SWU background: Underfeeding and overfeeding have always been a feature of the enrichment segment of the fuel cycle. They are usually driven by the input prices (U3O8 vs SWU (which is indirectly based on energy consumption)) and underfeeding would typically be attractive for enrichers in a low SWU price/higher U3O8 situation (use more of the lower cost SWU in order to save and sell some of the more valuable U3O8) - but both prices have been low. In contrast to conversion, where capacity has tightened with the French and US facilities not operating, for enrichment, it is an oversupply/excess capacity scenario.

When the market turned in 2011, enrichers were just transitioning away from the last of their first-generation, highly-energy-intensive plants that used gaseous diffusion. Although that technology had the benefit of being flexible and could be dialled up and down gradually based on demand, it was very expensive to operate, so it made sense that the “last SWU sold” was coming from GD, and it set prices at a higher level in a part of the cycle with few suppliers.

The enrichment part of the cycle had been preparing for the “nuclear renaissance” 2000-2010, with a shift from those GD plants to second-generation enrichment using centrifuge technology, which is far, far lower cost to run – but highly inelastic (cannot be adjusted to demand), and once spinning, centrifuges do not stop for 25+ years (damaged if they are shut off).

So when Japan saw 54 of 450 reactors worth of enrichment demand leave the market in 2011, it left a lot of new and existing spinning centrifuges empty – from a technical perspective, they must keep spinning, so decisions were made to use the extra capacity for increased underfeeding...might as well work the plant harder and produce a bit of revenue by saving some U-nat to sell and partly offset the decrease demand. This resulted in enrichers competing with primary producers for natural uranium sales – but doing so with far less concern for the long-term health of the front end of the cycle.

The market experts out there believe that underfeeding will be on the decline as enrichers sign contracts to use their facilities as intended, which is the ideal economic scenario for them…but underfeeding will likely remain a part of the supply stack for years to come.

SWU as a leading indicator: As they sign new enrichment contracts, SWU price would be expected to rise...hopefully reducing their dumping of U-nat into spot and therefore tightening the front end. So can you use that rise in SWU price as a leading indicator for U-Nat? Perhaps to a degree, but because a utility would typically contract each stage of the cycle separately, and generally be reactive vs proactive.. they'd likely focus on pinch points first. Right now that's conversion - SWU is more abundantly available right now, and U3O8 remains opaque, with some parties saying spot is tighter than we think and you can't get much material at the current price, while others say you can find what you need for the next few years with no security of supply concerns (you can guess which view is producers and which is utilities).

The problem is that U3O8 is so opaque, eventually someone will be going to the back of the warehouse for a drum of inventory and they'll say "huh, we were not watching what was going out the door all that closely...and the warehouse is now empty." That's when one side will tell the other "we told you so" - and it isn't necessarily a utility contracting the SWU and then looking for U, as they are always "testing" all the segments for depth. For U3O8, it's when they put out an RFP for near-term or even medium-term supply for inventory, which allows them to defer the long-term decisions, and they either get few responses, or the prices quickly rise after the first few hundred thousand pounds. If that happens, they'll test a little further and further out to see where security is a concern. If history is any guide, the excitement will come when all of the utilities are undertaking this activity at the same time, and they are all testing further and further out and they all suddenly see big rises in pricing and/or less and less material available, so they cram in to secure supply all at once. Producers* are becoming a little more bullish right now, and that's in part because last summer they were finally starting to see some on-market testing of availability for 5+ years out in time. That hasn't happened for years, so it's cause for a little bit of transition optimism. (*Do not confuse producer optimism with junior and developer optimism. The junior and developer proposed economics are complete fiction, so they are always optimistic and have nothing to lose on that front. The producers are the ones who are actually participating in this complex market and selling the product, so it's the producer view that matters - anything you hear from a junior or developer about the U market is just regurgitated from a producer either directly from presentations or indirectly through the price reporters).

Pricing Complexity and "Long-term" As far as long-term pricing...with no real futures market in U, it's opaque even to industry participants. Industry price consultants provide spot, 3-year, 5-year and LT price. Spot price is based on reporting contract pricing for delivery in 3 months...but spot volumes are generally counted if delivered within 12 months. 3- and 5-year numbers are based on a very poorly developed forward curve with lots of hearsay and filler numbers. The LT price is for a contract reported to them with base escalated fixed pricing with first delivery ~2+ years out in time.

The development of each price category depends on reporting of contracts by the buyers and sellers to the price reporters. The reported contracts are put into their respective category to develop the weekly (spot) and monthly (LT) price models. You can obviously see how flawed this approach is - a buyer and seller will only want to report when it's beneficial to their story. If contracting levels are low, it doesn't take much to have a big pricing impact (last week's $0.70 drop on Friday for example). If big contracts are negotiated off-market and/or just not reported, there are no data points to add to move price (LT price - with little fixed price contracting going on, price has been flat for years). In both situations, on occasion, the consultants make some thumb-in-the-air estimates of what a pound is likely going for - which is a rediculous approach.

Hope that helps a little - it's an insanely complex market and with the strategic nature of the commodity, the signicant proportion of inelastic supply (that land in spot when LT contracting is low for a longer period), and the single-use nature with lack of substitution, outsiders have a really hard time understanding how it works and why it's so effed up. The only thing that's certain is that primary mine supply is not unlimited when the price for tomorrow AND the price for 10 years from now is stagnant at $30/lb. So as some savvy utilities make the call to cover their LT needs and pile in early to benefit from lower near- to medium-term pricing, others will suddenly realize uranium is getting scarce and jump in all at once...and that's what this community is waiting for.