New Materials Industry: If Vietnam’s titanium exports are restricted, supply could be affected in the short term.

　　Sino-Vietnamese political relations are becoming increasingly tense, which could affect Vietnam's exports of mineral resources, potentially leading to a tightening of supply in the non-ferrous metals sector, including titanium. On May 19, stocks related to the titanium sector experienced a significant surge. We have been closely monitoring this development and have been in communication with industry insiders. The key conclusions are as follows:

　　Short-term supply of high-grade titanium ore is tightening. According to data from the U.S. Geological Survey, global ilmenite supply in 2013 totaled 6.79 million tons, with Vietnam accounting for 500,000 tons, or 7% of the total. In 2013, China imported 40% of its titanium ore, of which Vietnam accounted for 26%. Given that Vietnamese titanium ore has a higher grade and can be used for producing sponge titanium and high-grade titanium dioxide, while domestic titanium ore has a lower grade and cannot effectively substitute for imported ore, any disruption in Vietnam’s normal export of titanium ore could, in the short term, affect the domestic supply of high-grade titanium ore and trigger a rebound in prices.

　　The strength of the rebound in titanium ore prices will depend on the pace at which alternative sources can step in to fill the gap. The primary alternative comes from India. Among China’s major sources of titanium ore imports, Australian ores have lower grade, whereas Indian ores generally offer a quality that can effectively substitute Vietnamese ores. It’s also worth noting that in the first quarter of 2013, China imported 100,000 tons of titanium ore from India, accounting for 19% of total imports; however, in the first quarter of 2014, imports fell sharply to just 32,000 tons, a drop of 68%. We believe that, absent export restrictions, the core reason behind this decline in imports is weak demand. Therefore, once Vietnam’s titanium ore exports become constrained, Indian ores could effectively serve as a substitute. However, we cannot rule out the possibility of short-term supply shortages triggered by traders’ reluctance to sell.

　　Demand is the more significant influencing factor in the medium to long term. In 2010, 42% of China’s imported titanium ore came from Vietnam; however, by the first quarter of 2014, this share had dropped to just 10%. This decline was due, on the one hand, to weak downstream demand, and on the other hand, to Vietnam’s imposition of export restrictions on ilmenite through measures such as raising taxes. Yet, as evidenced by the price trends of titanium ore, despite a decline in Vietnam’s supply since 2012, the prices of Vietnamese ore have continued to fall under the influence of sluggish demand. Based on this, we predict that, in the medium to long term, demand will play an even more critical role in shaping titanium prices.

　　The beneficiary stocks are Baotai Shares, Western Materials, Jinpu Titanium Industry, and Pangang Vanadium & Titanium.