Ann: High Purity Vanadium Pentoxide Produced, page-45

Hi Azlans, it's a good point that few people understand. The market is opaque in China and it's hard to get a good read.

When looking to by-product vanadium production, note that run-of-mine grades are 0.3% V2O5. Few people know this but 1 tonne of 98% V205 flake contains just 0.56 tonnes of pure vanadium. Chinese mills that use vanadium-bearing magnetite ore to produce steel extract vanadium using a duplex blast oxidation furnace process (BOF), whereby they blow the molten iron with oxygen in the first BOF to oxidise the vanadium into the slag. This slag is then tapped off and the molten metal is transferred to the second stage BOF. The reason for the duplex process is to get the vanadium out before the calcium is added, as both elements react to form a sort of bronze formation, from which point the vanadium is uneconomical to extract.

There are only a few mills that have this facility and so even in times of high iron ore price, output of vanadium can't adjust as would first be assumed. Sichuan, which is home to the majority of vanadium by-product production, doesn't have the infrastructure to transport steel to the more populated Chinese coastline where the majority of steel intensive investment is occurring and so produce only what is required locally. Also, note that at times of low iron ore prices, there is ample supply of better quality ore from seaborne sources that will in most cases displace the use of vanadium-bearing magnetite (23% Fe in-situ). The economics of steel production very much dominate here.

Ultimately, while by-product production of vanadium does sit at the bottom of the cost curve, it is still very much dependent on the steel outlook and the use of this particular low grade magnetite, which is also unfavourable for environmental reasons.

Looking to stone coal (Chinese major source of primary production), cash costs have increased considerably over the past few years due to new standards introduced to reduce wasted water and pollution from these sources. The improved process is considerably more expensive from both an operating cost point of view and CAPEX requirements.

Therefore, the only possible short term significant source for increased supply is for mills near vanadium-bearing magnetite mines to substitute seaborne ore out for domestic ore. Again, this is difficult for environmental reasons, but there has been some evidence of this. Currently, the vast majority of stone coal producers' cash costs are above the current market price. Elsewhere, steel mills shall have to introduce new expensive BOF capacity, which given expected long term growth in favourable (for steel production) seaborne sources, is unlikely to offer a good ROI. Seaborne ore does not contain vanadium.

Hope this helps