Recent months have seen a vanadium price surge of more than 50%! In January 2016, FeV80 prices were below US$13/kgV. This was in-spite of the closure of Highveld Steel & Vanadium (“HSV”) which took as much as 11% of the vanadium feedstock out of the market. The gloom among producers was understandable. Bushveld Minerals’ choice to pivot on vanadium, with an articulated strategy to build an integrated vanadium company, could easily be seen as mistaken. To be sure, as a company we have never wavered in our faith in the proposition of the vanadium metal. At the core of our confidence in this commodity lies an understanding of the market demand and supply dynamics that govern this industry.
An assessment of the vanadium supply and demand made it clear to us that the vanadium market was headed for a sustained structural deficit. While this deficit could be ascribed to a large extent to the troubles of Highveld Steel & Vanadium, whose closure took out more than 11% of vanadium feedstock supply, something more than Highveld was at play. To understand this, one needs to understand the structure of the industry.
The demand side is largely well understood – 90% of world vanadium consumption is in the steel industry where it is mainly used as an alloying additive to strengthen steel. The growing intensity of use of vanadium in construction steel has seen the demand growth of vanadium outpace the crude steel production in the past 10 years and can be expected to continue supporting vanadium demand going forward.
Meanwhile, energy storage presents significant upside which is increasingly acknowledged even if not as well understood. Some research estimates puts the energy storage share of vanadium consumption at ~20% by 2030. The recently announced 200MW/800MWh project in China awarded to Rongke Power is estimated to require as much as 4,000 mtv (i.e. almost 150% Vametco’s production and ~4% of the world’s annual vanadium consumption.
It is the supply picture that is not as well appreciated in its impact on the vanadium market. 88% of the vanadium supply comes from magnetite deposits that contain iron, vanadium and titanium. There are mainly 2 ways these deposits are processed for production of vanadium, and these are shown below.
The first, accounting for 64% of vanadium supply, involves smelting plants where the magnetite ore is crushed and concentrated using magnetic separation and then smelted to produce steel while a vanadium rich slag is produced as a by-product, to be further processed into final vanadium products.
The second method, accounting for approximately 24% of vanadium supply produces vanadium directly from ore or ore concentrate using a roast and leach process, similar to the one used by the likes of Glencore’s Rhovan, Largo Resources’ Maracas project and the soon to be Bushveld Minerals’ Vametco project.
This analysis led us to the conclusion that the vanadium market had undergone a significant structural change with sustained deficits for years to come. Both vanadium demand and supply are decoupling from the steel industry. That this would not lead to an immediate rally in vanadium prices could be ascribed to vanadium slag inventories that had been accumulated in the past and could still be processed cheaply into final vanadium products. However, as these inventories are used up and new supply does not materialise sufficiently to cover the supply gap, we expect that prices would reflect this reality. It is thus not surprising to see the price rally of the past 6 months.
The question is where will new supply emerge from? According to Roskill a sustainable price above US$21/kgV would be required to incentivise new primary vanadium production. We believe that the steel industry has a new normal characterised by low steel prices and low iron ore prices that does not present an opportunity for significant new supply on the back of steel production increases, for reasons explained above. Yet, building new primary vanadium capacity requires sufficiently high in-magnetite vanadium grades, which incidentally South Africa has plenty of.
Predicting commodity prices will always be a difficult thing to do, but there is reason to be cautiously optimistic. The supply/demand fundamentals are sound and the vanadium price has been on the up, perhaps contributing to a more upbeat mood at the recent Ryan’s Notes FerroAlloys conference in Miami, which I attended.
In the end, though, the best strategy is to target being among the lowest cost producers. Starting with the acquisition of Vametco, we believe we are well on our way to achieving this.