2017 REVIEW: China dictates tungsten highs and lows but global industry breathes more easily

Improved demand and higher prices have been a welcome change for tungsten market participants outside China in 2017 but, when it comes to price moves and price floors, China still holds the cards.

Benchmark ammonium paratungstate (APT) prices assessed by Metal Bulletin - and used across the tungsten supply chain - were at $295-300 per mtu, cif Rotterdam on Friday December 15.

By contrast, prices closed 2016 at $187-198 per mtu and were widely considered to be below the cost of production for the mainly integrated tungsten industry outside China.

This summer saw the APT reference soar, reaching a 34-month high of $310-335 per mtu cif Rotterdam in September. Producers’ downstream order books strengthened in 2017 and spot demand for APT has been steady but China has been key to the direction and extent of price moves.

Production disruptions in China tightened the market considerably in 2017; buyers in Europe were forced to pay hefty prices to secure the necessary tungsten intermediates.

Environmental inspectors reached the tungsten-producing provinces of Hunan and Jianxi in the summer, with the effect of cutting output and increasing production costs of those still operating.

The inspections forced the closure of smaller mines and the implementation - and associated costs - of measures intended to cut the environmental impact of China’s tungsten production in the long term.

What China’s drive to curb its pollution problem has brought into focus over the past 12 months - even once inspectors had moved on from key tungsten-producing provinces - is the rising cost of production for tungsten miners in China and their rising break-even costs.

So while prices slipped back from their September highs, they have held on to much of their summer gains, closing 2017 up 54.5% from where they started.

In November, APT prices dipped to lows of $270-280 per mtu in Europe when sellers took profits, fearing further losses after such a steep run-up in the summer - prices rallied 48% between late June and early September, according to Metal Bulletin data - and spot demand fell.

By contrast, fob China prices dropped only as far as $275-280 per mtu at the very start of November - local producers resisted cutting their offers further.

“$270 per mtu looks like the floor in China now, but even there, there will be people not making any money,” a trader source told Metal Bulletin.

Other traders and integrated producers echo the suggestion that APT prices were underpinned at $270 in the second half of the year since Chinese break-even costs are now significantly higher.

“There are additional layers of cost that producers need to leverage and use to get a higher price,” a producer said.

That is on top of factors that have been in the pipeline for the past few years, such as rising labor costs and the removal of government subsidies.

“Employee costs go up year on year. The Chinese were predicting a range of $280-300 per mtu in the fourth quarter; [they] have been convinced that [price weakness is] limited on the downside,” a second trader said.

Improved demand also played a role in supporting tungsten prices in 2017. While China’s costs are rising, global demand has exceeded conservative estimates made late in 2016.

“The aviation and defense industries are strong; oil and gas were strong earlier in the year. There’s nothing negative on the demand side,” the producer said. “People ran down their stocks but customers have more confidence in the forward order books now.”

While Western producers still prefer to maintain control over their supply chain by purchasing concentrates over APT and intermediates, upstream supplies remain tight. Consequently, western buyers have found themselves topping up stocks with intermediates, for which China is still the dominant market participant.

European prices also found support in the fourth quarter because China plays such a crucial role in the provision of APT to the rest of the world.

Higher prices, therefore, look set to stay.

But just as it is undesirable for the Chinese to see global production ramp up, it is no longer feasible for Chinese producers to see APT prices languishing below $250 as a result of the higher costs they now face.

In addition to rising production costs, new environmental taxes are due to come into force in January, adding up to 2,000 yuan ($302) per tonne to APT costs.

“Are we going back to $220? It doesn’t really seem feasible,” a second trader said.

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