I began writing about vanadium in November 2016 when the price of vanadium pentoxide (v2o5) was $4/lb.; since then, v2o5 prices have more than doubled to over $11/lb. In addition to the depletion of ground stock inventory, in 2017, the vanadium market underwent key structural supply and demand changes which I believe will force a much higher vanadium equilibrium price in both the short and medium term. In this article, I will detail the changes that support my thesis that this vanadium bull is still in its early innings with much more upside to come.

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Chinese Environmental Drive Impacting Vanadium Prices

Vanadium pentoxide prices had been steadily increasing since it bottomed out at $2.5/lb. in 2016. In July 2017, waves of Chinese environmental inspections triggered an explosion in vanadium prices.

China Vanadium Prices  vanadium pentoxide

Source: cnfoel.cn

As reported by MetalBulletin on July 24, 2017: “Chinese ferro-vanadium and vanadium pentoxide are in tight hands amid news that local vanadium plants in the major production hub of Panzhihua, Sichuan province, will have to halt production while environmental inspections are conducted.”

At this point, vanadium pentoxide inventories were already depleting with many Chinese suppliers, including Chengde Jianlong, refusing to provide materials for export. Not long after, these same suppliers stopped providing quotes on domestic enquiries as well.

On July 31, 2017, MetalBulletin stated that “[t]he big move [had] been facilitated by tighter supplies as a result of environmental inspections in the major production hub of Sichuan province. Stocks were relatively low ahead of the closures being announced, aggravating the effect on spot prices”.

Chinese Upgrade of Rebar Standards

Less than a month later, the supply disruption was met with potential revisions on Chinese rebar standards, which could cause vanadium consumption to rise by as much as 30% (or 10,000 tonnes) per year, according to MetalBulletin on August 21, 2017.

MetalBulletin added that the revision had “been forwarded to the Standardization Administration of China and [was] very likely to be formally released in September”.

The article went on to specify that the new standard will be “an improved edition of the GB 1499.2-2007 and proposes to eliminate the 335MPa strength rebar, replacing it with a 600MPa strength rebar, to increase rebar grades with earthquake resistance.”

Two days later, the Chinese government announced a scrap import ban to come into effect at the end of 2017. This ban will cut approximately 4,500-5,500 tonnes (or approximately 6%) from the Chinese vanadium pentoxide (V2O5) production each year, according to MetalBulletin on August 23, 2017.

More specifically, on August 17, the Chinese Ministry of Environmental Protection announced on their website that all four categories of vanadium scrap will be forbidden from being imported into China under these new regulations.
This ban shows Beijing's resolve in its war against pollution and echoes the stringent environmental inspections seen across China over the past year, showing that the country is endeavoring to curb air, soil and water pollution from both domestic and foreign sources.

The four categories and their HS codes are as follows:

HS Code: 2620999011

Forbidden list: Containing more than 20% of V2O5 of slag, ore ash and residue

HS Code: 2620999019

Forbidden list: Containing more than 10% but less than 20% of V2O5 in the slag, ore ash and residue

HS Code: 2619000021

Forbidden list: Containing more than 20% of V2O5 of vanadium slag generated by producing steel

Waste catalyst containing vanadium

Source: MetalBulletin on August 23, 2017

Just this week, on September 26, in an effort to reduce the smog in northern China, the City of Handan, located in the top steelmaking province of Hebei, ordered drastic cuts to steel output earlier than expected, noted  Reuters. This news impacts the steel and vanadium output of the Hebei Iron and Steel Group Co., Ltd – one of the top companies in China. Given Majority (80%+) of vanadium in China is produced as a byproduct from steel via blast furnace, further curtailment of steel production will have significant negative impact on the country’s vanadium output.

Finally, as Andy Home points out in his September 13, 2017  Reuters article: “Neodymium, together with its sister rare earth metal, praseodymium, has almost doubled in price since the start of the year. Vanadium has done the same in the space of two months, while tungsten is up by “only” around 60 percent since the start of July.”

In addition to being esoteric and critical for various manufacturing processes, these metals are all also produced in China and have been slammed by Beijing’s environmental restrictions. Consequently, this environmental crackdown has gone hand-in-hand with the sector breakdown. While policymakers strive to create bigger, better and cleaner national champions, everyone else suffers as Beijing’s cleanup shuts down production and ramps up prices.

The script could nott have been written better for the vanadium bull.

What is the new vanadium equilibrium price to reflect today’s reality of decreasing supply and increasing demand? 

Vanadium pentoxide prices reached an all-time high of $35/lb. in 2005 when the Chinese government upgraded the rebar standard by increasing the vanadium intensity requirement. This time, the fundamentals look even better—not only are rebar standards being upgraded again but additional demand is coming from several high tech applications such as vanadium redox flow batteries, aerospace body and engine parts, catalysts to reduce factory air pollution, super magnets and alloys in high speed rail transit.

From the supply side, unlike the 2005 price blip, no new vanadium production from steel mills will arrive at the market due to environmental restrictions. This vanadium run could have sustained momentum well into 2018 and beyond. Even by the time new inventory stock comes on stream 2 to 3 years from now, the vanadium price will likely be sticky in order for suppliers to recoup capital cost and cover higher operating costs associated with staying environmentally compliant.

Since my last article on August 2, Largo Resources Ltd (TSE: LGO) has nearly doubled, while Prophecy Development Corp. (TSE: PCY, OTCPK: PRPCF) is up over 30%.

One year price chart of Largo

China Vanadium Prices

Source: Stockwatch.com

One year price chart of Prophecy

China Vanadium Prices

Source: Stockwatch.com

I believe the investors are still in a state of vanadium daze and that the valuation of those companies does not yet fully reflect the current vanadium price, let alone vanadium’s upside potential. When people wake up to the new vanadium paradigm, we could see a big wave of capital coming into a very small vanadium mining universe. I continue to highly favour the prospects of both companies. In summary, I believe we are in the second inning of a nine-inning ball game and a fat karaoke lady is nowhere to be seen. I am the executive chairman of Prophecy and own shares of Prophecy.

Article by John Lee, CFA

[email protected]

John Lee, CFAJohn Lee, CFA is an accredited investor with over 2 decades of investing experience in metals and mining equities. Mr. Lee joined Prophecy Development Corp. (www.prophecydev.com) in 2009 as the Company’s Chairman. Prophecy aims to provide exposure and leverage to rising vanadium prices by defining and adding attributable vanadium resources in the ground in politically safe jurisdictions, and to build the first vanadium mine in North America by steadily advancing mine permitting, project financing and construction.