tungsten

Tungsten - Getting cornered in China

By Sam Kiri CFA ACMA
Mar 28 2008 2:28PM


China’s insatiable hunger for metals is well documented. This columnist recently published an article on China’s Resource Safari in Africa, highlighting China’s tightening grip on African mineral riches. The article also explained China’s alliances with certain African governments as a way to ensure access to metals to feed its burgeoning industrial sector. Meanwhile China has identified a series of metals as being strategic and has restricted export of these, and banned foreign direct investments for their development. Tungsten is one of them.

It is not as if China is strapped for tungsten. According to the US Geological Survey (USGS), China currently accounts for approximately 85% of the world’s primary tungsten (mine production) and approximately 65% of the world reserve base. So what prompted China to change from liberal exporter to thrifty accumulator in a relatively short space of time?



Tungsten has been an important aspect of our every day life and has a wide range of applications. Apart from the filament of the humble light bulb, tungsten is incorporated into wear-resistant materials used in metal working, mining, petroleum & construction industries, stainless and full alloy steels, manufacturing including jet engines, strategic applications in the defence sector and high temperature resistant alloys. That explains China’s desire to keep its tungsten to itself!

Compared to "glittering matter" such as gold, a steel-grey to tin-white coloured tungsten invokes little enthusiasm amongst resource investors. But what makes tungsten interesting are its chemical properties which contribute to the diversity of its applications. Tungsten has the highest melting point, lowest coefficient of thermal expansion and lowest vapour pressure of any metal. It is also corrosion resistant, stands up well to mineral acids, and alloys well with steel thus increasing its toughness. Clearly, tungsten is a metal we use and rely upon in our everyday lives so it’s hardly surprising that the Chinese consider it to be strategic.

Unlike many other metals, there are no significant close substitutes for tungsten; those that do exist involve considerable cost increase and compromise of product performance. Industries such as jet engine manufacture, defence and construction, where product performance is important, have studiously avoided experimenting with substitutes. The closest to a substitute, molybdenum, is even more expensive and has nothing like the range of characteristics tungsten offers as a metal. As such, it is safe, literally, to assume that tungsten is unlikely to be replaced.



The dynamics for tungsten are the same as those for other metals. The world economic growth underpins demand for tungsten and much of this demand come from industrial nations. Demand is particularly high from the US due to tungsten’s military and defence applications. Interestingly, the US has no domestic tungsten source and is entirely dependent on imports. As China restricts its exports, the US and other industrial nations are keen to secure alternative, more reliable supply sources. Canada naturally assumes prominence on the list of limited alternative supply sources.

Meanwhile, supply remains tight with China controlling 66% of world reserves. Of the total estimated reserves of 630,000 million tonnes, Canada and Russia account for just 8% and 7% respectively. This leaves industrial nations at China’s mercy and its decision to control exports has, indeed, become a matter of concern.

China’s ability to influence the tungsten market becomes evident if one goes back to the past tungsten price movements. When China unexpectedly curtailed its exports in 1963, tungsten saw a three-fold price increase. Subsequent reversal of the decision to release export restrictions prompted a gradual price decline, only to climb again in 2005 due to a similar restriction by China. While reasons behind such manoeuvres are still not clear, China’s present intent to curtail exports comes from its own tungsten requirements to feed local industries. As China emerges as a large outsourcing economy, Chinese industries demand tungsten and the authorities are keen to ensure an uninterrupted supply.

This strengthens the investment case of companies with exposure to tungsten, particularly those that are in close proximity to industrial nations. Despite its own tungsten reserves, Russia is yet to emerge as a reliable potential supplier. This makes Canadian tungsten companies particularly attractive due to their proximity to the key US market and the availability of advanced stage projects.

For tungsten prices to fall, China needs to revoke the export restrictions. Indeed, China has done so in the past and one would not find fault with such wishful thinking. However, that view implies a sudden slow down in the Chinese economy. If China’s current economic growth at 10% GDP is anything to go by, hopes of a slow down would prove to be less than realistic.

Sources & Acknowledgements:

US Geological Survey (USGS), International Tungsten Industry Association

Sam Kiri