Reflecting on the best-performing commodities of the year, 2017 echoes a theme we wrote about last year when we dug into China’s role in 2016’s hottest commodity: metallurgical coal.1 Once again, China’s wherewithal to influence production of a niche commodity has driven the price of globally scarce minerals to new heights. This article delves into China’s role in the tungsten and fluorspar markets, where the price of each has risen respectively by more than 55% and 200% this year. Despite the substantial increase in production through the first half of the decade, significant regulatory action by the Chinese government has recently slowed production and led to price increases in 2017.
Tungsten – also known as wolfram given that it was discovered in the mineral wolframite – is a minor metal characterized by having the highest melting point (6,192 degrees Fahrenheit), lowest vapor pressure (3,000 degrees Fahrenheit) and highest tensile strength of any metal. Given these characteristics, tungsten is commonly used for purposes that warrant strengthened alloys, such as for high-end machining and precision cutting tools, steelmaking equipment and heavy-duty mining machinery. Sometimes known as the “king of war” metal, tungsten is also used to make armaments such as rocket nozzles, ballistic war missiles and gun barrels. The automobile industry is responsible for approximately 25% of global tungsten consumption per annum, making it the biggest consuming industry.
Tungsten is an example of a commodity that falls within China’s regulatory purview, which is increasingly directed toward industries where unfettered production growth has led to rampant ground and air pollution. Home to 80% of the world’s tungsten deposits and with 25% of its annual GDP attributable to mineral trade, China is one of the few nations that can swing global mineral markets solely by influencing domestic production levels. Officially, the Chinese government limits annual tungsten production to 91,300 metric tons; however, until 2016, authorities rarely enforced this quota. According to a recent Bloomberg article, China has at times allowed tungsten production to exceed its annual limit by up to 50% in order to encourage growth in the country’s burgeoning molybdenum industry, as molybdenum can be a byproduct of tungsten production. Over the past 18 months, though, the Chinese government has chosen to enforce the production quota on tungsten mines and altogether halt production for a number of small mines that lack satisfactory environmental controls; consequently, tungsten prices have jumped in 2017.
A combination of lax government regulation and the industry’s focus on pushing volumes drove mining equipment and companies to their limits, resulting in environmentally risky production practices. Widespread soil damage soon followed in regions with the greatest concentration of minerals production, and wastewater from production was used to irrigate agricultural land adjacent to mines and processing facilities, giving rise to a rash of regional illnesses.
In summer 2013, a nonprofit environmental organization, Changsha Shuguang Environmental Charity Development Center (or CSECDC), spent 500 days collecting soil samples throughout China’s south-central Hunan province, the epicenter of mineral deposits for the world’s industrial metals production industry. Of the over 160 types of minerals in existence, 140 – including tungsten – are mined in Hunan. CSECDC’s study discovered that more than 1,500 times the permitted level of heavy metals were in the soil in and around Hunan. These alarming results prompted widespread social concern and fast response by governmental authorities.
In response to mounting societal concerns about the quality of drinking water and farmland, Chinese authorities have made it a priority to clamp down on heavily polluting mines and production facilities since 2016. Through more rigorous enforcement of production quotas and closures of mines deemed to excessively pollute the environment, authorities have stemmed the flow of tungsten to the global market.
While the Chinese government’s stated effort was to curb environmentally harmful mining practices, the result has been a significant increase in the price of tungsten this year from approximately $20 per kilogram to about $40 per kilogram. The government’s recent moves to crack down on smaller, less sophisticated and environmentally aware mines will likely drive market share into the hands of larger, more industrialized tungsten producers. Recalling its 2016 cuts to metallurgical coal production and reallocation of mining quotas away from smaller producers, this would not be the first time that the Chinese government’s actions have driven consolidation among industrial metals producers.
Fluorspar (CaF2), much like tungsten, has seen its production reined in by the Chinese government in recent years. The mineral form of calcium fluoride, fluorspar is an industrial commodity principally used by the steelmaking and chemicals industries. Its market is essentially bifurcated into two categories for commercial use: metallurgical grade (metspar) and acid grade (acidspar), with the latter being the purer form of the mineral. Metspar, characterized as having CaF2 content between 80% and 94%, accounts for 40% of fluorspar demand and is primarily sold as a flux into markets for iron and steel casting and steelmaking. Acidspar, defined as having CaF2 content between 95% and 97%, is the raw material for hydrofluoric acid – and thus all fluorochemicals – and makes up the remaining 60% of demand.
As both a consumer and producer of over 60% of the world’s annual fluorspar supply, China dominates the global market. In March 2017, the U.S. Department of Commerce imposed anti-dumping laws on a litany of refrigerants imported into the U.S. from China. As a result, Chinese fluorspar producers’ output has diminished, as has their global market share.
In concert with the U.S. imposing import duties, government regulation of mining in China is also intensifying. As a result of fluorspar being named a strategic metal in 2017 by the Chinese government, smaller independent producers have faced increasing difficulty in obtaining mining and production licenses that are a prerequisite to raising capital to support necessary facility upgrades. Similar to the tungsten market, the result has been increased consolidation among producers.
As the market for 60% of global fluorspar production continues to consolidate, prices may continue to rise. However, competing suppliers with significant production capabilities, such as Mexico, Mongolia and Vietnam, may also increase production to fill the gap.
Both tungsten and fluorspar represent interesting examples of markets where one country dominates the supply of an essential global commodity. As regulation of these heretofore minimally regulated industries increases, prices may remain firm – until new sources are able to come online to meet growing demand.
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1 For more details on metallurgical coal’s performance in 2016, read the December 2016 Commodity Markets Update article, “Metallurgical Coal: 2016’s Best-Performing Commodity.”