Project Blue notes that expectations were high that various commodity markets would enjoy a rebound after China’s reversal of its ‘zero-COVID’ policy. However, while a recovery is underway, China's economic rebound is set to be uneven.

Last year was marked by major macro events which pushed markets in different directions. Coming off the back of a post-pandemic recovery, prices increased when Russia invaded Ukraine amidst concerns over potential supply shortages. As the year progressed, supply-side concerns gave way to demand-side fears over the health of the global economy and especially the outlook for China given its strict COVID-19 containment plan, its faltering property sector and weak construction activity.

It was unsurprising that the abrupt reversal of China’s COVID policy translated into high expectations for the Chinese economy in general, the construction sector, and ferroalloys demand. Indeed, ahead of China’s construction season, which usually takes place from March to May, steel mills restarted production and rebuilt inventories. But since then, China’s vanadium pentoxide flake (98%) fell from a February-March average price of US$9.90/lb to below US$7/lb, echoing the trend seen in Europe.

How to explain this drop?

Project Blue assigns the vanadium price slump to demand uncertainty set against supply stability and sufficient inventories. On the supply side, output was adequate in China and the ROW. In Q1, Largo sales increased 28% y-o-y (despite a lower production) and Bushveld enjoyed 20% y-o-y and 13.5% q-o-q increases. It also appears that some discounted material from Russia has been on the market. Inventories have been replenished and de-stocking has taken place in recent weeks.

On the demand side, while the market was expecting a sharp rebound in China’s steel production, triggered by a fast recovery of its property market, the recovery has so far been mixed. The property market continues to suffer from a lack of cash on the developers’ side and from a lack of confidence on the would-be purchasers’ side. China’s Q1 rebar production was 57.2Mt, a mere 1.6% y-o-y increase, although March production saw a 12% y-o-y increase at 23.3Mt.

How will things develop in H2?

Project Blue believes that any improvement in the Chinese property market will only be seen in late 2023. With this in mind, Project Blue forecasts China’s crude steel production at 1,030Mt for 2023, a 1.5% y-o-y increase. Rebar production may see higher output growth, supporting vanadium demand growth, but uncertainty remains. More generally, with China’s steel production plateauing, any increases in vanadium demand in steel will come from a higher intensity of use via a switch from Grade III to Grade IV rebars.

The bright spots for demand are aerospace (particularly in the USA) and VRFBs, which consumed record levels of vanadium in 2022 according to Project Blue estimates. This view is supported by China’s Pangang, which estimates that about 8% of 2022 Chinese consumption came from the VRFBs sector vs 4% in 2021.

On the supply side, AMG’s Zanesville plant is ramping up and Bushveld is expecting higher y-o-y production while Largo’s new guidance shows flat y-o-y output. Uncertainty remains regarding the material from Russia and its impact on market dynamics.

Overall, the market should stabilise and moderately improve over the coming months with prices recovering from their current lows. But, with major economies on the brink of recession, the market should keep its expectations in check to avoid more disappointments.

22

22

19

18

18

17

17

15

15