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Vanadium

By Mark Gordon, Senior Resource Analyst, Breakaway Research

This week I will give a brief summary of another of the specialty metals that is getting good press coverage recently – vanadium.

The main use of vanadium is as a steel additive in high-strength steel, which accounts for about 92% of the current global demand of ~100,000t of contained vanadium (~180,000t V2O5 equivalent). Other uses include chemicals, catalysts and in batteries. Vanadium is produced as two main products – FeV for steel-making and V2O5 for chemical and battery applications. To get an idea of the size of the market, it is about 10% of that for nickel and <1% of that for zinc.

Vanadium uses

Vanadium Uses

Source: Vanitec, Roskill in Largo Resources presentation

The largest source for vanadium is as a by-product from slag produced from the smelting of titaniferous magnetite ores for steelmaking – it is estimated that this accounts for ~60% of total supply, with 20% being derived from mining as a primary product and the remainder from secondary sources, including oil residues and fly ash.

Supply is concentrated, with over 90% of vanadium products produced in South Africa, China and Russia. In addition non-Chinese production is limited to only a few companies, including Glencore, Evraz, Largo, Vanchem and Bluescope Steel (New Zealand iron sand operations).

However we have recently seen some supply shocks. South African producer, Evraz Highveld avoided liquidation in May through a Business Rescue Plan, including a proposed acquisition by Hong-Kong based International Resources – should the transaction not occur there is the possibility of a controlled winding down of the business. This also affected Vanchem, as Highveld temporarily suspended production at its Mapoch Mine (in which Vancham has a 35% non-economic interest), which supplies the raw material for Vanchem’s vanadium chemical production business.

On the other hand new developments include Largo Resources’ Maracas Project in Brazil, which has recently started production and is continuing to ramp up to a planned production of 6,500t of V2O5 per year, with a planned FeV plant to be added at a later date.

Vanadium Sources

Production

Source: Vanitec

Demand Drivers

Steelmaking

The key demand driver at the current time is as an additive in steel – demand for vanadium closely follows the production of steel. This includes two factors – firstly the natural organic growth in steel production and secondly increasing vanadium intensity in steel to further drive demand, with the move to lighter weight and higher strength steels – the addition of just 0.2% vanadium to steel increases steel strength by up to 100% and reduces weight in relevant applications by up to 30%.

This second factor is particularly relevant in China, where there is increasing vanadium intensity in rebar due to changes in building standards, partly following on from the 2008 earthquake – the policy announced in the 2011 12th Five-Year Plan seeks to gradually replace lower strength rebar with grade 3 rebar, which has a significantly increased vanadium content, requiring an addition 20,000 of vanadium annually.

The graph below shows the relative vanadium intensities between various jurisdictions and the estimated effect of increasing Chinese quality.

Vanadium steelmaking intensity

Steelmaking

Source: Largo Resources Presentation

Another use for lightweight, high strength steel is in the automotive industry, largely driven by tightening fuel efficiency and fuel emissions regulations.

Aerospace Applications

The use of vanadium and other specialty metals in aerospace applications is growing rapidly, with an estimated 7% of current vanadium demand in lightweight specialty alloys (particularly titanium-vanadium) in this industry. Growth in this sector will come from both organic growth and higher utilisation intensity, especially in the newer models including the B787, A-380 and A-250 aircraft.

Energy Storage – VRB’s

The blue sky in demand is in grid scale battery usage. The key here will be the adoption of vanadium redox batteries (“VRB’s) that have the capacity for multi-megawatt scale storage. This makes them useful for grid scale applications, including grid balancing, and storing energy from variable output sources, including wind turbines and solar cells.

Other attributes of these batteries include:

  • Scalability
  • Long lifespan – up to 20 years
  • Up to a 1 year charge retention
  • 100% discharge without damage
  • Only one element – V2O5 – in electrolyte

There are widely differing forecasts on the growth in VRB’s, however some commentators see the potential for VRB’s to provide up to 30% of the growing energy storage market, with some forecasting an additional demand of 300,000t of vanadium over coming years to meet this need.

There are a number of active VRB developments globally at the moment, reportedly with the largest being the commissioning of a US$200 million, 15MW/60MWh facility by Sumitomo on the Japanese island of Hokkaido.

Some commentators are of the view that large scale development of these has been partly hamstrung by the lack of a suitable battery grade V2O5 supply.

Demand Supply Balance

Roskill estimate that, although steel production will only grow at 1% CAGR over coming years, the increasing intensity of vanadium in steel along with other end uses will result in a long term demand growth of 3.45% CAGR – Roskill has forecast a growth to ~135kt contained vanadium by 2025 from the current level of 100kt, with supply deficits from 2018.

Other forecasts are more aggressive, with demand figures up to 120,000tpa by 2017 being published, which incorporate a more oprimistic view on use in energy applications.

The following graph presents Roskill data as included in a Largo Resources presentation.

Estimated vanadium supply-demand balance

estimated supply demand

Source: Roskill, Bloomberg in Largo Resources presentation

Pricing

We can see from the chart below that the FeV price has traded between $10 and $15/kg since the end of the GFC, however it has dropped recently due to demand/supply imbalances. Standard grade V2O5 (98% purity) tracks at about half the price of FeV.

The market is not particularly transparent, and also prices do not correlate with steel production even though this is the key demand driver.

9 Year Vanadium Price Data

Price

Source: Infomine

What Does the Future Hold?

How long is a piece of string? There are more experienced commentators and forecasters out there; however I will provide a few comments and some food for thought.

Growth in demand for VRB’s and steelmaking is a critical factor, with the latter particularly driven by China. Although the price does not correlate strongly with steel production, we have seen a strong fall in prices recently, which is reasonably well correlated with falls in floor space starts in China (with this shown in the following graph).

Slowing construction activity naturally cuts domestic consumption of rebar (and other products) in China, and hence domestic requirement for steelmaking materials. However, Chinese mills have maintained production, despite this drop in domestic demand, with the surplus material being exported – for example rebar prices have fallen to the lowest levels since 2006, with exports increasing significantly. The recent devaluation of the Yuan has also allowed Chinese producers to cut prices, angering a number of foreign producers, particularly in India.

This behavior could be considered dumping, potentially resulting in a number of countries applying tariffs to Chinese imports, and hence affecting Chinese production (at least until domestic demand picks up). Closer to home, this is unlikely to apply to Australia following the recent signing of the FTA.

The elephant in the room is the VRB market – this has the potential to significantly increase demand, however it is still a developing and not a mature application for vanadium, and could take more time than some commentators think to reach its full potential.

China floor space starts and completions

China floor

Source: Bloomberg, in Peterson Institute for International Economics, extracted Nov 2, 2015

About the Author

Breakaway Research is the research provider of choice for the 121 Mining Investment Event Series. Breakaway Research specialises in reports that provide a clear insight into a company’s assets and its strategy for delivering shareholder value in a format that is designed to assist both fund managers and retail investors. Independent technical and financial analysis is also an important criteria for investors as this generally enhances or validates the company’s message as well as providing comparative analysis. Lastly, we ensure the reports are widely read through our own distribution channels include the “Digger” newsletter with a distribution list in excess of 20,000 investors and our Breakaway Research website.

Breakaway Research is part of the Breakaway Investment Group (Australian Financial Services Licence 290093), a well-established niche advisory firm specialising in equities research, funds management, private equity funding and corporate advisory services in the global mining and energy industries.

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