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Economics Demand And Supply For Uranium

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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 provide 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 medium 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),Australia’s uranium industry foundering – ?nearly dead, 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
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