Vanadium is a grey, soft and ductile high-value metal with several unique characteristics that position it strongly in the steel, alloys and chemicals sectors.
More than 80% is recovered from magnetite and titano-magnetite ores, either as the primary product (18% of global supply in 2018) or more commonly as a co-product with iron processed for steel production (70% of 2018 global supply). It can also be recovered as a secondary product from fly ash, petroleum residues, alumina slag, and from the recycling of spent catalysts used in some crude oil refining. China is the world’s leading producer at 57% global output in 2018, mostly through co-production. South Africa produced 8% of the world’s vanadium feedstock in 2018, mostly from only two producers, Bushveld Minerals and Glencore. The two main traded vanadium products are V2O5 and FeV. V2O5 is commonly produced through the treatment of magnetite iron ores, vanadium-bearing slags and secondary materials. It can be used directly in some non-metallurgical applications and in the production of vanadium chemicals. It is also used as an intermediate product for the production of FeV, the vanadium alloy used as a strengthening agent in manufacturing of high-strength steel.
The FeV price has seen a significant surge in the last three years, rising by more than 700% from lows of US$13.50/kgV in December 2015 to a high of US$127/kgV in November 2018. This price performance has been driven primarily by a structural market deficit due to: – Growing demand underwritten by applications in the steel sector where enhanced regulations is driving greater intensity of use of vanadium, while applications in energy storage provide significant step change upside in demand; this is coupled with a concentrated and constrained vanadium supply base that has declined, essentially due to reductions in supply from co-producers with limited upside in new production, the closure of Highveld Steel & Vanadium in 2015 presenting the single biggest supply shock.
While the above described factors have driven vanadium price increases over the past three years, temporary demand side factors during the second half of 2018 accelerated the price increase. These temporary factors were also responsible for the equally rapid drop in prices experienced in the first quarter of 2019.
- Seasonality and short-term de-stocking in China at the end 2018 and beginning 2019.
- New rebar standards in China introduced in November 2018 not being immediately enforced, as initially envisaged.
- Significant reduction in VRFB deployments during the second half of 2018 owing to high vanadium prices.
- Increased Ferroniobium (“FeNb”) imports into China suggesting greater substitution of vanadium in rebar in an environment of higher than US$100/kgV vanadium prices. The incentive to substitute vanadium with FeNb is significantly diminished by the recent price reductions, while in the longer term, vanadium continues to have several advantages to FeNb in steel applications.
There have been some opportunistic supply additions in the market in response to the high vanadium prices. However, the sustainability of these supply additions is questionable on account of their high operating costs.
Meanwhile, longer-term factors continue to support the structural deficit thesis:
- The incentive to substitute vanadium with FeNb is significantly diminished by the recent price reductions, while in the longer term, vanadium continues to have several advantages to FeNb in steel applications. Reverse substitution is inevitable amid decreasing vanadium prices.
- Increasing enforcement of new rebar standard in China is expected to support demand growth going forward.
- Longer term, supply will continue to be impacted by grade and capital access limitations:
- Price volatility not helpful to debt capital availability;
- Reduction in vanadium price not conducive to high cost and low-grade primary production (including stone coal production);
- Co-production still primarily driven by steel market dynamics rather than vanadium;
- Significant new supply from existing brownfield primary production expansions expected mainly from 2021 onwards.
- Vanadium consumption in energy storage applications, through VRFBs, is poised to enjoy greater competitiveness at current vanadium prices. Vanadium demand for electrolyte fell significantly in the second half 2018 but it is likely to rebound during the course of 2019, with the restart of temporary delayed projects.
We expect these structural drivers of the vanadium market to remain supportive of healthy prices in the medium to long term.
Enforcement of the new rebar standard is expected to accelerate ramp up during 2019. As previously expected, this will increase China’s intensity of use of vanadium and drive strong growth in vanadium demand.
We believe there is limited risk of continued substitution of FeNb for FeV as:
- FeV performs better than ferroniobium in structural steels which are used for high rise buildings;
- Replacing vanadium requires a number of technical adjustments;
- Vanadium generally requires lower rolling pressures and temperatures than FeNb to give equivalent steel properties; and – Supply of FeNb is more concentrated than vanadium.
In addition, the recent softening of the vanadium price further reduces the incentive to substitute vanadium. While we note recent price trends, our flagship asset, Vametco, continues to generate healthy cash flows at prevailing prices. Bushveld Minerals is confident that, maintaining its strategy of targeting the lower first quartile of the cost curve down in tandem with ramping up production, it will continue to be one of the lowest-cost primary producers and maintain a competitive position to generate healthy cash flows throughout the commodity cycle.
Furthermore, Bushveld Minerals’ vertically integrated business model provides a natural hedge against future vanadium price downswings. Lower vanadium prices make vanadium more attractive for emerging uses, such as energy storage, which remains more sensitive to movements in vanadium prices than steel production.
The Role Of Vanadium In The Modern World
Vanadium use is dominated by its applications in steelmaking, which was estimated to account for 93% of total consumption in 2018. VRFBs accounted for 3% while the non-ferrous alloys and chemicals sector accounted for the remainder. The steel market is expected to continue supporting robust vanadium demand, which is expected to grow at a CAGR of approximately 2.5% through to 2027, supported by the increased intensity in use of steel in emerging markets like China. However, the energy storage “upside” may increase the CAGR of vanadium demand from 2.5% to 8.4% over the next 10 years.
Chinese Rebar Standards Regulations And Enforcement
The new production standards for high strength low-alloy (“HSLA”) steel rebar came into force in China in November 2018, mandating the use of higher-strength reinforcing bars. The standard eliminates low-strength Grade 2 rebar and sets out specifications for three different high-strength standards, namely: Grade 3 (400MPa), Grade 4 (500MPa), and Grade 5 (600MPa). These will require 0.03% V, 0.06% V, and more than 0.1% V respectively, which is equivalent to kilograms of vanadium in steel of 0.3kgV, 0.6kgV and 1kgV respectively. Market consensus supports the view that enforcement of the new rebar standard will increase in 2019.
Meeting The World’s Demand For Vanadium
We expect vanadium market’s structural deficit to persist in the near to medium term driven mainly by the growing intensity of use of vanadium in the steel sector, as well as burgeoning demand from the energy storage market in an environment of limited supply growth.
Vanadium demand in the steel market is expected to grow at a CAGR of approximately 2.5% through to 2027. Although forecasts for VRFBs vary widely, they indicate that VRFB demand could increase vanadium demand from 2.5% up to 8.4% CAGR up to 2027.
While co-production accounted for 70% of global vanadium feedstock supply in 2018, it continues to face significant constraints, including low profitability arising from high input and processing costs where producers have no leverage on steel prices, and environmental-related restrictions that adversely impact producers’ competitiveness. Moreover, several efforts by the Chinese government to reshape its steel industry can be expected to impose further constraints on vanadium co-production steel plants. These initiatives include the reduction of excess steelmaking capacity targeting highly pollutive high cost plants, and the conversion of more than 200 Mtpa in blast furnace operations to electric arc furnace technologies which will increase the role of scrap iron in steel making and reduce the overall demand for iron ore.
Secondary production will increase or decrease supply based on both vanadium price and feedstock availability. However, it remains a higher-cost form of production than primary and co-production and thus is unlikely to add significant vanadium units for prolonged periods.
Supply from greenfield projects also faces significant hurdles. Most of the recent greenfield projects that have been announced for development are of a co-production type due to their low in magnetite grades and thus require large capital investments. The primary projects under development also face significant capital constraints made worse by the volatility seen in the vanadium price historically.
It is Bushveld’s view that the best opportunity to address the structural deficit in the vanadium market lies with existing primary producers that are economic at both prevailing and the long term forecast vanadium price and are capable of increasing production at their facilities on a lower-cost, brownfield basis.
Energy Storage And Vanadium Redox Flow Batteries
Electricity’s share of global energy consumption has been and will continue, to grow at a rapid pace, already doubling from 10% in 1980 to 20% today. By the middle of this century, it is expected to account for 45% of all energy consumption. This has huge implications not only for global energy production but also for all minerals involved in the electricity value chain.
At the same time, the contribution of renewable energy to the electricity generation mix continues to grow, aided in large measure by the falling costs of renewable energy generation and the growing push for clean forms of electricity generation. These changes have led also to the growth of distributed electricity generation, including mini-grids, decreasing the reliance on centralised power systems featuring massive power plants and expansive transmission networks, which has created the opportunity for hundreds of millions of people across the world to obtain access to “green” electrical energy cheaper and faster than before.
Energy storage, a process in which energy generated at one point in time is preserved for use at another time, plays a critical role in this energy transition. While the broader energy storage market, comprising of consumer electronics, mobility (e.g. electric vehicle applications) and stationary applications is expected to grow at a CAGR of 36% between 2018 and 2027, the fastest growth rate among all three belongs to stationary energy storage. Navigant Research forecasts stationary energy storage to grow at a rate of 58% p.a. exceeding 100GWh and US$50 billion in market size by 2027.
Stationary energy storage applications include:
- Enhancing grid stability where intermittent renewable energy sources are used;
- Smoothing a power system’s load distribution by shifting power demand from high peak areas to low peak areas (load shifting); and
- Storing power generated during off-peak periods when excess electricity is can be generated to supplement peak periods when electricity generation needs to be supplemented with expensive “peaking” generation sources.
Supporting remote electricity users without access to transmission infrastructure to connect to the main grid.
Multiple trends are also impacting the usage of stationary storage:
- Long duration energy storage applications are expected to account for up to 90% of energy storage deployments by 2027 (excluding pumped hydropower). To date, most battery energy storage installations have been of short duration, with sufficient energy to last for 15 to 60 minutes. Long duration storage, requires typically from 3 to 10 hours of daily energy storage capacity;
- Deploying energy storage systems can be utilised for multiple purposes and benefits rather than just one application. Traditionally, batteries have only provided frequency control, due to their ability to respond to power fluctuations near instantaneously. While this use case remains important, it is increasingly coupled with provision of system reserves, peaking capacity, deferral of transmission and distribution expansion and ancillary services;
- Finally, as the industry matures the focus is shifting from pure technical and financial capability to safety. Significant fires in South Korea over the past 18 months and multiple high profile fires in Europe and the United States at large battery sites using lithium ion technologies from well established developers and manufactures, have increased focus on the safety of stationary energy storage. While car and computer batteries have been known to catch fire before, the amount of damage and potential human harm from fire and smoke is significantly greater from larger stationary energy storage installations.
Africa Offers Significant Energy Storage Opportunities
While the energy storage market opportunity is global, Bushveld Energy has, since inception, focussed its efforts on the African market, which offers the potential to grow faster than most other regions. Sub Saharan Africa features over 600 million people without access to electricity and poorly developed or weak grid infrastructure. At the same time, it possesses some of the best potential for solar and wind generation on Earth, presenting an attractive opportunity for both the energy transition and greater, short term usage of stationary energy storage.
Three important developments reinforce Bushveld Minerals’ African focus:
1. World Bank Group Commitment Of Us$1 Billion For Battery Storage
The World Bank Group has announced a US$1 billion programme to support the deployment of energy storage in low- to middle-income countries. The programme is expected to mobilise a further US$4 billion in concessional climate financing and public and private investments to deliver 17,500 MWh of energy storage in these countries by 2025. This is not only positive for energy storage globally, but for Bushveld Energy and its focus on African markets. Since typically over one-third of World Bank funding is directed towards sub-Saharan Africa, the programme could expect to deliver 5,000-6,000 MWh of storage in Africa alone, or an average of 1,000 MWh per year. Similarly, most of the storage deployed
for future projects under the programme will be to ensure greater integration of renewable energy, which requires long-duration, daily storage and fits into the technical and commercial superiority of the VRFB technology.
2. Eskom’s Battery Energy Storage Systems Programme
In 2018, Eskom announced a programme to install 1,400 MWh of battery energy storage in South Africa by 2022. The first phase of that programme is expected to start in 2019. Once started, the programme could propel South Africa into one of the top five energy storage markets globally. Although the structure of the programme and its projects are not yet public, the nature of South Africa’s peak demand, which lasts for six hours a day and peaks twice a day, makes the economics especially favourable for long-duration, limitless recycling technologies such as VRFBs.
3. Developments In South Africa’s Energy Regulation Framework
South Africa’s Integrated Resource Plan (“IRP”), which outlines the country’s future electricity needs and the technologies that will be used to meet that need is expected to be released
in mid-2019. The new IRP is broadly expected to support more renewable energy, especially wind and solar, and acknowledge the need to support integration of that variable generation through storage technologies. The recently announced decision by South Africa’s Minister of Energy to permit significant “small scale embedded generation” of up to 10 MW, will open up the “behind-the-metre” market for energy storage in South Africa. Additionally, the South African Renewable Energy Independent Power Producer Procurement Programme (“REIPP”) has been restarted to continue to add renewable energy to the grid, creating opportunities for long-duration battery storage, either as standalone facilities or co-located with solar or wind generation. In an environment of a constrained South African power system, including the significant financial constraints facing the national utility, Eskom, the emerging approach by the government will unlock private sector participation, in the form of the REIPP programme, the development of embedded generation solutions and/or partnerships with the utility with significant opportunities for energy storage as a part of the solution mix.
Vanadium Redox Flow Batteries
VRFBs are well positioned to take a significant share of the stationary energy storage market, on account of their unique features that give them an edge in large scale, stationary and long-duration energy storage applications.
These features include:
- Long lifespan cycles: Ability to repeatedly charge/discharge over 35,000 times for a lifespan of over 20 years;
- 100% depth of discharge: Without material performance degradation is unique to VRFBs;
– Low cost per kWh when fully used at least once daily makes VRFBs today cheaper than Li-ion batteries;
- Safe, with no fire or smoke risk from thermal runaway;
- –100% of vanadium is re-usable upon decommissioning of the system, making VRFB’s the most sustainable major battery technology;
- Scalable capacity to store large quantities of energy;
- Flexibility that allows for capturing the multi-stacked values of energy storage in grid applications;
- Very fast response time of less than 70ms; and
- No cross-contamination, with only one battery element that is unique among flow batteries.
The lack of cross-contamination, combined with the lack of degradation of the vanadium electrolyte over the lifespan and the simple architecture of the VRFB that allows for the removal and re-use of the electrolyte, opens up the technology to innovative financial solutions such as electrolyte rental that could be a significant catalyst for adoption by reducing the upfront capital costs of these systems.
According to Navigant Research, the global stationary energy storage demand is forecast to grow to 100 GWh in annual deployments by 2027. A mere 10% share of this market by VRFBs would see VRFB deployments of 10GWh per annum by 2027. With a 1 GWh VRFB system, requiring approximately 5,500 mtV in electrolyte, more than 5% of current annual global vanadium consumption (2018 vanadium production of ~96,000 mtV), this would add 55,000 mtV to annual vanadium demand by 2027. Navigant’s own forecast calls for an 18% market share for flow batteries, which could increase demand to in excess of 80,000 mtV.
The VRFB market opportunity is attractive, not only for its diversification and strengthening of the vanadium demand profile, but also for its own commercial opportunity. There is significant economic value in the VRFB value chain to justify the downstream integration that would unlock these solutions. For these reasons, Bushveld Minerals initially established Bushveld Energy Limited to exploit the multi-billion dollar commercial opportunity that the energy storage industry presents.
Annual Installed Stationary Energy Storage Capacity and Deployment Revenue by Market Segment.
VRFBS – Challenges And Opportunities
The growing adoption of VRFBs must overcome two key hurdles to be sustainable: security of supply and stability of vanadium input costs. Bushveld Minerals believes the key to capturing this opportunity is in a vertically integrated vanadium business model that provides both upstream and downstream enablers for the success of VRFBs in the global energy storage industry.
- Security of supply: if VRFBs capture even 18% of the Navigant Research forecast of the stationary annual energy storage deployment of approximately 100 GWh in 2027, it would indicate a vanadium demand of over 80,000 mtV for energy storage alone. Accordingly, the ability to guarantee supply of vanadium for VRFBs will be key to the success of these systems.
- Stability of vanadium input costs: vanadium makes up between 30 and 50% of the cost of a VRFB system, depending on the battery size and vanadium price. The adoption of VRFBs thus depends on the relative and absolute vanadium price. Low-cost primary producers with significant production capacity are well positioned to address price volatility by potentially providing long-term, stable pricing. While such solutions could guarantee supply at fixed prices for a longer period, other solutions include the option of never fully selling the vanadium and rather leasing or renting it out over the life of the VRFB or energy storage project.
Bushveld Minerals is uniquely positioned to effectively address the VRFB adoption hurdles through its large high-grade resource base and low-cost processing facilities. The increased deployment of VRFBs will support the diversification and strengthening of the vanadium demand profile while capturing the compelling commercial opportunity.