FOCUS: Why have Chinese vanadium prices fallen so sharply after Lunar New Year?

Chinese vanadium prices have dropped significantly since this year’s week-long Lunar New Year holiday (February 4-10) amid falling international prices and weak demand in both the domestic and international markets.

For example, Fastmarkets assessed the export price for ferro-vanadium, min 78%, fob China, at $50-54 per kg on Thursday April 11, which is down by around 28.5% from $70.50-75 per kg on February 14 – the first assessment after the Lunar New Year.

The latest export price assessment also marked a year-on-year decline of 24.1% and is down by 61.5% from a historical high of $130-140 per kg reached on October 18, 2018, according to Fastmarkets data.

Similarly, Fastmarkets’ price assessment for vanadium pentoxide, min 98%, fob China, stood at $10.50-11.50 per lb on April 11, down by 33.7% from an assessed price of $16-17.20 per lb on February 14.

The latest assessment marked a drop of 26.9% year on year and a 65.6% decline from the all-time high of $31-33 per lb reached on October 25, 2018, Fastmarkets’ historical price data showed.

The significant decline in both of these prices in the months following Lunar New Year is combined “efforts” of several factors, Fastmarkets understands.

Weak foreign prices, demand dampen sentiment in China
Since early March, sentiment in China’s domestic market has, to some extent, been dampened by a continual decline in international ferro-vanadium prices, market sources said.

These sources added that subdued demand from abroad since Lunar New Year has contributed to the bearishness.

International ferro-vanadium prices began to show signs of softness in mid-to-late February, and this has continued since then amid persistently weak demand and some aggressive offers in a bid to entice sales, Fastmarkets understands.

Fastmarkets most recently assessed the price for ferro-vanadium, 78% min, free delivered duty-paid, Europe, at $45.50-47 per kg on April 12, marking a decline of 40% from $76-78 per kg on February 13 – the first assessment after the Lunar New Year.

The latest assessment is also down by 32.9% year on year and 63.6% lower than an all-time high of $126-128 per kg reached on November 16, 2018.

Chinese ferro-vanadium exporters had lowered their offer prices to entice buying interest from abroad in an attempt to clear their inventories for better cash flow and after coming under pressure from the sharp fall in international prices, a China-based market source said.

In addition, many Chinese ferro-vanadium smelters had ramped up production following Lunar New Year in anticipation of price increases due to an expected round of restocking by foreign buyers after the holiday, the source added.

“Demand in the domestic market had also been weak [after Lunar New Year] but the domestic ferro-vanadium price had not weakened too much at that time,” a China-based exporter source told Fastmarkets. “It was only after the sharp drop in the international market that the Chinese price began to follow the trend and fall.”

Furthermore, persistently thin buying interest from abroad after Lunar New Year has clouded the Chinese vanadium export market, which deteriorated market sentiment and weighed on the exporters’ offer prices, market participants said.

“Demand had been pretty weak [after Lunar New Year], which was not our expectation, especially when a round of restocking from abroad was expected,” a second China-based exporter said.

“The price keeps dropping and the more quickly it dips, the more unlikely it is that overseas buyers would place orders because they will wait for a lower price,” the second exporter added.

Production curtailment stifles mills’ buying appetite

While the Chinese People’s Political Consultative Conference (March 3-13) and National People’s Congress (March 5-15) were held in Beijing, steel mills’ production, particularly those in north China, was restricted. This undermined Chinese mills’ interest in restocking raw materials including ferro-vanadium.

“Chinese mills aren’t usually interested in restocking more volumes of raw materials [at the time of the conferences] when they are required to curtail their production for air quality improvement,” a fourth Chinese market source told Fastmarkets.

“The daily consumption of raw materials was reduced during the period as a result, which means that the volume of raw materials they restocked ahead of the Lunar New Year enabled them to sustain their production for a longer period of time,” the above source added.

Mills delay restocking on expectation of lower prices after the implementation of 13% VAT

Even after the two events in March, many Chinese mills still refrained from restocking ferro-vanadium because they wanted to delay their stockpiling until after the three-percentage-point cut to the value-added tax (VAT) paid by Chinese manufacturers of metals and minerals.

On March 15, Chinese Premier Li Keqiang announced the government would lower the VAT rate to 13% from the previous 16% from April 1 – earlier than the May 1 implementation that many market participants had expected.

Previously, the VAT rate for the manufacturing sector was lowered from 17% to 16% in May 2018, so many Chinese market participants expected the 13% VAT policy to be enforced from this May too.

The cut in the VAT rate means a reduction in production costs, so some mills expected domestic ferro-vanadium producers to lower their offer prices in April, or if not, at least they can cite the VAT cut as the reason to require these ferro-vanadium smelters to slash their offers.

“The VAT cut policy can, if not wholly, partly account for why some domestic mills remained inactive in procuring ferro-vanadium even after the [conclusion of the conference-related production restrictions],” a Chinese market participant said.

Demand suppressed by lack of inspections on new rebar policy

A lack of inspections on the implementation of a new rebar policy in China has choked domestic demand for ferro-vanadium across the country, Fastmarkets understands.

The new rebar policy, effective November 1, 2018, encourages domestic Chinese mills to utilize greater volumes of alloys to meet the revised strength requirements. The policy also seeks to restrict the production of rebar via the water-quenching process, which produces rebar that has lower durability because it rusts easily and therefore poses a risk to building safety.
Without inspections taking place, some Chinese mills may not add a sufficient volume of alloys when producing rebar or run the risk of utilizing the traditional water-quenching process to maximize profit margins, market sources said.

“I am shocked to hear that some mills are still producing rebar via water-quenching. The reason why they dare to do so is because there is no stringent inspections on the rebar quality in accordance with the revised rebar standard at the moment,” a fifth Chinese market source said. “This would also explain why domestic demand has not had a significant uptick since last November.”

“The vanadium market is looking to a possible inspection this year, but so far there is still no official news on when and where the inspection will be carried out, despite rumors spreading around the market,” the above market source added.

Chinese mills have been relatively unwilling to accept high prices for raw materials after their profits shrunk to around 500 yuan ($74) per tonne since the fourth quarter of last year compared with an approximate 1,000-yuan-per-tonne profit at its peak last year. Although, the steel price has undergone some growth since the Lunar New Year, yet this is still lower than year-ago levels, market sources said.

Fastmarkets assessed the price of rebar in east China at 4,060-4,110 yuan per tonne on April 15, up by 6% from 3,830-3,880 yuan per tonne on February 11 – the first assessment after Lunar New Year. Yet, this is still down 12.8% from a one-year high of 4,670-4,700 yuan per tonne reached on October 30, 2018.

Mills’ increased use of substitute alloys squeezes demand for ferro-vanadium
Chinese mills have shown growing interest in replacing ferro-vanadium with more cost-competitive substitute alloys such as ferro-niobium after the ferro-vanadium price climbed to a multi-year high level last October.

Fastmarkets’ assessment of the export price for ferro-vanadium, min 78%, fob China, recorded a historical high of $130-140 per kg on October 18, 2018. The price was most recently assessed at $50-54 per kg on April 11.

Meanwhile, the latest price for ferro-niobium sits at around 215,000 yuan per tonne, paid on acceptance and including VAT, equivalent to around $49 per kg, according to market sources.

The lower price for ferro-niobium prompted a major influx of the material into China amid strong demand from the steel mills who are desperate to cut production costs.

China imported a combined 10,010 tonnes of ferro-niobium in the first two months of this year, surging by 149% year on year, despite February export volumes falling 57% from a historical high of 7,010 tonnes in January, according to official but unconfirmed data seen by Fastmarkets.

“There is no doubt that ferro-niobium has become and will be the biggest competitor of ferro-vanadium,” a sixth Chinese market participant commented, adding that mills will possibly resume their interest in ferro-vanadium utilization when its price is close to or even below the price of ferro-niobium.

Underpinned by strong demand, ferro-niobium producers have increased their capacity. In January 2019, Companhia Brasileira de Metalurgia e Mineração, the world’s largest niobium producer, said it would boost its ferro-niobium capacity by 50% over the next two years.

The company expects to end 2020 with a total niobium capacity of 150,000 tonnes per year.

[Editor’s note: This story was updated to clarify that the announcement regarding the implementation date of the new VAT rate in China was made on March 15 rather than March 5 as was previously published.]