FOCUS: Why has China’s tungsten conc price failed to bottom out despite falling below producers’ break-even point? [CORRECTED]

After China’s spot tungsten concentrate price fell below a level widely considered to be the break-even point for most producers in the country, many in the market had expected the price to bottom out.

But the price has defied this expectation and continues on a downward trend, most recently reaching its lowest since July 2017. Some in the market are pointing to an abundance of supply as the reason behind the price’s persistent weakness, stating that the dynamic will likely continue in the short term.

Fastmarkets MB assessed the price of Chinese tungsten concentrate, 65% W03, at 88,000-90,000 yuan ($12,720-13,009) per tonne on Wednesday June 12, down from 90,000-92,000 yuan per tonne a week earlier. The latest price is down 7.5% from 95,500-97,000 yuan per tonne at the start of the year.

Although the price has moved below the break-even point for most tungsten producers, widely believed to be around 85,000-90,000 yuan per tonne, the price has not yet found a floor.

Instead, Chinese tungsten concentrate suppliers were heard to have cut their offer prices this past week amid fears of declining demand amid output cuts by a number of downstream ammonium paratungstate (APT) producers in the country during June.

At the same time, some bids were heard at around 85,000 yuan per tonne this week – though no deals were concluded at this level – indicating that buyers are confident that the market has not yet recovered.

“The lower bids indicate that the market continues to soften,” a trader source told Fastmarkets MB.

Although the China Tungsten Industry Association (CTIA) has called on tungsten concentrate producers in the country to cut production by 10% this year, it has done little to support Chinese tungsten concentrate prices for the time being.

Similarly, last week’s news that Chinese APT refiners will cut production in June has also not supported APT prices in the country.

Around 20 of China’s approximately 39 smelters have been temporarily shut, with the remaining APT smelters operating at an average production rate of just 49%, according to market sources. But some in the market are still skeptical that these cuts are sufficient to boost China’s APT price in the near term.

“APT producers have had to reduce production due to a lack of new orders, which indicates a lack of demand for APT. This means that the market has excess capacity at the moment. The point at which demand exceeds supply has not yet come,” a China-based trader source said.

Market sources told Fastmarkets MB that the price of APT in China’s domestic market fell by 2,000 yuan per tonne to around 138,000 yuan per tonne this week compared with a week ago.

Although China’s APT export price was unchanged amid a lack of activity this week, many exporters said that the market remains at risk of weakening in the short term.

Fastmarkets MB assessed the China export APT, min 88.5% WO3, price at $240-250 per metric tonne unit (mtu) on Wednesday, unchanged from a week earlier. The price is down by 12% from an assessed price of $272-285 per mtu at the start of the year.

Some market sources said that the weak demand for APT in China can be attributed to the decline in use of cemented carbide rods – a key downstream market for APT – in the automotive sector as a result of a decline in output from the country’s automotive market.

China produced 1.848 million vehicles in May, down by 9.9% month on month and 21.2% year on year, according to data from the China Association of Automobile Manufacturers (CAAM). Car sales in China were also down last month; China sold 1.913 million cars in May, down by 3.4% month on month and 16.4% year on year.

Market sources attributed the drop in production and sale volumes partly to the implement of national emission standards (phase six) for light vehicles in around 18 provinces in China, which originally was set to be implemented on July 1, 2020, but has been brought forward to July 1 of this year.

China is not alone in experiencing weakness in its automotive sector.

From January to April, demand for new cars in the European Union decreased by 2.6% year on year to 5.3 million units registered in total, according to the European Automobile Manufacturers Association.

This led to a decline in demand for China-origin APT over the period; China exported 1,452 tonnes of APT in January-April of this year, a decrease of 21% from the 1,834 tonnes shipped in the same year-ago period.

Output cuts likely to underpin Chinese tungsten prices in medium-to-long term
But some market sources held more a more optimistic view toward the announced production cuts in China’s tungsten market, saying that prices have not yet had a chance to react to the news given a recent national holiday and relative freshness of the announcements – both coming within a month of one another.

It was a national holiday in China on June 7, which saw markets close to observe the Dragon Boat Festival. But when markets reopened on June 10, tungsten-related stocks on the Shanghai Stock Exchange and Shezhen Stock Exchange closed after hitting their daily upper limits. This included stocks for such companies as Xianglu Tungsten, Zhangyuan Tungsten, Zhongwu Gaoxin.

Stocks for these companies again hit their daily upper limits on June 11.

“Tungsten market participants have put forward two calls of consecutive production cuts in order to halt the decline of tungsten prices in a month. The impetus for those moves was a sharp drop in profitability among Chinese tungsten producers,” a Beijing-based analyst from Essence Securities told Fastmarkets MB.

According to CTIA data, sales income of 123 major Chinese tungsten enterprises increased by only 0.16% year on year in the first quarter of 2019 and declined by 10.78% from the final quarter of 2018.

Meanwhile, the average profits of these 123 tungsten companies decreased by 46.18% year on year in January-March. The number of companies facing losses accounted for 35%.

“More tungsten companies are losing money, therefore more APT refiners are cutting production, which would likely to lead tungsten concentrate producers to further cut productions as a result. With the improving supply and demand fundamentals, prices can be underpinned in the middle or long term,” the analyst added.

Editor’s note: This story was updated on June 13 to correct the year-over-year percentage decrease of Chinese APT exports in the January-April period.

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