“Live and Let Die” — a Couple of Thoughts on New Benchmark Developments
Recently, there has been quite a bit of a dynamic development on supply / demand and, obviously, prices for some of Ferroalloys. Let’s take FeSi and some other products like electrodes as an example, which have recently exploded. Seems, ‘security of raw material supply’ has a chance to be the-phrase-of-the-year after a decade of the domination of so called ‘supply diversification’.
And what is happening with Cr price today? We refer to our previous view posted during Lisbon Conference. Over the last two years, EU Benchmark followed the dynamic of tender price in China. This price went down by 1,400 RMB/mt or approx 17% during the last three months (which is equivalent to 17usc/lb in absolute and in relative terms of approximately 23 usc/lb decrease of EU Benchmark). However, the picture has recently changed, and the strong demand is driving the price today on the background of limited supply, but no longer opposite. Will it impact a Q1 settlement? Hopefully, yes, and the last two years trend will break out. Let’s see. In any case, this is a good example to illustrate that the system of pricing of FrCr and other Cr-contained products is outdated.
Going further on FeCr pricing discussion, one could notice a very interesting development recently, when Patrick Ryan has announced the launch of the new index. Indeed, the most important and significant difference, which makes his solutions much more relevant, is the idea to measure, average, and hopefully, publish volumes, and not only the price. The market price has not much meaning without the volumes traded at this price. However, this obvious fact was never applied to most of ferroalloys and FeCr and Cr are good examples. Thats why we believe that above idea will be a good development as it will introduce the index of average price by volumes. Though, it has to deal with the same flaws as the current publications reporting FeCr price: spot market is respectively small and spot deals have a little market representation, as most volumes in US, EU and Japan are traded by formulas and not at fixed prices. Thus the key for such index is to include big enough volumes. This may need to consider and include prices on the volumes sold on long term formulas, otherwise this index will be based on a very small market share. Another issue is the transparency and, how reliable the sources are.
Recent developments of internet trading platforms for ferroalloys and numerous start-ups, designed to apply the blockchain technology in commodity trading in order to ensure facilitation of the transactions, can also help as such platforms will automatically be able to provide the data on the average pricing and volumes. This will automatically solve reliability issue, but again it will require such projects to be successfuly introduced in the industry to attract big enough number of the transactions to have representativeness.
We believe, that the market of Cr-contained products does require new index or a benchmark to reflect new realities, so we would like to suggest the following options:
- First idea would perfectly feet into Patrick Ryan’s concept: Some (or as many as possible) of major ferrochrome industry participants shall report their weekly average sales/purchase prices, both spot and contractual based on formulas, by the type of ferrochrome product (high, medium and low) as well as volumes, which will be confidentially used for weighted average calculations. In this sense, the published weighted average prices would give more profound representative understanding of the actual market as it will include non-spot sales.
- The second option is to acknowledge one independent, recognized and responsible trader, who will publish on a weekly (or monthly) basis its public ‘offerta’ for the sales price and binding purchase price bid at, say 5% discount to above of sales price. The purchase price also will specify the quality of the material, but not the origin. The tradable amount should be at least 500 tons per week. This will mean that somebody takes responsibility and will, consequently, lose the money if this price is wrong. This would give markets the feeling that the above price is reasonable and reflects actual market situation.
- A possible solution can be a company or a hedge-fund handling some quantity of different grades representing respective grade world share of consumption by grades, with the total volume of 300-600k Mt. In this case, main producers and consumers would have a confident share, but not more than 5-10% each. This constitutes approximately 5-10% of the annual consumption of the world ex China. This fund shall quote warrants for certain share of the stock and buy it back with some reasonable discount. No doubt, this trading mechanism will establish more transparent indicators for the price. The justification for the price will be established, and this will also create efficient hedging mechanism on this market. Now we are in the process of forming a group of the parties interested in participation in the creation of such a mechanism. This solution will give a possibility for the Cr market to be more reliable, hedge-able and transparent. Moreover, this system may become a good solution for the other, non-LME metals and ferroalloys to find more appropriate pricing instrument.
The above-mentioned solutions or combination of those are just a stepping stone in developing the pricing mechanism for ferrochrome industry. It won’t be a swift transformation, but it is a change that the market needs. And we do appreciate the support from the stakeholders of this market we received so far.