Demand and Supply for Uranium

Question: Discuss about the Demand and Supply for Uranium. Answer: Introduction At the present, the world is grappling with serious issues dealing with global warming and climate change and it is likely that if this problem is left unabated, it may even threaten human existence on the planet. As a result, the emphasis on clean fuels and non-renewable sources of energy is at its peak so as to control the ever increasing greenhouse gas concentration in the atmosphere. One of the clean energy alternatives that could prove to be a beacon of hope in this regard is nuclear energy. Most of the nuclear energy at the present is generated from uranium even though the usage of other minerals is also being explored. Uranium is of significance for the Australian economy considering the fact that it is the largest exporter of uranium in the world. In the recent times, the uranium prices have plummeted especially on account of security concerns which have been triggered due to the Fukushima incident (Green, 2016). This is a concerning situation for the uranium producers in Aus tralia. In the backdrop of the above facts, the report aims to highlight the influence of demand and supply factors on the uranium market dynamics especially the price. Further, the report also seeks to present the likely futuristic pricing trends based on the market dynamics prevailing at the present and expected in the near future. Discussion As per the relevant microeconomic theory, the price of a particular good or service tends to be driven by the respective demand and supply factors which impact either the demand or supply of the underlying good/service. Although the relevance of the demand supply analysis exists for all goods but it is more relevant for commodities where quality is pre-defined and price is directly driven by the demand and supply. Also, the price of such commodities tends to be dynamic and keeps on altering unlike the other products that are available at the retail level (Mankiw, 2014). The global uranium prices since 2014 have plummeted to unprecedented levels which have fundamentally altered the market dynamics. The main reason attributing to this drop in uranium prices is the Fukushima incident which has fuelled safety concerns with regards to the nuclear reactors. As a result of this and the potential damage that could happen in case of a nuclear meltdown, the demand for nuclear energy and also the nuclear fuel i.e. uranium was adversely impacted. Not only did it lead to the incremental demand slowing down but the public opinion in Japan was so adverse that even the 48 other operational nuclear plants were shut down which further lowered uranium demand (FOE, 2013). The fallout of the Fukushima disaster was not limited to Japan but was global and altered the energy mix in other nations also particularly those located in the developed world. For instance, certain European nations like Germany, Netherlands reached a decision whereby the phasing out of the operational nuclear plants began and the shortfall was made up by focusing on clean energy sources particularly wind. Before this incident, a significant amount of power was generated through nuclear energy in these nations and hence the demand for uranium was adversely impacted. The public opinion has also been hit in the developing world where massive protests have been witnessed particularly by the people situated in the vicinity of the plant location who were weary of the underlying safety concerns and thus wanted an alternative location to be considered. This in turn would slow down the building up of nuclear energy capacity which typically has a high gestation period (Green, 2014). The cumulative result of the above is a reduced global demand for uranium. This is reflected in the following diagram. It is apparent from the above that due to the Fukushima incident and its devastating effect on nuclear energy, the demand for uranium plummeted. Hence, the demand curve has shifted towards the left from Dh to Di. In the short run, since the supply does not alter, the shifting of the demand curve leads to lower equilibrium price and equilibrium quantity as indicated by PI and QI respectively. The fall in price of uranium due to the factors discussed above was about 50% of the peak prices existing before this incident (Nicholson and Snyder, 2011). Due to the falling demand which led to the decline in the prices, the uranium supply was also adversely impacted. This is primarily because the profit margins associated with uranium mining trimmed significantly and as a result plans for new mines were postponed since there was an apparent oversupply. Also, the mining companies (for instance Paladin Energy) that had only uranium in its product portfolio suffered huge losses and hence had to exit from the market which resulted in a marginal decrease in the overall supply of uranium. Till the time that the demand of uranium picks up again, it is expected that the uranium supply would remain stagnant at the current levels only (FOE, 2013). As a result of this, the supply curve would marginally shift towards the left but the same was insufficient to bridge the demand supply mismatch and hence the soft prices prevailed. Since then, Japan had reopened two nuclear plants and it was expected that this would provide a boost to demand and also remove the negative sentiments associated with nuclear energy. However, the price remained stagnant despite this move by Japan. A possible explanation for this anomaly lies in the fact that major nuclear energy producers already have significant stockpiles and hence any fresh demand would be generated only when the existing stocks deplete (Cormack, 2014). Also, there is reduced demand from western nations (such as Europe USA) which in wake of rising nuclear liability are making a transition to renewable energy sources. Besides, the stockpiles already stacked with Japan are so substantial that any new demand for incremental uranium is expected to arise only after years when the current stock is depleted. Hence, the developed world paints a very gloomy picture with regards to future demand of uranium in the near future (McHugh, 2016). However, in this gloomy global demand scenario, the developing nations led by India and China are serving as beacons of hope for this sector along with stability in uranium markets. This is primarily because these nations have energy shortage and thus are looking at nuclear energy as one of the viable alternatives to ensure better accessibility to power. However, it is highly likely that China with the intention of increasing the overall national energy security instead of relying on supply of uranium from outside sources may instead buyout certain uranium mines so as to ensure that backward linkages are developed. Besides, the growing need of India and China for nuclear reactor is being partially fulfilled by Russia due to restrictions of nuclear reactor exports to certain markets (Green, 2014). Meanwhile, the advancements of technology in nuclear reactors are also expected to dampen the demand for uranium since with the advent of breeder reactors, the uranium usage efficiency has t remendously improved and as a result the requirement of uranium for production of per unit nuclear energy is decreasing (Green, 2016). Also, the time period required for putting a nuclear reactor into place and attaining critically typically entails years and may be a decade also. This implies that impact of various environmental accords and international greenhouse gas emission cuts would be limited in the near future as the fresh demand would emerge only when the nuclear plant is actually constructed. Thus, it is highly likely that the demand for uranium in the near future would continue to be lacklustre and hence the price would also not firm up unless there are some major disruptions in supply of uranium which seems unlikely as of now (Levit, 2016). Conclusion On the basis of the discussion carried out above, it is correct to conclude that the Fukushima incident led to a decrease in the uranium demand on account of safety concerns and this leading to decrease in price as the supply remained constant. However, plummeting prices had an adverse impact on the profitability of uranium miners which led some of them to close shop and hence supply reduced slightly. However, still there is an excess of supply due to which prices continue being soft. In the near future, the likely demand is expected to emerge from developing nations as developed nations are looking for renewable energy alternatives. Additionally, the emphasis on climate and global warming is expected to be positive for uranium demand but the same would actually transform into real demand only years later due to high gestation period involved. Thus, in the near future also, it is expected that uranium prices would continue to be soft. References Cormack. L. (2014), Uranium jumps as Japan reopens reactors, Retrieved on August 3, 2016 from https://www.afr.com/markets/commodities/uranium-jumps-as-japan-reopens-reactors-20141112-11l8li FOE (2013), Uranium price slumps, Paladin Energy in trouble, Retrieved on August 3, 2016 from https://www.foe.org.au/uranium-price-slumps-paladin-energy-trouble Green, J. (2014), Uranium how low can it go?, Retrieved on August 3, 2016 from https://www.businessspectator.com.au/article/2014/5/29/energy-markets/uranium-%E2%88%92-how-low-can-it-go Green, J. (2016), Australias uranium industry foundering ?nearlydead, i Retrieved on August 3, 2016 from https://nuclearinformation.wordpress.com/2016/06/12/australias-uranium-industry-foundering-nearly-dead/comment-page-1/ Levit, D. (2016), Uranium Prices Recovery Could Take 10 Years, Retrieved on August 3, 2016 from https://www.economiccalendar.com/2016/05/13/uranium-prices-recovery-could-take-10-years/ Mankiw, G. (2014), Microeconomics (6th edition), London: Worth Publishers McHugh, B. (2016), Uranium price increase around corner as China and India look to nuclear to reduce carbon emissions, Retrieved on August 3, 2016 from https://www.abc.net.au/news/2016-03-09/uranium-future-price-set-to-improve-as-new-plants-built/7232944 Nicholson, W. and Snyder, C. (2011), Fundamentals of Microeconomics (11th edition), New York: Cengage Learning Demand and Supply for Uranium Question: Discuss about the Economics For Business Demand and Supply for Uranium. Answer: Introduction The world currently is facing several issues in relation to climate change fuelled by global warming. This situation requires urgent attention or the problem may spin out of hand. In this backdrop, there is a renewed focus on enhancing the energy generation through cleaner sources which can act as credible substitutes to traditional coal based electricity generation. One of the alternatives worth considering is nuclear energy which is produced from uranium. Australia is one of the largest exporters of uranium worldwide. However, the fall in uranium prices that have been witnessed recently has been a cause of worry for the miners both in Australia and elsewhere (Green, 2016). There have been several reasons that are responsible for the fall in the prices or uranium. The given report in this context has the objective of highlighting the various demand and supply factors related to uranium which tend to have an impact on the underlying price. Based on these factors, it is possible to pr ovide an insight into the likely prices of uranium going forward in the future. Discussion In accordance with demand supply theory in microeconomic, the underlying price of any commodity is essentially dependent on the actual demand and supply and the same is the case for uranium (Mankiw, 2014). The uranium prices in the last couple of year have been in a state of virtual freefall as there has been a drastic reduction in the demand for uranium. This trend has been triggered by the Fukushima incident that has resulted in inflated security concerns about nuclear energy production not only in Japan but elsewhere also. In the response of the Fukushima incident, all the 48 nuclear plants that were operational in Japan at the time were phased out of production which led to drop in the uranium demand (FOE, 2013). Alarmed by the security concerns, the developed countries based out in Europe (such as Netherlands, Germany) also made out a conscious decision to phase out the existing nuclear plants and substitute the same with clean energy production by harnessing the renewable energy sources. This also impacted the demand adversely as a significant contribution to the energy security in these nations was done by the nuclear power. The fallout of these developments has also been witnessed in the developing countries such as India where the concerned people where new nuclear reactors are expected to come up have staged huge protests against the potential security threat and hence stalled the process of construction of new nuclear reactors. This is also expected to add to the downward pressure in the demand as considering the high gestation period of such projects, incremental demand may be several years away (Green, 2014). The net impact of the above developments has been witnessed in the form of plummeting demand whose impact can be accessed through the diagram indicated below. As a result of the factors highlighted above, there has been a shift in the demand curve towards the left i.e. to D1 from the original position Do. The supply continues to be the same in the short term and hence the net result of the demand curve shift is a fall in the equilibrium price and quantity to new levels denoted as PI and QI respectively (Nicholson and Snyder, 2011). The all in demand leads to lower prices which tend to have an adverse impact on the supply of uranium. This may be explained on the basis of reduced profit margins in the mining business and therefore the capital investments in the development of new mines are postponed to future when the demand would pick up. Additionally, some of the smaller companies have to shut down shop as they cannot sustain their operational expenses. This leads to the supply levels coming marginally downwards and stabilising there until there is increase in demand again (FOE, 2013). With regards ot future of uranium prices, the demand from the west remains tepid only and this trend is likely to continue with the increase in nuclear liabilities and rich prospects presented by other renewable energy sources. Also, even though the nuclear reactors in Japan have since then commences electricity production, the stockpiles that Japan currently possesses is so huge that any incremental demand for uranium from trading partners is years away. Hence, it may be correct to conclude that a very dismal situation is presented by the developed world in relation to demand for uranium in the future (McHugh, 2016). The only potential ray of hope stems from developing countries particularly China, India which are actively constructing new nuclear power plants in order to provide energy security to the people. Hence, nuclear energy is a viable option for these nations. However, with China also it is likely that prices would not receive much support as China may purchase a uranium mine abroad rather than trade uranium from others (Green, 2014). Besides, with the introduction of breeder reactors, the amount of uranium required per unit electricity production is on the decline (Green, 2016). Besides, for countries such as India where nuclear reactor construction is going on, the full scale operation of these reactors is some years away and may take upto a decade. As a result, the future prospective with regards to demand of uranium seems bleak with concerns on security front and high gestation period of those under construction. As a result, it is quite possible that uranium prices in the enar to me dium term would continue to remain soft (Levit, 2016). Conclusion The above discussion is indicative of the fact that the prices of uranium have come down in the recent times due to plummeting demand fuelled be security concerns across the world in the aftermath of the Fukushima incident. As a result, the price has also become quite less which is adversely impacting the profitability of suppliers. But it is expected that the prices would continue to the soft in the near to medium term as immediate increase in demand does not seem in sight. Only over a medium to long is demand expected to improve that to in the developing nations. References Cormack. L. (2014, November 12), Uranium jumps as Japan reopens reactors, Retrieved on August 3, 2016 from https://www.afr.com/markets/commodities/uranium-jumps-as-japan-reopens-reactors-20141112-11l8li FOE (2013), Uranium price slumps, Paladin Energy in trouble,Retrieved on August 3, 2016 from https://www.foe.org.au/uranium-price-slumps-paladin-energy-trouble Green, J. (2014, May 29),Uranium how low can it go?,Retrieved on August 3, 2016 from https://www.businessspectator.com.au/article/2014/5/29/energy-markets/uranium-%E2%88%92-how-low-can-it-go Green, J. (2016, June 12),Australias uranium industry foundering ?nearlydead, iRetrieved on August 3, 2016 fromhttps://nuclearinformation.wordpress.com/2016/06/12/australias-uranium-industry-foundering-nearly-dead/comment-page-1/ Levit, D. (2016, May 13),Uranium Prices Recovery Could Take 10 Years, Retrieved on August 3, 2016 fromhttps://www.economiccalendar.com/2016/05/13/uranium-prices-recovery-could-take-10-years/ Mankiw, G. (2014), Microeconomics(6th ed.), London: Worth Publishers McHugh, B. (2016, March 9),Uranium price increase around corner as China and India look to nuclear to reduce carbon emissions, Retrieved on August 3, 2016 fromhttps://www.abc.net.au/news/2016-03-09/uranium-future-price-set-to-improve-as-new-plants-built/7232944 Nicholson, W. and Snyder, C.(2011),Fundamentals of Microeconomics (11th ed.), New York: Cengage Learning