Uranium in its naturally occurring form consists primarily of two "isotopes” with the same chemical characteristics, but different atomic weights due to the differing number of neutrons in their nuclei. Both isotopes have 92 protons in their nuclei (and, thus, the same chemical characteristics), but the lighter isotope (atomic weight of 235) has 143 neutrons and the heavier isotope has 146 neutrons. The lighter isotope, U-235, comprises only 0.7% of natural uranium, but it is the only isotope that can actually undergo fission and, thus, produce energy. The other isotope, U-238, comprises the remaining 99.3% of natural uranium. In order to be useful as fuel in the most prevalent nuclear power technologies, the percentage of U-235 must be increased to the level of 2-5% U-235, a process called "enrichment." Enrichment is a technically difficult process, whose essence is highly secret because it is the same process used to produce some nuclear weapons material. (Nuclear weapons can be made from uranium of approximately 90% U-235.)

Unlike a fossil-fueled power plant, a nuclear power plant is not fueled continuously, but rather in batches. At its initial operation, the nuclear plant is loaded with what is called an "initial core" of fuel assemblies in a geometric configuration inside the plant's "reactor core." The plant is started up, and the fission of U-235 occurs in the fuel assemblies inside the core. Eventually (in 1-2 years of operation), the fission product level builds up inside the fuel and quenches the fission process. At this stage, the nuclear plant has finished an "operating cycle" and is shut down for refueling. A portion (typically 20-40%) of the fuel assemblies are replaced at refueling time, with U-235 enrichment levels specific for that plant and operating cycle, and the rest of the fuel is shuffled in the reactor core to optimize the plant's future operations. The nuclear plant is then started up again in a new operating cycle, that lasts from 12-24 months, depending on the design of the plant's operation. Utility companies like to shut down for refueling in their "off-peak" demand periods, which is usually in the Spring or Fall.

The company fabricating the fuel assemblies is nearly always not using the enriched uranium product (EUP) delivered by that customer to manufacture the customer's actual fuel assemblies. The fabricator is using its working inventory to produce the customer's assemblies. In actual practice, the utility customer is asked by the fabricator to deliver EUP of different characteristics (quantity and U-235 enrichment) than that used for that customer's fuel assemblies; in fact, the customer usually orders EUP matching a future fabrication customer's needs. In each such case, the customer delivers EUP of the same enrichment services (SWU) content, but different natural uranium equivalent. When the fabrication customer delivers the EUP for fabrication, the customer's EUP is broken up into "feed" (i.e., natural UF6) credits and SWU credits for the customer's storage account at the fabricator. On a periodic basis (usually once a year), the fabricator and its customers reconcile their feed accounts, on the basis of the feed equivalent actually required to fabricate the customers' fuel. (Remember that the customers each deliver the proper SWU content in their EUP.) If the feed equivalence of a customer's actual EUP deliveries is less than the feed equivalence of the fabricated fuel delivered to the customer (after accounting for manufacturing losses), the fabrication customer delivers feed UF6 to the fabricator's account somewhere; and vice versa for customers with excess delivered feed content.

To further complicate (or, actually, to simplify) matters, the enricher usually delivers the EUP prior to its customer's contractual delivery date. This EUP is then recorded as feed and SWU credits for the enricher's storage account at the fabricator. Then, when the enricher is required to make delivery of EUP to the enrichment/fabrication customer, the enricher just notifies the fabricator to make a book transfer of feed and SWU credits from the enricher's account to the utility enrichment/fabrication customer's account. Thus, the notion of a physically-identifiable lot of EUP is meaningless in this industry, and the accounting concept of feed and SWU credits makes the feed and SWU fungible in their own right.

This accounting system does not mean that physical quantities of EUP are not important. There is a system of physical protection and nuclear nonproliferation safeguards that requires a strict accounting for the physical inventory of EUP within the fabrication plant boundaries, so that any theft or diversion of EUP for military or terrorist purposes can be detected. The responsibility (including government inspection and reporting requirements) for this physical protection and the liability for any radiation-related accident is purely that of the fabrication facility owner, not the fabrication customer. It is tied to the physical possession of the EUP, not to the party with legal title to the EUP. The same situation occurs for the other processing stages of the nuclear fuel cycle.

Electric utility buyers of uranium, UF6 conversion and SWU often purchase by open bid request, for their specific needs. Such purchases can be either for a "spot" purchase (with typically one delivery within 12 months of the date of the bid request) or for multi-year purchases under a "long-term" contract. Although only a minority share of the utility industry's uranium and enrichment services needs are procured under spot purchases, long-term uranium contracts typically have significant buyer flexibility to buy more or less (typically ±20-30%) than a nominal annual quantity specified in the contract. Therefore it is easy for the utility to shift to more use or less use of the spot market, depending on the then-current spot market price, compared to the delivery price in the long-term contract.

Enrichment contracts are most often based on covering a specified percentage of the utility's (or power plant's) requirements, which provides considerable flexibility to the buyer, but of a different sort than that of uranium contracts. UF6 conversion contracts can provide either type of flexibility, depending on the particular contract form agreed to.

Evolution of the Market

When the Western World's nuclear power industry was starting its commercialization, the only supplier of uranium in the USA was the US Atomic Energy Commission (AEC). Under US legislation passed in 1964, private ownership of uranium was allowed starting in 1968. The same legislation authorized the AEC to provide "toll enriching services" for uranium, under non-discriminatory terms, on the basis of the AEC's recovery of its costs of providing such services. This part of the legislation was a clear mandate to the U.S. government to involve itself in the commercial nuclear fuel industry only by providing enrichment services, and not the other segments of the fuel industry. This was an important precedent, because it lead to markets for each processing stage for nuclear fuel–markets that persist to this day. A typical utility buyer will contract separately for natural uranium concentrates ("yellowcake," or "U3O8"), services for processing U3O8 into uranium hexafluoride ("UF6 conversion"), services ("SWU") for enriching uranium in its U235 content, and services for fabricating the enriched uranium product into finished fuel assemblies, for loading into the nuclear power plant.

Although there is no formal "market" for uranium and SWU, in which standardized sales terms and quantities exist, several organizations publish prices for activity in these markets. The longest running of the uranium price series is the NUEXCO Exchange Value, currently published by TradeTech and in publication since August of 1968—the beginning of the commercial market for uranium. This uranium price series history is shown in the Figure. The Exchange Value is a measure of the uranium price on the spot market, but is also used in the vast majority of long-term contracts with "market-related" delivery prices. In addition, the Exchange Value has, at times, been published as two series—one for the "Restricted Market" (i.e., with import restrictions on uranium from the countries of the former Soviet Union, or FSU) and one for the "Unrestricted Market" (i.e., for regions with no import restrictions).

In the early years of the commercial uranium market, the period of US government purchases for military purposes was just winding down, whereas the commercial nuclear power industry was just in its infancy. Consequently, uranium prices were at their all-time historical low (in nominal dollar terms) at the beginning of the commercial market. Several factors came together in the mid-1970s to change this situation. Firstly, nuclear power became more widely accepted (and proven economical) as a source of electricity by the world's utility industry, and the years 1973-1976 witnessed massive orders of nuclear power capacity (over 36,000 megawatts for the peak year in the USA)—indicating large future demand for uranium. In addition, there was a strategic push by governments to energy sources other than oil, in response to the actions of Organization of the Petroleum Exporting Countries. Next, the world's (then) only supplier of enrichment services (U.S. Atomic Energy Commission) first closed its order books because of its perceived enrichment capacity shortage, then reopened new contracting by shifting from requirements-based contracts to contracts with ten-year-forward firm commitments, thus fixing uranium demand that far into the future.

Finally, there was the alleged formation of a cartel by non-US producers, partially in response to US import quotas on foreign uranium, followed by the abrogation of a large number of contracts by the Westinghouse Corporation, which had sold uranium short (i.e., without covering these sales) as part of package deals for nuclear power plants. The price consequently rose rapidly from $7 per pound U3O8 at the end of 1973, to $14 in October 1974, to $21 in May 1975, to $40 in April 1976, before peaking at $43.40 in May-July 1978.

By the end of 1979, it became clear that electricity demand, which had been experiencing annual growth rates in the USA of 7% for decades, was suffering from the economic impact of the OPEC oil embargo and, consequently, the backlog of nuclear plant orders became at risk for lack of anticipated future demand for electricity. On the supply side, the U.S. import restrictions were being phased out, and the world's uranium producers were responding to the price increases. Production increased from about 105 million pounds U3O8 in 1973 up to almost 175 million pounds in the 1980-81 period, the historical peak. Actual world consumption for the years 1980-81 averaged only 55 million pounds U3O8 per year. This high production (relative to consumption) was sustained through about 1988, before starting a precipitous decline thereafter.

There were several reasons that production did not decline in the early to mid 1980s, in spite of the precipitous price decline. For one, the long-term, fixed-commitment enrichment contracts of the period fostered the development of long-term uranium supply contracts, whose prevalent pricing mechanisms were (1) base-prices with escalation (from bases of $40 or so for contracts signed in the mid- to late-1970s) and (2) market-related prices with price floors typically around $35 per pound U3O8 for contracts signed in the mid- to late-1970s. Thus, producers with long-term contracts were protected from drops in the spot price. The second reason for sustained production was the discovery and development of a new class of "super deposits" of large size and low production costs in Australia and Canada. Thus, while production was declining from older low-grade deposits, this lost production was being replaced by new high-grade deposits. Throughout most of the 1984-1988 period, the Exchange Value hovered in the $15-17 per pound U3O8 range. However, a sustained decline ensued thereafter under pressure from the huge overhang of excess commercial inventories (much of it due to nuclear plant cancellations) and the entry of supplies from the Soviet Union into the West.

Accelerating this price decline was the high degree of market efficiency brought about by the creation of a new class of market participant: the uranium trader. The uranium trading companies, exemplified by NUEXCO, Nukem, and Urangesellschaft, bought and sold uranium for their own account, typically purchasing large quantities from utilities with large excess inventories or the Soviet Union (and, later, Former Soviet Union [FSU]), then reselling in smaller lots to match market demand. The uranium spot price dropped below $10 per pound U3O8 in May 1989—reaching the $7-8 range from late 1991 through mid 1992.

Late 1991 saw the beginning of the era of protectionism in the market, with the filing of a dumping complaint by some US producers against uranium from the Soviet Union. Shortly after that filing, the Soviet Union was dissolved, and the dumping investigation was continued against the six FSU countries that had been determined to have produced uranium in the past. In early- to mid-1992, the US Department of Commerce (DOC) found preliminary justification in the complaint and ordered an interim dumping duty of 148% on uranium from these countries. The FSU countries were thus faced with the prospect of intolerable dumping duties, and the U.S. government was faced with the dilemma of trying to reward the FSU countries for "throwing off the yoke of communism" in the face of impending trade restrictions on one of the few products these countries had to export. The compromise was the implementation of so-called suspension agreements between the DOC and the FSU countries, using a relatively obscure provision of U.S. trade law and under which the FSU countries individually agreed to limit their exports to the U.S.A., under terms essentially dictated by the DOC.

The suspension agreements were put into place in October 1992, and the Euratom Supply Agency in Western Europe followed suit with its own brand of trade restrictions against FSU uranium. A market bifurcation resulted, with FSU uranium selling at a $2-3 discount from non-FSU uranium. This discount range generally persisted from late 1992 through the middle of 2001. Import restrictions have been discontinued in the U.S.A. against all but Russian uranium, whereas Euratom continues its overall guidelines restricting use of FSU uranium in general.

The market reacted to these restrictions in two stages. Firstly, the price for non-FSU uranium in the restricted markets rose to over $10 per pound U3O8 , staying in the $9-10 range until the early 1995 period. By February 1995, the depletion of commercial inventories available to the restricted markets and the bankruptcy of NUEXCO, the leading uranium trader at the time, helped spur a price rise from $10.40 in February 1995 to a peak of $16.50 in the May-July 1996 period.

However, this price run-up was short-lived, as pent-up production responded and the FSU suspension agreements had been modified earlier in 1994 to effectively loosen the terms of the import restrictions. In fact, the Russian suspension agreement was modified to allow "matched sales" with equal parts of U.S.-produced uranium and Russian imports, under terms that effectively subsidized the U.S. producers. The "restricted" spot price dropped below $12 per pound U3O8 in May 1997. The spot market has seen some upward price excursions (late 1997 and early 1999), but was generally on a downward incline since late 1996, especially during the year 2000.

After a rise to a plateau of about $10 per pound U3O8 in early 2001, the spot price began rising in April 2003 to its current level of over $18 per pound U3O8. Several events on the supply side of the market contributed to this price rise, including the lingering effect of a fire at a uranium processing plant in Australia, a flood at a uranium mine in Canada, and an offsite discharge of uranium-bearing gas from a processing plant in the U.S.A.