Tungsten, also commonly known as wolfram, has seen a recent rally that has pushed prices to record levels. This has raised concerns within the defense, aerospace, electronics and industrial gas turbine industries that largely require this critical metal. A confluence of factors has helped to fuel this price rally.
First, China imposed export restrictions on the metal last year. China is the primary extractor and processor of tungsten, so when it imposed these restrictions, the supply of the metal contracted around the world. This has caused buyers to compete for the limited supplies and this is exerting upward pressure on the price of the metal.
Additionally, China now requires firms that export the metal to obtain permits from the government. This requirement was imposed this year in January and only 15 firms were listed as companies that would export tungsten from the country going forward. Consequently, less material is being exported since not many buyers can access these permitted firms.
To compound matters for the global wolfram market, domestic industrial consumption of tungsten has increased within China. This means that even if production remains constant, more material is being used locally and as a result, there is a reduction of what can be exported. The current high prices reflect this supply constriction caused by higher local consumption within China.
Falling ore grades aren’t helping matters either. As mines age, ore quality is becoming poorer which is driving up costs for producing each ton of wolfram. As production costs go up, buyers of the processed metal have to foot these added costs through paying more for each ton of the metal that they buy. It is therefore unlikely that prices will reduce meaningfully over the coming years.
As you may know, the process of discovering new deposits and moving from exploration to production usually takes years or even decades in some jurisdictions. New supplies are therefore unlikely to come online quickly enough to fill the supply gaps triggered by declining ore quality and increasing demand for the metal in key industries that are ramping up the use of tungsten.
Outside China, tungsten production is fragmented in countries like Bolivia, Spain, Austria and Rwanda. This means that these alternative sources cannot meet the growing demand for the metal around the world by producing the volumes that have largely been coming from China. This places firms like Collective Mining Ltd. (NYSE American: CNL) (TSX: CNL) in a good position to attract investment since there is an apparently insatiable market for wolfram yet supplies are constricting and are largely controlled by China. The case for supply diversification is strong.
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