DETROIT (ResourceInvestor.com) I have learned from some of the comments on my recent Resource Investor articles that the recovery of strategic metals in America from tool steel scrap that a specter is haunting natural resource investment analysis.
The specter of holistic analysis, where every factor that may influence supply and demand is considered and given a weight in the final estimates rather than just taking one factor and myopically applying the classical logical fallacy of post hoc propter hoc (after that, therefore, because of that).
This is the fallacy of cause and effect that drives men to say that such things as a single (usually brief) oil refinery shutdown after a storm means that there will be a shortage of gasoline everywhere rather than just in the region served by the refinery.
Case in point: The activity in ferrovanadium prices since the summer of 2005 seems to be counterintuitive. To the myopic analysts it looks like the prices for vanadium in the forms in which it enters international commerce do not track with supply and demand.
Look again at the graph I published last week, specifically at the green line, ferrovanadium prices from the first quarter of 2001 until the present.
As of this writing ferrovanadium costs about 600% (7 times) more now than it did just 5 years ago. But note that at the end of the summer of 2005 ferrovanadium was priced at nearly 2000% (20 times) more than it had been priced in 2001!
It was during the summer of 2005 that the Chinese decided that ferrovanadium was in oversupply! They then shut down two primary producing mines to "correct" the market. But that doesn't make sense, does it. The price was rising, which must have been due to demand exceeding supply, and the Chinese reduced supply. Even more confusing is the fact that the Chinese domestic market for ferrovanadium surged in 2005 as the production of steel alloys, just in China alone, went up 23% from the year before.
For the last calendar year the price of ferrovanadium has been much less volatile and in a smaller range between $25 and $35 even though it is said that, in Europe, for example demand has been softening. The Chinese have continued to ship more vanadium to Europe than the demand during most of 2006, but European dealers refuse to lower the price. An interesting article on Metal Pages a couple of weeks ago discusses the vanadium situation in Europe and says:
"...However, although producers agree that demand is low-key, they have refused to offer material down in line with lower dealer offers, preferring to wait in the expectation that the steel industry will return for material in the next few weeks."
"Traders have pushed prices lower but the market is not as weak as they think," one producer told Metal-Pages. "Demand has been steady and there have been recent production shutdowns in South Africa (Highveld [Nasdaq:HSVLY]) and Austria (Treibacher)," one producer said...."
Another article in Metal Pages just three days ago, was headlined "US FeV Prices Weaken on Slack demand," containing the statement: "Consumers in the steel industry have plentiful supplies of the alloy."
Even so, a major vanadium mine in Australia, the Windimura, is on schedule to be reopened by 2008, and thus supplies will increase dramatically again.
So, what in the 'Sam Hill' is going on?
Vanadium was traditionally mined in the U.S. as a byproduct of Uranium. Even though deposits in Colorado may produce more vanadium than uranium the low prices for uranium and, up until last year, for vanadium, made it uneconomical to mine vanadium, or uranium, this way up until the current uranium boom.
All that has changed dramatically. With uranium at $60/lb the U.S. uranium mining industry has been revived dramatically as is attested by the volume of articles just in Resource Investor alone. With vanadium at 6 times what it sold for 5 years ago and uranium being mined again in volume in, for example, Colorado for the first time in 25 years there is now feed of a substantial amount of vanadium to process into ferrovanadium and specialty catalysts.
The USGS statistics for 2005 show no production of vanadium by the eight (unnamed) producers of vanadium products that the USGS says make up 100% of the U.S. vanadium products industry. The USGS says that imports accounted for 100% of U.S. usage in 2005.
I don't like to contradict an agency of the U.S. government, and perhaps it was true in 2005 that the U.S. imported 100% of the approximately 4000 tonnes of vanadium (measured as V2O5) that it consumed, but bankability studies for the financing of the reopening of U.S. uranium mines in Montrose County, Colorado, for example, in 2005 and 2006 have taken into account not only the value of the uranium but also, for the first time, the value of the vanadium byproduct.
In the past not only were the vanadium byproducts of uranium mining disregarded but the VPL (vanadium pregnant liquor) from the uranium processing was even disposed of sometimes as a waste! One wonders what has become of the tailings and landfill sites where these materials were dumped. They certainly are not shown as an asset (nor need they be legally) by any of the uranium mining companies in the U.S.
As uranium mining in the U.S. and Canada surges back on line there is bound to be a dramatic upswing in domestic vanadium production. After all, in the U.S., at least, the current production (2005) is shown as 0. Could material already being produced account for some of the seeming imbalance between supply and demand? Yes, certainly, in the U.S., and perhaps even in Europe and China.
What about the ferrovanadium content of tool steel alloys? As I wrote recently here, and notwithstanding those who said that this material was long ago discovered and taken into account, it is only in the last year that there has been a focus on recovering strategic metal values from tool steel scrap.
The purchase volume of new ferrovanadium by one major steel mill and one major foundry are down dramatically due to their ability to recover ferrovanadium values from automotive die scrap. I am not at liberty to name these two companies, but I can tell you that a substantial amount of their increased profit in the last quarter came from not having to buy new ferroalloys including ferrovanadium.
So, the mystery is solved. The ferrovanadium market, in particular in the U.S., is not down or soft. It is that two new sources of vanadium have gone unnoticed by resource investor analysts. The USGS says that the U.S. uses about 10% of the world's production of vanadium. Most of the use is for alloy production (92%). The balance is for chemical catalysts used to make maleic anhydride, which is important in the making of plastics, and sulphuric acid. Perhaps the single most important chemical used in the smelting and refining of metals.
Steel mills and foundries do not give away competitive advantage by telling others how to save money. Chemical producers do not let their suppliers know what they buy from other suppliers or for how much. That also would be giving away competitive advantage. The metal market journals and bulletins do much of their price and demand research by telephone and rarely go to look at operations or processes. It shows.