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May 27, 2019 7

Vanadium 2019 ~ Taming the Tiger

Chinese Steel Production in 2018

Vanadium has certainly taken investors on a wild ride. From the crazy pricing of late 2018, to V205 98% selling now at around one fifth of the high’s.

What conclusions should we consider and what lessons are to be learned?

Personally, I fully expected Vanadium prices to fall back. However no-one was predicting pricing as low as sub $8/LB together with the persistence of weak demand. This article looks at what may have happened and where it may lead us in the future.

Expectations of enforcement of standards.

As most of us know, high prices were largely driven by changes to the Chinese re-bar standards. What seems likely now is that larger Chinese steel mills began implementing these changes much earlier than anticipated. On the back of strict government enforcement of environmental standards, I believe industry in China expected the same rigorous enforcement of re-bar standards and began preparing around August 2018. We expected implementation to be staged over a period of time but nonetheless we also expected a firm approach to the transition.

What is obvious now is that enforcement was slow and in the face of runaway prices the government likely took a more relaxed view. It seems this was particularly the case with smaller producers.

The finer nuances of the Chinese market are always difficult to quantify, even to the Chinese. It is quite possible that even larger steel producers have eased off on compliance in order to compete in the market. There is little hard evidence right now but I expect this has been the case, at least to some degree.

Eye of the storm.

You can be certain that during the period of high pricing, the usual stockpiling of vanadium would have been in full swing. Speculation by Chinese traders is always hard to quantify and rarely fully considered during an up-cycle. However, history tells us that such stockpiling can be an integral part of price and sentiment swings. In addition, the hype at that time likely encouraged much higher inventories across the Vanadium market.

During the wild ride of high prices, we continually mentioned how damaging such prices would be if sustained. While I think that warning was largely ignored at the time, the consequences are now obvious and were simply a matter of time.

Every action has a reaction.

The Chinese can and do react to market conditions better than any race on the planet. They are the masters of capitalizing on opportunity and reacting quickly to changed events. As a country, they have large resources of vanadium. While it’s true that most resources are of a lower quality and higher opex, their reaction times are faster than most in the west can comprehend.

Through the best business network in the world the talk began of new projects and expansions within China. While the west felt assured of strong demand the Chinese were once again looking inward and there seemed a change of sentiment around November and December 2019, whereby they became more confident of supply. Although many of their expansion ideas may never happen, it caused a change in sentiment that coincided with the Chinese winter and reduced demand from the steel industry. Momentum was lost, niobium made inroads and those with stockpiles likely began to feed an already depressed market. Speculators began to panic causing an end to the boom and into the current down-cycle.

The wild ride for Vanadium in late 2018 to mid 2019

What is the reality?

We have heard for many years that vanadium will be in structural deficit moving forward. I absolutely agree with that sentiment. However, that seems to suggest that the existing market cannot react to such a deficit based upon steel and alloy usage alone.

In the short to medium term I think they can react, although in the medium to long term it seems very unlikely. Expansion from existing producers, production from byproducts, and China’s own ability for expansion seems to suggest we’re not there yet as far as demand for steel strengthening alone.

There are already reports from China that high cost producers have now ceased production. Inventories are low and demand is weak. I believe there will be an inevitable increase in demand and prices in the short-term.

Enter the vanadium battery.

We’ll soon write a full article on vanadium batteries. Suffice to say that we think in order to return to market excitement and real short to medium term shortages, they are the critical component. They have the capacity to soak a huge amount of raw material and are inextricably tied to the price of V205. A balance of growth and excitement without price shocks will be critical. Here we look for consistent pricing at sub $10/LB to encourage the resumption of stalled projects and the beginning of new projects.

Good news for existing producers.

For existing producers, they may not see prices of USD 20/LB again for some time. I certainly hope not. You can also be certain that existing producers enjoyed the high prices but are probably more content with reasonable and rational prices over a long period. Price stability is critical for an industry to grow in a stable and sustainable manner. Even with Vanadium prices now below Niobium, some are reluctant to change back for fear of more volatility. Time and stability will heal that lack of confidence and there will be a new normal.

Challenges for new projects.

For new entrants the story is different. I’m not sure how many times I read comments like, “they need our product”, or, “why don’t they just take us out”. There is a reality that underpins sentiment, and many investors don’t get it. During periods of hype deals can often be even more difficult. I mean if you’re hungry and haven’t eaten for days you just care about your next meal, not next years. In the same way, in a hype market, processors just want the V205 and want it now. Start talking two or more years down the track and they lose concentration very quickly.

We see new potential resources moving steadily along timelines while investors are somewhat frustrated. While V205 prices have dropped it does not mean that new miners will not find success. The memory of high prices will remain and investments will still need to secure their supply chains in the medium to long-term. There should remain enough scope for new entrants providing their resource is adequate and their development model is sensible.

Vanadium has also attracted a lot of attention in the past year. Along with that attention are the cries of massive new resources and potential returns for investors. Quite honestly I disregard most new projects as lacking resources of a sufficient grade to sustain a new mine. Those with huge resources of low grade will need to provide a lot of verifiable testing before they can be considered seriously.

Yes, it’s tough.

Existing producers such as Bushveld and Largo are in for a touch of short-term pain that I think will turn to a sustainable and very exciting future. They are evidence that those that take the chance and back it up with outstanding management, can find success in the long-term.

In determining the potential for new mines to succeed we need to be realistic. I personally discount the 90% of pretenders and focus on the few.
Against that backdrop we need to be mindful of the large capex involved in developing a new mine. Therein lies the greatest hurdle.

Traditional debt finance will likely shy away from Vanadium for some time to come and consider it both a niche market and too great a risk based upon past volatility. That leaves a very small potential current pool of finance and off-take partners. Investors might consider how many potential partners there are and what their capacity is to finance just one new and large vanadium mine. Then consider whether that group could realistically finance multiple new mines. It’s going to take something special to join that elite group of current producers.

This once again reinforces the importance of the success of vanadium batteries. Not only are they able to soak a large amount of supply, they also provide a new list of possible suitors as they will seek to safeguard their supply. We need new players that will use volume and see a long-term future for their products. I don’t think we are there yet, but we all hope for a major change in the dynamics.

In conclusion.

Perhaps the history of vanadium prices shows us that the steel market can react with additional supply when needed. Certainly, I now think that steel is the base but the success of vanadium batteries will be needed for the kind of growth that brings on multiple new mines. For that to happen we need to see consistently stable pricing that attracts investment to the sector, along with much clearer market recognition of vanadium batteries.

The success of Largo should be a reminder that a company that took a huge risk during times of depressed pricing has become a success. They were dealing with much lower pricing than we are now. Bushveld Minerals also emerged during a period of financial turmoil in the industry. Conversely, there was no major project financed during the period of hype and high pricing. Perhaps the lesson here for miners and investors is to be focused and deliberate, knowing that with excellence, their time in the sunshine may come…… regardless of current sentiment.

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