A Little Bit of History Repeating?
In my previous post entitled China Environmental Inspections Expanding as Vanadium Market Tightens, I introduced the potential effect that these more stringent environmental inspections could have on the vanadium market in China. Much of which ties back into a set of fairly recent tweets I posted on the subject.
One of those tweets now looks to be gaining more relevance and so I thought I would try and add more meat to these environmental bones.
Back in Sept 2017, VanadiumCorp ran an article entitled 'China Rattles Vanadium Supply Chain: How High Can Vanadium Prices Go?' Incidentally, the author of the article was John Lee. Mr Lee is as far as I can make out one of the main drivers behind Vanadiumprice.com, which has certainly become one of my go-to places for all things related to vanadium production/pricing in China.
In that 2017 article, the following was stated,
"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"
At this point, it is worth introducing this recent article from Argus Media entitled 'China's Handan puts curbs on steel, coking industries.' The reason is that it not only demonstrates that history may be starting to repeat itself but also it will help me explain the broader picture here.
From that article,
"China lifted 50pc curbs on winter pig iron output in 28 cities, including Handan and Tangshan, on 15 March. But the prospect of a rise in pollution in the off-peak spring and summer months has prompted local authorities to maintain some of the curbs on steelmaking. China's peak emissions season runs from November-March, when excess coal is burnt to heat homes and offices. "
The key to the understanding here is that curbs on pig iron production are the norm in the Winter months (November to March), in order to offset their citizens increased use of coal for keeping warm. What's not the norm is extending them into the warmer months (April to November), which has the ability to increase overall pressure on any affected industries, vanadium included.
It's important to appreciate that back in the Summer of 2017 the main disruptor as far as the vanadium market was concerned was "local vanadium plants in the major production hub of Panzhihua, Sichuan province" which "will have to halt production while environmental inspections are conducted.” (See above VanadiumCorp article once more).
Panzhihua is the home of Pangang the largest vanadium producer in China today at c. 35%. To date, Sichuan province is not on the list of environmental inspections but given that Sichuan is "home to many industrial regions along the Yangtze River " (see this 2017 article on Environmental inspections for proof), one is entitled to assume that their day will come.
Why? Because pollution into the Yangtze River has seen recent actions within the latest environmental inspections (See here), which affect "Shanxi, Liaoning, Anhui, Jiangxi, Henan, Hunan and Yunnan."
It should be noted at this point that Pangang makes strong assertions as to their environmental credentials and so they may not be affected in the same way, even if said environmental inspections do come to a town near them.
However, there's clear evidence that they have at least demonstrated a willingness to adhere to "government's requirements for environmental protection" before (see this 2015 report) and yet were still shut down in July/August 2017 (see here). So the form is at least there.
Back to the matter at hand. Pangang aside we have Tangshan and now Handan both in the environmental inspection headlights. If nothing else that presents the same set up that was highlighted by John Lee in his article.
"This news impacts the steel and vanadium output of the Hebei Iron and Steel Group Co., Ltd – one of the top companies in China."
Whilst Pangang is clearly the biggest player in China, HBIS Group is no small fish either. Here's their 2019 and 2020 V205 output. At 15,250t in 2020, the company is responsible for c. 13.5% of total Chinese V205 production. So if production were to be affected then in a tightening vanadium market, it can potentially add significantly more pressure to local vanadium prices and so is worthy of understanding and monitoring.
Here now is a link to HBIS Group and its business segments. As we can see not only has HBIS Tangsteel in Tangshan but also HanSteel in Handan. So two of its major steel/pig iron-producing units are potentially affected. Be it that its actual vanadium production hub, whilst also in Hebei Province which is under general inspection, has itself not been singled out in any reports I have seen to date.
Here's a map giving a better feel as to the exact location of these facilities and their relationship to Beijing, which itself is heavily affected by air pollution from these Northern steel hubs.
Now without wishing to pour unnecessary fuel onto these vanadium disruptive flames, here is an article that directly links Tangsteel to recent failed environmental inspections. So if nothing else, elements of HBIS have some part to play in the fallout from this new Chinese government drive. However, I stress once again that this does not guarantee that HBIS vanadium production is currently being affected.
To give more insight as to the extent of these environmental inspections, Argus Media reported that in the case of Hebei Province,
"It (China's environment ministry) has also imposed a 50pc curb on steel output at 112 companies in the province that have pending environmental control work."
"The environmental restrictions could support steel and iron ore markets as construction steel demand picks up in the spring and summer."
A 50pc curb in the warmer months is a significant move in a province that HBIS Group makes its home and we are talking about at least 112 steel companies. Yet despite all of this supposed reduced steel industry demand, the price of vanadium is going up.
Right now Sichuan the biggest vanadium production hub in China is not affected by the latest round of environmental inspections but a pattern certainly is forming.
Panzuhihua was heavily involved in the same environmental inspections that took part in the Summer of 2017 and focused on air pollution issues. It also sits on the Yangtze river, which is forming a part of the wider reasoning for these latest checks thus raising the chances that Sichuan and with it Pangang could soon come under closer scrutiny. Also, its previous environmental efforts did not stop it from being affected when the inspectors came to a call.
HBIS Group has a heavy influence in Hebei Province and that has reportedly already seen significant distribution to its steel mills and HBIS has at least in part been in the firing line already. However, I cannot find direct evidence at this time that its Chengde vanadium hub has been directly affected but its location in relation to Tangshan and Beijing, certainly looks influential. So it's another one to keep watching.
Back in 2017, one of the key concerns for the vanadium market was the extension of the Winter curbs into an October start (normally November). These additional Summer curbs that we are now witnessing are potentially adding an entirely new issue that could easily be followed by even tighter Winter curbs.
Let's not forget that these environmental inspections are deemed to be more strict as the Chinese authorities attempt to tackle issues that have become far more important to the world and their customer base.
Such a scenario has the ability to impose greater demand on already tightening vanadium inventories. Meaning the true fall out from all of this could well be seen this coming Winter when those curbs on pig iron production are again introduced.
The flip side of course is reduced steel industry demand for vanadium but again what's really interesting is that Chinese vanadium prices are rising. This, just as these new steel curbs (112 steel mills in Hebei Province alone remember) are supposed to be kicking in and acting against vanadium demand. That of course could still happen and so must be continually monitored.
All of this needs to be appreciated within the context of a world that has been severely hampered by the Covid pandemic, meaning resurging demand is very much an unknown but potentially may also add pressure to this whole situation.
I will be continuing to monitor all of this because as Bushveld Minerals have themselves stated, many of these major vanadium producers are reportedly maxing out on their production capacity. If so, then any halts in or losses of production through these environmental inspections have the ability to remove material that cannot easily be replaced. Making this year's inspections potentially far more critical to the wider vanadium market.
In late May 2017, prior to these inspections exacting an influence, V205 pricing was running at c. $6 per lb. by the time we had reached the end of July those prices had more than doubled.
Tightening inventories, strong demand and supply disruption, made for a strong vanadium cocktail in 2017. In 2021 history has a good chance of preparing itself once more but with at least one new ingredient. That being VRFBs and their ability to heap sizeable demand upon the V205 market. A subject that I covered in my first BMN post entitled 'New Chinese VRFB Projects, Tell Only Half the Vanadium Story.'
There's no guarantee that Chinese environmental inspections will have any influence at all but it's certainly worthy of trying to find out.
Note - This article represents the opinion and research of the author only and the author currently holds a position in one or more of the stocks mentioned. Nothing shared in this article is to be deemed financial advice. Where possible all facts have been checked and references provided, however, it is the responsibility of the reader to check all details for themselves before making any financial decisions. Please also refer to the disclaimer policy