the
transfers described above. Given that URENCO is primarily in the
business of providing enrichment services, that it devotes 85% of more
of UUSA's capacity to primary enrichment, and the fact that the price
suppression on the spot prices for uranium concentrates and conversion
is relatively small--$1.40 per pound U3O8 for
uranium concentrates and $0.30 per kgU for conversion--the effect on
URENCO would be relatively small and not one of real import or great
consequence such that it would constitute an adverse material impact on
the domestic enrichment industry.
V. Other Comments
A number of commenters throughout the public participation process
have expressed views on matters that were not specifically within the
scope of this Determination, or may be related to the topic of DOE's
uranium transfers but not specifically its Determination of adverse
material impact.
Some commenters commended DOE for undergoing an open and public
process on this Determination, e.g., NIPC Comment of Duke Energy, at 1,
while others commented that greater transparency in DOE uranium
management and planning was important to promote predictability and
stability in the nuclear fuel market. NIPC Comment of NEI, at 2. Some
commenters supported DOE's transfers as a means to support continued
cleanup at the Portsmouth site, FBP Comment, and others commented that
funding for such activities should be obtained from Congress through
appropriations. See NIPC Comment of Duke Energy, at 1, NIPC Comment of
NEI, at 3. Comments ranged from requesting DOE halt all uranium
transfers, NIPC Comment of UPA, at 2, 17, to, in the alternative,
limiting DOE transfers to the least harmful of the three options,
Scenario 2. NIPC Comment of ConverDyn, at 2.
Certain comments from the public were out of scope of this
Determination.
Several members of the public requested that DOE transfer all
surplus uranium to American reactors and cease exporting any uranium to
foreign countries. NIPC Comment of Anne Marie Zeller at 1; NIPC Comment
of Dawna Papenhausen, at 1. Other commenters' statements regarding the
amount of uranium imported to power domestic nuclear reactors is
illustrative only as to the international nature of the uranium
markets. See, e.g., NIPC Comment of enCore Energy, at 1. U.S. origin
uranium is not required for U.S. reactors to meet demand and, as
demonstrated in this Analysis, much of the uranium used in domestic
reactors is obtained from foreign suppliers.
Comments related to proposed legislation also are outside the scope
of this Determination. NIPC Comment of UR-Energy, at 2. The
Administration has not taken a formal position on proposed legislation
related to uranium management. In addition, UPA's comment as to the
fair market value received for DOE transfers is outside the scope of
this Determination, which addresses only the requirements of section
3112(d)(2)(B) regarding market impacts. NIPC Comment of UPA, at 16-17.
DOE evaluates whether it receives fair market value prior to each
transfer through a separate process. Lastly, UPA's call for DOE to
withdraw the December 2016 national security determination is outside
the scope of this Secretarial Determination and Analysis, which only
considers future EM transfers. NIPC Comment of UPA, at 2.
Commenters also requested DOE consider foregoing the down-blend of
highly enriched uranium to 5% enrichment or below in anticipation of
demand for high-assay LEU not available currently in the market for use
in advanced nuclear reactors and advanced nuclear fuel development.
NIPC NEI Comment, at 2. In consideration of these comments, and
notwithstanding policies suggested in proposed legislation, DOE is
considering plans to issue a Federal excess uranium inventory
management plan to provide additional information on DOE's uranium
management planning and thereby increase transparency and reliability
upon which the uranium industries can make investments and decisions.
VI. Conclusion
For the reasons discussed above, DOE concludes that transfers under
either the 1,600 MTU or 1,200 MTU scenarios will not have an adverse
material impact on the domestic uranium mining, conversion, or
enrichment industries, taking into account the Russian HEU Agreement
and Suspension Agreement.
[FR Doc. 2017-09243 Filed 5-8-17; 8:45 am]
BILLING CODE 6450-01-P