New Chinese VRFB Projects, Tell Only Half the Vanadium Story

Updated: Apr 13, 2021

If any investor interested in vanadium or indeed #Bushveld Minerals, needed any insight into where this is all heading, then in my opinion, the enclosed Argus Media article surely delivers that in spades.

In a nutshell, China is beginning to back VRFB at a grid-scale level not currently seen anywhere else in the world to date.

The article states 3 major projects that are on the horizon and what they will deliver ;

1. VRB Energy - 500MWh

2. Shanghai Electric - 400MWh

3. Rongke Power - 400MWh (Stage 1 of the 200MW project assumed already completed, from a vanadium demand point of view).

Total = 1,300MWh

In addition, we have the following further developments, which signal the intent in terms of future recurring demand for Chinese based electrolyte and VRFBs ;

4. Sichuan Xuteng Battery Energy - industrial park for VRFB energy storage projects

5. Jiangxi Yinhui New Energy - 66,000 m³/yr for vanadium electrolyte in Yichun city

The article states that "Market participants estimate around 9.25t of vanadium pentoxide is used in each MWh."

If we employ the conversion rate set by Largo (1 tonne = 2.204 lbs. See Largo Resources 17th March update), who is a significant producer of vanadium in the form of V205, then that equates to c. 4.2 mtV of vanadium per MWh of VRFB produced.

1,300 x 4.2 = 5,460 mtV

TPP Squared ´total estimated mtV production of vanadium in 2020 = 109,187 mtV.

Meaning those 3 Chinese based projects alone will demand c. 5% of current total world production.

That's 5% of an expanded production in a world where China produced c. 19.6% more V205 than in 2019 (V205 tons, not mtV remember), driven by its mills reportedly maximising their co-produced vanadium slag, by employing lower grade (cheaper) iron ores, which itself was driven by elevated iron ore prices.

5% from just 3 projects, which does not take into account what the rest of the world is doing with VRFBs. #Invinity Systems and now Enerox, being strong cases in point.

As I have discussed previously on Twitter, that same TPP Squared presentation (which I remind us all, was produced for Vanitec, which is the global collective of vanadium producers, including members from China and so should carry validity with its conclusions), forecasts that vanadium is expected to enter a structural deficit of c. 5,400 mtV in 2021.

A question mark remains over how much allowance TPP have put in for VRFB projects but logic says it would have to be at best limited because securing accurate data on when any VRFB projects would be agreed, never mind when they would likely place their demand on the vanadium supply, is not easy, even for Vanitec members.

Bushveld Minerals are far more reserved in their latest forecasts, which were presented in their latest corporate presentation, dated February 2021 and marked as "company analysis and Navigant Research."

There they show a minimal deficit for 2021, when "existing + cap expansion + (mine) restart" are all taken into account, which still isn't a given on the supply side, at this time.

However, despite these additional production sources, they are very clear that the trend will be a deficit, which will grow as we move through to 2029. Again, it's difficult to pin down exactly where these larger Chinese VRFB projects come into these projections. For me it's highly likely that they don't. Instead, the likes of Navigant and Roskill have continued their conservative outlooks for VRFB vanadium demand, and are simply waiting on the market to demonstrate that the demand is there, and it's more than just demonstration one-offs.

Still, one must also consider that #BMN alone plan to produce an additional c. 4,000 mtV over the next 3/5 years through their existing known refurbishment plans. In addition, Australian Vanadium plans to bring c. 6,000 mtV online as this decade further unfolds. So those 2 alone should bring minimum c. 10% more world supply online between now and 2029, and yet that deficit not only remains but is projected to expand.

The latest projects listed in the above Argus Media article begin to deliver that and in my view, set a very strong tone for where this is all now heading.

"China is expected to install around 30-60GWh of new energy storage capacity by 2030."

It remains difficult to conclude just how much of that market, VRFBs will be able to capture but the trend is towards long duration, and that's where VRFB comes into its own against the better known lithium-ion batteries. Still, even BMN themselves have been consistently conservative in their estimations.

However, at c. ave 45GWh over the next 9 years, what the above project list (just 3 projects remember) delivers is c. 3% of that total demand is arguably the first year to 18 months, and the trend is certainly an expanding one.

What that signals is that pressure is beginning to build on the VRFB side of the market and it's a market that's already under pressure, from its more natural demand sources. As TPP demonstrated in one of their Vanitec presentation slides.

Vanadium content in Chinese steel is increasing, led by the very re-bar regulations that drove such high vanadium prices back in 2018. However, back then the market was arguably getting ahead of itself as the actual implementation of the new regulations, turned out to be slower than predicted. Jump forward to 2020 and that marked increase in vanadium content is now showing itself.

If we take the figures from the above slide extract, then we see that whilst steel production in China was expected to jump c. 6.7% between 2019 and 2020, vanadium demand actually was increasing by over 16%.

This year, the trend is expected to continue (hence the anticipated market deficit), delivering a further 10% increase in vanadium demand in China even when steel production is only expected to increase by just c. 1.7%. Therefore, the majority of the elevated vanadium demand in China is expected to remain, even if steel production begins to wane. An outcome that is beginning to be tested through the environmental production curbs being seen in Tangshan, and which are now spreading to other provinces.

All of which is a potentially explosive environment, if the predictions set down by Bushveld Minerals in their Feb 2021 corporate presentation are indeed true. That being that Chinese markedly increased vanadium supply is a direct result of the elevated iron ore price causing steel mills to switch away from seaborne (high Fe grade, low vanadium content) iron ore, and over to lower grade (lower Fe, higher vanadium content) ores.

Meaning that any external influences, such as production curbs in Tangshan, (which can place downward pressure on iron ore prices), have the ability to drive the Chinese steel mills that matter, in terms of vanadium co-production, back to higher-grade ores and thus lower their vanadium production once more. Why? because their main game in all of this remains steel production and not vanadium itself.

In addition to all of the above, we need to also consider the influence of these environmental curbs (which in the case of Tangshan, have now been extended to the end of this year), on Chinese steel mills choices when it comes to sintering and processing lower grades ores, which require more energy and so arguably more pollution. So, we may find that these mills are forced to switch back anyway as regulation begins to trump profitability.

So, we have the potential for a rising vanadium demand in China that will hold the majority of its levels, even if/when steel production drops. To this we need to then add the possibility of Chinese vanadium production falling, as iron prices reduce and mills can once again move back to higher grades ores, with the added bonus that Chinese regulators may force their hand.

Then comes the icing on the cake in the form of just 3 major VRFB projects, which alone can take c. 5% out of the global vanadium market and likely set a trend that will only expand, as time moves on.

One thing I believe.

The projections set by market analysts when it comes to renewable/energy transition technology have consistently been demonstrated to be well short of the actual outcomes.

As an example, here's a slide from the #BMN Energy Storage 101 presentation dated 13th Nov 2018. There we can see not only how consistently far out the IEA were out on PV but also the significant jolts in projections set by the likes of the BNEF.

It's therefore reasonable to assume that this trend will continue and so all the projections employed against vanadium market supply/demand balances and that growing VRFB market, are likely to continue to be conservative.

However, what's most important here is that VRFB market demand, is in the main, completely independent of economic cycles. That precedent was set by the Paris Climate Agreement and the realisation that policy will lead the way over funding and economic viability.

With China firmly demonstrating that it is now truly behind VRFB roll out, the biggest threat to VRFBs is the vanadium market itself. If prices rise too high then VRFBs may well struggle with their own economic viability issues. and lithium-ion will likely step even further in.

However, as a long term investor in Bushveld Minerals, I have both cards with which to play with and the knowledge that BMN has already worked hard, to ensure its VRFB world can be sheltered and nurtured throughout any further spikes, that may come the market's way.

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


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