In the modern times when there is continuous emphasis on clean energy, one of the viable means is through nuclear power generation. The main raw material for the same is uranium and Australia is one of the largest global exporters of uranium. But, the recent years have been bad for the uranium miners in Australia as there has been a severe decline in the uranium prices and these have reached their historical lows adversely impacting the Australian economy (Green, 2016). This particular report deploys microeconomic principles particularly demand and supply to explain the current price fall and provide some future guidance on uranium prices.
The demand and supply theory highlights that the underlying price and quantity consumed is driven by the demand supply mismatch. This is clearly truer for commodities where differentiation is more difficult besides the ore grades (Mankiw, 2014). The fall in uranium prices may be explained on the basis of falling demand especially post the Fukushima nuclear meltdown which has brought the safety concerns associated with nuclear energy to the centrestage. As a result, there has been resistance on the part of the several nations to continue or expand their nuclear power plants (FOE, 2013).
One of key nuclear energy producers, Japan had to shut down all the live reactors. Further, the western countries also responded by taking the decision to gradually shift to other energy means instead of nuclear energy. Additionally, there are concerns in the west about the nuclear liability clause as well which potentially could be beyond imagination. The developing countries which were earlier embarking on a glorious journey to embrace nuclear energy have come to a halt as staunch resistance has been faced by residents and non-government groups with regards to safety of these nuclear plants. This has lowered the cumulative uranium demand which in terms of demand and supply theory can be expressed as highlighted below.
Due to decreased demand, there has been a leftward shift in demand curve to D1 which has led to lower equilibrium price and quantity demanded as indicated by P1 and Q1 respectively. A tacit assumption is that the supply in the short term cannot adjust to the falling demand (Nicholson and Snyder, 2011).
The falling prices of uranium has had a negative impact on the suppliers or the uranium miners as due to plummeting of price, there profit margins have also plummeted and some of the exclusive uranium producers are at the verge of bankruptcy. However, majority of the supply is catered to by the large miners which are stable and hence there would not be any serious supply cuts in the short term (FOE, 2013).
A imperative question to consider is the future of uranium prices and also to consider whether uranium price is justified by the underlying demand and supply forces. The justification of the uranium price by the current demand and supply was apparent when the news of few reactors opening in Japan did little to provide an upward momentum to uranium prices. This is because, the nuclear reactors situated in Japan already have uranium stocks which are expected to serve them for many years and hence any additional demand is not likely (Cormack, 2014). Also, with the other developed world making a policy shift away from nuclear energy, it is difficult that any significant uranium demand would emerge from any of these nations. The only exception is in the form of Russia which still is embracing nuclear energy but it does not add to the international demand as it is bestowed with rich uranium deposits both at home and neighbouring nations (Green, 2014).
The only incremental growth in uranium demand thus could be extended to stem from the developing world where energy generation needs a boost and alternative sources are not present thus making nuclear energy a lucrative source (McHugh, 2016).. However, even in these nations most of the reactors are in construction phase and considering the high gestation period, fresh demand could be several years away. Also, the nuclear reactor technology with the introduction of breeder reactors is constantly undergoing improvement which has led to lesser consumption of fuel which further would dampen fresh uranium demand. In wake of the above factors, it seems that uranium price recovery should not be expected anytime soon (Levit, 2016).
Using microeconomic theory of demand and supply, the low prices of uranium have been explained on account of falling demand. The low prices of uranium are here to stay considering that demand from the west would be quite subdued only and incremental demand from the developing world would still take some time as most of the reactors are under construction. Also, the technological breakthrough in reactor technology coupled with negative public sentiments is further likely to act as potential bottlenecks in uranium price rise.
Cormack. L. (2014), Uranium jumps as Japan reopens reactors, Retrieved on August 27, 2017 from http://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 27, 2017 from http://www.foe.org.au/uranium-price-slumps-paladin-energy-trouble
Green, J. (2014), Uranium − how low can it go?, Retrieved on August 27, 2017 from http://www.businessspectator.com.au/article/2014/5/29/energy-markets/uranium-%E2%88%92-how-low-can-it-go
Green, J. (2016), Australia’s uranium industry foundering – nearly dead, Retrieved on August 27, 2017 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 27, 2017 from http://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 27, 2017 from http://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