Analysis of Potential Impacts of Uranium Transfers on the Domestic Uranium Mining, Conversion, and Enrichment Industries May 1, 2015 i EXECUTIVE SUMMARY: The Department of Energy (“Department” or “DOE”) plans to transfer the equivalent of up to 2,100 metric tons (“MTU”) of natural uranium per year (with a higher total for calendar year 2015, mainly because of transfers already executed or under way before today’s determination). These transfers would include 1,600 MTU in natural uranium hexafluoride transferred in exchange for cleanup services at the Portsmouth Gaseous Diffusion Plant; and low-enriched uranium, at an assay of 4.95 wt-% U-235, equivalent to 500 MTU of natural uranium, transferred for services to down- blend highly enriched uranium. In support of a determination whether these transfers will have an adverse material impact on the domestic mining, conversion, or enrichment industry, the analysis below assesses the potential impacts of DOE’s transfers. It takes account of the transfers just described as well as past DOE transfers still affecting the markets and certain transfers contemplated for later years. For purposes of the Department’s determination, transfers will have an “adverse material impact” when a reasonable forecast predicts that an industry will experience “material” harm that is reasonably attributable to the transfers. To test that attribution, the analysis compares the expected state of each industry in light of the planned transfers to what would happen in the absence of transfers. Such “but-for” analysis identifies what impacts DOE’s transfers can be said to cause. As a corollary proposition, the analysis does not conclude that transfers would be impermissible solely because an industry is weak. Conversely, it also does not regard transfers as permissible so long as they are not the sole or primary cause of an industry’s problem. The analysis must reflect existing conditions, whether prosperous or difficult; and the proper question is to what degree the effects of DOE’s transfers would make an industry weaker. Not every impact will be an “adverse material impact” for these purposes. In general, 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. The 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 myriad inputs, including a study prepared for the Department by consultant Energy Resources International, Inc., market data and forecasts from several sources, reports by other market consultants, and additional submissions in response to the Department’s requests for comment. The uranium mining industry serves the market for uranium concentrates. DOE’s transfers, including those described above, constitute less than 4% of global demand for uranium concentrates. The Department forecasts, on the basis of consonant results from multiple economic models that these transfers will tend to suppress prices (on average over a 10 year period) by about $2.70 per pound. While this price effect will decrease producers’ revenues, the near-term impact will be smaller because most producers primarily sell on long-term contracts and therefore have limited exposure to price fluctuations. The impact on production and employment in the industry will also be limited. As prices increase over the coming decade, there appears to be little domestic production for which DOE’s transfers would make the difference between expansion and contraction. In the long-term, the Department concludes that the effect of its transfers would delay decisions to expand or increase production capacity but would not change the eventual outcomes. ii The uranium conversion industry processes uranium concentrates into uranium hexafluoride suitable for enrichment. Most conversion is sold on long-term contracts, and the sole domestic converter makes essentially all its sales that way. The distinctive feature of the conversion market is that the price for long-term contracts appears not to be the product of ordinary market forces. It has been stable for five years despite market changes that have caused the prices for uranium and enrichment to change by 50% or more, and despite the fact that none of the major converters in Western countries is producing at full capacity. These conditions arise in part because conversion is a key step in the nuclear fuel cycle, but one that makes up fairly little of the overall price of uranium fuel. At the same time, most of the costs of conversion are fixed costs. It appears that fuel customers are willing to pay the prices converters demand to secure long-term supplies. In light of these conditions, the Department concludes that the term price will remain stable despite DOE’s transfers. Transfers will tend to cause a suppression of the global spot price by about $0.70 per kgU, but the domestic industry has no or almost no exposure to the spot price. DOE assumes the domestic industry will lose some sales as a consequence of DOE-sourced material’s appearing on the market. Those sales will reduce the industry’s revenues. But if the decrease in production were to increase average costs above current term prices, the industry would be able to increase prices correspondingly. The Department also concludes that its transfers will have, at most, limited impact on employment and plans for capital improvement and expansion. As it did with respect to the uranium mining industry, the Department concludes that the effect of its transfers would, at worst, slightly delay decisions to undertake major capital improvements or capacity expansions. The enrichment industry applies enrichment capacity to produce low-enriched uranium. It can also, by appropriate use of enrichment capacity, conserve natural uranium (through a mechanism called “underfeeding”) and effectively generate additional uranium supply. On the basis of several different models, DOE forecasts that its transfers will cause a price suppression of about $5.25 per SWU (separative work units, the unit for measuring enrichment services) in the near term and $5.40 per SWU over the longer term. The vast majority of enrichment is sold on long-term contracts, and indeed an enrichment provider typically will not invest in capacity without having such contracts in hand. The sole domestic enricher began operations in 2008, and contracts typically last 10 years or more. The domestic industry therefore has little exposure to current prices for enrichment. Because enrichers can also sell conserved natural uranium, a suppression of uranium concentrate and conversion prices can also affect their revenues. But that impact should be relatively small because natural-uranium sales consume only 10-15% of enrichment capacity. The Department also concludes that because enrichment facilities cannot easily decrease capacity, DOE transfers will not cause changes in production levels or employment at existing facilities. In the longer term, DOE’s transfers will not significantly affect investment decisions because substantially higher prices would be needed to justify investment than could be obtained without market growth, even absent DOE’s transfers. As it did with respect to the mining and conversion industries, the Department concludes that the effect of its transfers would, at most, slightly delay decisions to construct additional capacity. The Department recognizes that market conditions have been difficult in recent years for all three industries. But its analytical task under section 3112(d)(2) is to forecast what additional harm industry would suffer that can reasonably be attributed to its transfers of uranium. The Department concludes that the potential impacts to the domestic uranium mining, conversion, and enrichment industries from transfers at the rates described above are not so great as to constitute adverse material impacts. iii TABLE OF CONTENTS I. Introduction ............................................................................................................................................... 1 A. Review of procedural history ........................................................................................................... 1 B. Legal authority ................................................................................................................................... 1 C. Brief history of DOE transfers ....................................................................................................... 2 D. Transfers considered in this determination ................................................................................... 6 II. Overview of uranium markets .............................................................................................................. 11 A. The nuclear fuel cycle ..................................................................................................................... 11 B. The uranium markets ...................................................................................................................... 15 C. The nature of demand for uranium .............................................................................................. 17 D. The nature of uranium