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Signs in the global supply chain that China’s return to work is beginning to have an effect

Traffic jams are back on the roads in Shanghai, as the country returns to work

Bushveld Minerals Ltd -

The vanadium price ticked up by 25% to a mid-price of around US$7.25 per pound on Friday 17 April, as Chinese demand at last began to pick up slack in a commodity that has been on a serious downward trajectory for the better part of the last 15 months.

What does this tell us about the wider market, given the metal itself is so niche and the number of participants in it are limited?

First, it tells us that after a period of coronavirus market chaos, China is back as a price setter. Maybe not right across the commodities board, and maybe not in the same way that she was before, but nevertheless the influence is there.

The reason that vanadium is an interesting metal to watch in this regard is that broadly-speaking Chinese accounts for 50% of production and 50% of demand, so variations in either tend to show through in the market quite clearly.

Anyone who follows Bushveld Minerals (LON:BMN) will know what happens when this balance goes out of kilter: the vanadium price soared and Bushveld, which has serious vanadium production in South Africa, was able to use to leverage significant dealflow and expansion.

Even after the vanadium price corrected back from its 2018 highs of US$30, Bushveld is still worth £160mln on the London market, more than 10 times what it was worth ten years ago. Other companies, like Ferro-Alloy Resources Group (LON:FAR), have also been able to get in on this act, leveraging significant growth potential to the likelihood of ongoing strong demand from China.

And, like every company in the wider market, both Ferro-Alloy and Bushveld were driven off course in the middle of March, when the coronavirus panic was at its height. Shares in both have since ticked up off their lows, however, as the initial uncertainty fades and, more to the point, as the Chinese economy begins to get back to normal.

Of course, it’ll take a long time to completely recover, but the March PMI numbers, assuming they’re real, show real appetite on the part of purchasing managers to get things moving again. That the appetite is showing through in such niche areas as vanadium pricing is a sign that the Chinese recovery has some real depth to it, albeit that it remains patchy.

Ferro-Alloy Resources Nick Bridgen points out that vanadium and certain other base and specialty metals are likely to benefit in the near-term, precisely because the impact of the stimulus package that China has put together will initially be felt in the building sector, a major consumer of metals. Vanadium is used in steel, and steel is used in construction. But with Chinese production still somewhat curtailed demand for product from elsewhere is on the rise.

“Post-lockdown, everything looks good,” says Bridgen. He’s also hopeful that demand for vanadium to be used in redux-flow batteries will also increase, now that manufacturers don’t have to pay an arm and a leg for product. In short, in a space like vanadium things could get back to normal, or some semblance of normal very quickly.

Elsewhere though, the picture isn’t quite so pretty. Andrew Monk, the driving force behind VSA Capital, who has been doing business in China for nearly thirty years, points out that although parts of the Chinese economy can get going relatively quickly after the lockdown ends, it’s not a consistent story across the board.

“Today everybody in China is going back to work,” he says.

“The factories and offices are 90% back. Traffic jams are back in Shanghai. But consumer confidence is badly knocked, though.”

Anecdotally, consumer spending is down by 50% in China at the moment, and it’s not hard to see why. Apart from the impact to their own economy, which endured its worst quarter for more than thirty years, demand from the wider world, which acts as customer for a huge variety of products that China makes, is also down. In that context, it’s not surprising that people are feeling nervous.

China may restore economic activity through infrastructure expenditure but may also need to stimulate domestic consumption to make up for falling Western demand,” SP Angel wrote in a morning not to clients this week.

“If Asia is unable to take up the slack, and it probably won’t, then this combined with the economic hardships of the past few months of lockdowns is likely collapse many vulnerable companies. Combine this with multi-billion dollar losses from the WTI Oil ETFs and you have a recipe for a significant Asian crisis.”

Whether that prognosis turns out to be overly alarmist only time will tell. Certainly the Chinese are not going to sit idly by and watch it happen. Companies that do business with China outside of China, like Oracle Power PLC (LON:ORCP), report that the Chinese are as keen as ever to crack on and get things moving.

“I was impressed at the speed with which China Coal was able to fulfil the needs for our Letter of Intent application,” says Naheed Memon, Oracle Power’s chief executive.

Oracle is working with China Coal to develop the Thar coalfields in Pakistan into a multi-billion dollar energy producing hub.

“China Coal was very co-operative and managed it all in a month. There’s uncertainty of course, but I believe we can pull through this, and things might not be delayed that much.”

China, after all, still has its long-term economic interests to look after, and projects like Oracle’s are central to plans for future growth, albeit that timings are somewhat up in the air at the moment.

“Our project in Pakistan is important in the context of the China Pakistan Economic Corridor and there has been speculation and news coverage that the next Joint Cooperation Committee (JCC) meeting between Pakistan and China could be held in May, although there’s no formal confirmation of this,” says Memon.

“That said the willingness to move forward with the meeting is evident, and we await formal confirmation on timings.”  

Quick facts: Bushveld Minerals Ltd

Price: 11 GBX

LSE:BMN
Market: LSE
Market Cap: £126.83 m
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