Since prices bottomed two-and-a-half years ago, several commodities have vied for the title of ‘top performer’. That moniker – seen through the eyes of producers and bulls of commodities, rather than consumers – has few stronger contenders than vanadium, a soft, grey metal used in the steel and chemicals industries.
In 2017, the vanadium price more than doubled, on top of a 72 per cent climb in 2016, amounting to a fivefold increase between November 2015 and April this year. That puts it ahead of other ‘hot’ battery metals, including cobalt and lithium, whose prices have swelled amid expectations of surging demand from electric vehicle manufacturers. Those London-listed miners with exposure – Bushveld Minerals (BMN) chief among them – have benefited accordingly.
Despite this, there are reasons to believe that the vanadium price will continue to rise, irrespective of the market’s history of sudden spikes and violent drops. Interestingly, this is a view broadly held by mining analysts and producers alike. Asked why things will be different this time, they cite two excellent drivers of long-term demand, and a long list of structural impediments to supply.
These dynamics are complex, but comprehensible. Whether they will prove temporary or a lasting feature of the market will be largely determined by the strength and size of a deficit that looks likely to persist until at least 2020, according to the base case forecasts of industry consultant Roskill.
Steel the show
For all its blue-sky potential, vanadium’s principal application is decidedly low-tech. More than 90 per cent of the metal is used in steel manufacturing, where the addition of two pounds of vanadium will double the strength of a tonne of product. As you’d expect, China has an outsized role in the demand for the metal, given its dominance in steel, although over the next decade the country's annual production growth is expected to fall to 0.9 per cent – compared with 1.76 per cent globally – in part to adjust to its own falling steel consumption.
Yet within those numbers is a hidden driver: growing enforcement in China of high-strength rebar steel standards. According to analysis from Bushveld and consultancy TTP Squared, China used 48g of vanadium per tonne of steel produced in 2017. Were Chinese steelmakers to match European standards, this would require an additional 30g per tonne. Again, using 2017 Chinese steel production as a benchmark, this would equate to another 24kMt (thousand metric tonnes) of vanadium.
Some bears suggest a potential surge in medium-term demand (and with it price) runs the risk of substitution to niobium, another high-strength steel alloy. For steel manufacturers, there are obstacles to this, however, including complicated adjustments to production facilities, and the reliance on securing off-take deals from an industry dominated by one Brazilian company, CBMM. As such, there is reason to believe that steel producers have some capacity to absorb higher vanadium prices, particularly if prices of a more important input – iron ore – soften, as many expect.
Maintaining the flow
Unfortunately, high vanadium prices could be harmful to the second major driver of demand, redox flow batteries (see box below), given the metal’s significant proportional cost to the technology. As energy storage becomes a critical part of the low-carbon energy transition, demand for redox batteries (which are safer and longer lasting that lithium-ion alternatives), should be strong.
To put this into context for vanadium demand, the 200MW redox mega-battery developed by Chinese company Rongke Power is estimated to require more than 4kMt of the metal. Alone, that’s half the total global demand Roskill expects by 2027, suggesting there could be a massive secondary source of demand in the years ahead, so long as supply maintains the pace.
On that front, there is some doubt. More than 70 per cent of vanadium is produced as a slag by-product in steel-manufacturing, but generally in insufficient quantities to hold sway in the profitability of any given steel plant. That would be the case even if oversupply had rendered most spare steel capacity uneconomical. Compounding the tightness in co-production feedstocks, both Chinese vanadium mine supply and vanadium slag production have been affected by rising environmental standards. As a consequence, more than 40 per cent of global vanadium capacity is sitting idle. For vanadium co-production to become profitable, Bushveld and TPP Squared believe the metal’s prices would need to double, and stay above $100 (£74.25) a tonne “on a sustained basis”, which would be unprecedented.
Even primary production remains constrained, as Bushveld well knows. The Aim-listed miner, whose acquisition of the super low-cost Vametco project from Evraz (EVR) has been spectacularly timed to rising vanadium prices, will soon need to convince capital markets to fund the nearby Mokopane development, which should cost $300m. That project – which would more than double Bushveld's output (Vametco output should hit 5kMt by 2020) – carries a net present value of $418m at a 9 per cent discount rate, and assuming a long-term vanadium pentoxide price of $7.50 a pound. Whether a takeover of Bushveld’s vanadium division is more likely depends on any potential acquirer’s appetite for doing business in South Africa.
Glencore (GLEN) is also a primary producer. Last year, the group’s joint venture in Rustenburg, South Africa, produced 20.9m pounds of vanadium pentoxide, which fetches a lower value per kilogramme than ferrovanadium. That may be a small proportion of the commodity giant’s $200bn-plus top line, but is likely to be supplemented by the group’s role as a major trader in the metal. Indeed, one of its major off-take agreements is with Largo Resources’ (CA:LGO) Maracás Menchen in Bahia, Brazil. The Toronto-listed group, which bills itself as the biggest ‘pure play’ on the metal’s rising tide, is an option for investors prepared to look further afield, although there is an alternative way to buy into Maracás’ growing profitability, as detailed below.
When China switches to a net importer of a commodity, prices tend to jump. That is a distinct possibility in the vanadium market, according to BMO analyst Colin Hamilton, who suggests that “what is currently a China problem may quickly become a global issue”. And though predicting the Chinese steel industry’s next move is less simple than its juggernaut status suggests, improving quality standards is likely to provide a strong latent demand for vanadium feedstocks. Equally, improving capital market sentiment towards greenfield primary production is probably the best chance of moderating price volatility, and one that is more likely to sustain the vanadium redox flow battery revolution – if it ever arrives.