Lost in… conversion

With the summer end, slowdown is starting to ease up. Despite positive market news such as nickel price surge (around 32% since the beginning of July), the overall sentiment of the market is cautious and calculated due to still ongoing risks such as low demand, slowing EU economy, ongoing trade wars.
Last month, major stainless-steel mills in China (Baosteel, TISCO and Tsingshan) have released their tender prices for July. The corresponding drops were: 450 RMB/t, 500 RMB/t, 450 RMB/t respectively, making average July tender price 6215 RMB/t (roughly equaling 0.73 USD/lb).

This drop was more than originally anticipated, but with the oversupply of ferrochrome, large stocks and seasonal business slowdown, the steel mills were able to drive the prices down.

For August the stainless-steel mills rolled the Tender price over, that announcement arrived on the hills of production results for stainless steel in China in H1 2019. According to the Chinese Stainless-Steel Council the output increased by 8.5% in H1 to 14.35 million tonnes. This shows that demand for ferrochrome is still there, but price recovery might take a long time due to increased ferrochrome availability (which is at the highest level since 2017).

As one can see from the graph below, current prices are reaching a level that is close to break-even point for ferrochrome producers and the gap between European spot prices and Chinese domestic prices is at its lowest levels since Q1 2013. With Chinese domestic prices stabilizing, European prices should start a recovery, because soon some of the producers might begin diverting more tonnages to China.

Due to significant drop in ferrochrome prices, Hernic Ferrochrome is currently shutdown and is rumored to be prepared for scraping, Glencore/Merafe, Yildirim Group have announced production cuts, Afarak also stopped production due to maintenance and according to market sources Samancor is operating at 50% capacity. On the opposite side ferrochrome production in China continues to rise and ERG Group has also announced production increase.

Despite the price rollover for China Tender from July to August, the Tender Price in USD decreased due to Yuan devaluation. Lately the Chinese yuan has softened compared to USD as a response to new import duties for Chinese products in the United States.

Since the last change in Tender Price (July tender), yuan dropped 5% relative to USD, while chrome ore price increased by 10% in dollar terms. This should provide pricing boost for the upcoming September Tender, since cost of raw materials has increased in RMB. That means that even 5% increase in Tender Price in RMB would not be enough to compensate the producers for raw material price increase. At the same time, demand ex-China is still slow.

The yuan adds a new dimension to the currency risk, now combined with increased volatility of the South African rand, Turkish lira and Russian ruble.

September will show if recent rally in Nickel prices will boost stainless steel and FeCr demand towards Q4.

European Benchmark Q3 2019

Last week Merafe released Q3 2019 European Benchmark, which now stands at 1.04 USD/lb, a drop of 13% from 1.20 USD/lb in Q2.

Despite a big drop, it falls in line with the current decrease in CIF Shanghai, one of the main indicators of the price movement.
From the graph below, one can see that historically CIF Shanghai represents 72% of value of the Benchmark price. New benchmark of 1.04 USD/lb, corresponds to 0.75USD/lb for CIF Shanghai, the exact level market is reporting.
The current level can be considered a pricing bottom, with the production costs being either at the level of below current prices.

South African consolidation

As discussed before, South African ferrochrome industry underwent a significant transformation. That is still ongoing, with a change of ownership in Samancor.

That creates a possibility of Samancor’s charge chrome production being supplied mainly to China, thus leaving Glencore/Merafe as the only charge chrome producer in South Africa (Afarak is currently in turmoil, and it remains to be seen if it recovers).

This development in the long term might generate a shortage of charge chrome in the ex-China markets, which in turn might support European Benchmark levels and improve high carbon ferrochrome prices.

No easy way out

TISCO and Tsingshan just announced their June Tender Prices, the drop of 350 RMB/t (6550 RMB/t and 6746 RMB/t respectively). This moves Tender prices to lowest level since May 2018. The most likely scenario for Q3 European Benchmark now is to return to the level of Q1, but there is a possibility that the drop can be even wider, since Q3 is generally one of the slowest times of the year.

Some factors that attribute to the current downturn in prices:

  • Surplus of ferrochrome on the global market

  • China leads the oversupply, thus driving the demand for imported material down

  • New stimulus package in China has limited effect on the market and demand

  • Risk to supply side didn’t not last long, especially with price improvements in March and April

  • New turn in USA/China trade war, creates uncertainty for stainless steel and ferrochrome producers

  • US steel market is slowing down for first time since 2017

  • EU is also not doing well, especially the automotive industry

On the other hand, there are factors that might help improve the market, both short and long term and also support market in Q3:

  • Most of supply curve is underwater and shutdowns in FeCr are starting in China as well.

  • Following consolidation in RSA, last big deal will leave world ex-China with virtually one producer of ChCr as rest might be diverted to China in the future. To manage these risks consumers might increase the security stocks targets for the ChCr.

  • if restocking will start this will inincrease demand for HC FeCr

The current situation once again shows how dysfunctional market is. Domestic prices in China becoming more and more influential around the globe, but that doesn’t solve the liquidity and no-hedging issues, as well as a lack accounting for supply/demand fundamentals of different parts of the world.

How big is the fish?

China Tender Price increase for April 2019

As anticipated earlier, April bidding prices were announced at 300 rmb/mt above March level yesterday.

Although it is reported marginal in some newsletters, in fact this is a 4% increase in price including VAT, meaning a 7.1% increase of actual price ex VAT, which is quite significant for one month upside. This is the biggest hike since July 2018 and also equals to the resent price increase in European Benchmark.

This increase is mainly pushed by various factors from the supply side, still remains to be seen if it will continue in April depending on where the demand will be.

A Step towards the Right Direction

The Q2 2019 European Benchmark has just been settled at 1.20 USD/lb, an increase of 7.1%. The announcement came ahead of Chinese ferrochrome bidding prices for April, thus making the European Benchmark the leading indicator for the ferrochrome market this time.

Some market participants see this increase being on the high side, while we think it’s on the low side or rather moderate, giving today’s market conditions:

  • Continuous load shedding in South Africa has led to a ferrochrome production decrease by 20%

  • UG2 chromium ore price has increased since the beginning of the year by 20%

  • CIF China price has increased by 5%

  • China Tender Prices increased by 1%, pending a bigger increase in a few days

  • China spot ferrochrome prices increased by 7%

  • One more important change is a VAT decrease in China from 16% to 13%. This means from now on actual price ex-VAT should be adjusted by 3% up, compared to previous domestic price, which is always indicated including VAT.

In other words, a 7% increase in spot price, including VAT, is an equivalent of a 10% increase ex-VAT or CIF. Thus, one can see that the Benchmark increase in Q2 was not very drastic, but in line with other price hikes on the low side.

What remains to be seen is a bidding price increase in April, which is expected to be around 300 RMB/t, taking into account the above consideration of 3% VAT adjustment. Let’s see, if it will be enough to cover increased COP in China and apparent ferrochrome shortage from imports, or more increase will be expected for May.

Up From the Bottom

Recently, major stainless-steel mills in China have announced their ferrochrome bidding prices for March deliveries.

Just like in October, TISCO was the first mill to release the price, possibly to seize the market and hedge itself from sudden price surges. TISCO rolled the price over at 6,650 RMB/t On the other hand, this time Baosteel and Tsingshan increased their bidding price by 100 RMB to 7,000 RMB/t and 6,996 RMB/t respectively.

As the matter of fact, in case of TISCO there are some differences in fundamentals of ferrochrome bidding price:

  • TISCO is located close to Inner Mongolia, the main ferrochrome producing province, thus it has access to more supply at a lower logistics cost
  • Some of TISCO’s production capacity is still under maintenance, so its purchase requirements have decreased.

Even though 100 RMB/t is a slight increase, it is positive news for the market as it moved the prices close to 7,000 RMB/t.

It is probably the case that article, 7,000 RMB/t should be considered as a Chinese domestic ferrochrome industry support level. Both Baosteel and Tsingshan have returned to that level after 3 months. Some of the reasons for increase in bidding prices in China are as follows:

  • China and USA negotiations on trade are progressing and easing the fear of full-scale trade war
  • That has improved outlook for stainless steel in China and worldwide
  • Spot prices in China are increasing after Lunar holiday
  • Cr ore prices are picking up, with recent news of production problems in South Africa.

Over the past years some of the ferrochrome market participants suggested that international ferrochrome prices should be based on the Chinese domestic market data like bidding price and CIF Shanghai, which are more or less following bidding price in USD terms. Although market in China became an important part of the global ferrochrome industry, it still has too many specific local matters, like export duty regulations, ecological regulations and RMB exchange rate exposure. To apply the abovementioned indexes directly to contractual formulas ex China, will significantly strengthen its natural influence onto global markets outside of China and will be misleading and risky from both consumers and producers sides.

Recently some news surfaced that Inner Mongolia is going to have power shortage, which will affect production in March and April. Some industry players believe that it won’t be a big issue, since environmental shutdowns didn’t have a major affect on the production in China. On the opposite side, some market participants believe that this might lead to a shortage of ferrochrome, at least in a short-term prospect.

The situation in Inner Mongolia shows some resemblance to the issues of Eskom in South Africa. The ferrochrome industry was set up in RSA because of raw material availability and cheap electricity. The similar principle was applied in establishing ferrochrome producing hub in Inner Mongolia, i.e. cheap electricity. The recent development illustrates that this principle might not be sustainable in a long-term outlook.

In the second half of 2018, prices in the rest of world balanced to parity with Chinese domestic prices (without delivery and duty expenses). Thus, the current price increase in China will provide support for price improvements globally.

Truck tire will not fix town car broken wheel

Recently some of the ferrochrome market participants suggested that international ferrochrome prices should be based on the Chinese Tender Prices.

Over the last couple of years, the bidding price in China has become an important part for the global FeCr industry and markets started to follow each other and correlate. Despite that, using domestic prices in China for LT formula commitments could create difficulties for both suppliers and consumers, since the rest of the world will be exposed to China domestic FeCr market pricing, which is influenced by some country specific factors:

  • Currently it is disadvantageous for Chinese ferrochrome producers to export, due to export duty and nonrefundable VAT. If these duties are eliminated, the teneder price will immediately increase, since Chinese domestic producers will be more competitive on the international market, thus putting more pressure on the overseas prices and vice versa.
  • Secondly the Tender Price in China generally closely follows domestic FeCr COP, which is a function of Cr ore import price to China. That price in turn is not directly related to integrated FeCr COP of international suppliers. If export duty is implemented on Cr ore from the supplying country, the Chinese domestic FeCr COP will immediate increase, thus driving Tender Price higher. While on the other hand the supplying country will have domestic COP decrease with the support of export duty.
  • Third is ongoing issue with environmental shutdowns in China, which affect both the stainless steel and the ferrochrome industry. Now any environmental regulations will have an immediate affect on the global market directly, rather than a steady discovery of whether additional or new shutdowns will be effective.

Above three factors are most evident ones why this will only make the pricing system even worse than today. On top there are some more like unknown number of bidders, not always disclosed volumes of bidding, different seasonality and other specific domestic issues. The bidding price is relevant for the world market but straightforward usage outside Its own region is not a solution and will create a lot of additional risks for the industry.

All in all, the recent development is another evidence that FeCr market is in a desperate need of liquid pier to pier settlement mechanism with financial responsibility of participants, pricing transparency and possibility of hedging, similar to what exist in exchange traded products.

Jan 2016 to Jan 2017: MB HC growth of 78%, China Tender growth of 109%
Jan 2017 to Jan 2018: MB HC decrease of 9%, China Tender decrease of 30%
Jan 2018 to Jan 2019: MB HC decrease of 24%, China Tender decrease of 6%
Jan 2016 to Jan 2019: MB HC growth of 23%, China Tender growth of 39%

Q1 2016 to Q1 2017: EU Benchmark growth of 79%, China Tender growth of 101%
Q1 2017 to Q1 2018: EU Benchmark decrease of 28%, China Tender decrease of 21%
Q1 2018 to Q1 2019: EU Benchmark decrease of 5%, China Tender decrease of 11%
Q1 2016 to Q1 2019: EU Benchmark growth of 22%, China Tender growth of 42%

Mouse or Elephant — looking forward to Q1 2019

The end of December is approaching, and the ferrochrome industry is preparing for the Q1 European Benchmark announcement.

With the current price downturn in all the major markets, it seems reasonable that the benchmark price will go down, the question is by how much?

There are three major prices whose dynamics should be considered in European Benchmark settlement: China Tender Price, CIF Shanghai and MB HC FeCr.

We used all the above prices to calculate different scenarios for possible Q1 2019 European Benchmark.

We used Q4 vs Q3 price change and applied the corresponding drop to Q4 Benchmark

EU Benchmark vs China Tender

Benchmark Scenario: BM equals 1.20 USD/lb based on the percentage drop between Q3 and Q4 Tender Prices
Q1 2019 average Tender Price forecast 7000 RMB/t.

EU Benchmark vs CIF Shanghai

Benchmark Scenario: BM equals 1.18 USD/lb based on the percentage drop between Q3 and Q4 CIF Shanghai
Q1 2019 average CIF Shanghai forecast 0.8 USD/lb

EU Benchmark vs EU MB HC

Benchmark Scenario: BM equals 1.03 USD/lb based on the percentage drop between Q3 and Q4 EU MB HC FeCr prices
Q1 2019 average EU MB HC FeCr forecast 1.05 USD/lb

A big difference between EU MB HC FeCr and the other two prices is attributed to decreased premiums in the European market for HC FeCr compared to Charge Chrome. This is mainly due to increased competition in Europe.

A wide gap between prices of different indices for same product-ferrochrome, indicates ineffectiveness of the pricing mechanism.

Above analysis has a wide range of potential results from 1.03 to 1.20 and the average from three scenarios comes to 1.14 USD/lb. This might be a reasonable level, given the market situation and winter slowdown for the industry. The level also corresponds well for CIF Shanghai and Benchmark average historical spread.

EU Benchmark vs CIF China South African HC FeCr

The average quarterly difference from 2015 till now is 0.35 USD/lb. Based on above forecast for Q1 2019, the difference comes to 0.34 USD/lb, which in line with the historical data.

Trade war pause

Ongoing trade negotiations between USA and China are decreasing the risk of full-out trade war. The temporary stop on further increases in import duties are improving the sentiment for the international trade. This sentiment could help to improve ferrochrome prices in Q1 2019.

Bloomberg reported that China will decrease or even eliminated its import duties on the US made cars This will give a boost to US car manufactures in the world’s largest consumer market. As the result the US domestic car production should increase thus increasing demand for stainless steel products. That in turn should even further improve USA demand for ferrochrome and ferroalloys. From the other hand improved demand might attract even more pressure from supply side as it has already happened in the second half of 2018.

FeCr Supply Factors Overview November, 2018

1. ESKOM has been in denial about coal cliff

  • ESKOM is now running short on the coal stocks at the major powerplants. According to South African news sources and Ferroalloynet.com, some of the plants have around 10 days of stockpiles, while the minimum required is at least 20 days. ESKOM has warned that the possibility of nationwide power outages is increasing.
  • This problem continues to undermine governments attempts to attract more foreign investments in the country. Since such uncertainty most likely will push investors in the opposite direction.
  • This issue is growing on the weekly basis and continues to create major obstacle for the ferrochrome industry. Without stable supply of electricity, possible power shedding and outages, the industry most likely will continue to shrink at least for a short-term.
  • As the result, that might increase production and shipments of chromium ore, since its production is less electricity demanding.
  • To be a building block for the economy and the ferrochrome industry ESKOM will need to address the main problems and implement fundamental changes to solve them.

2. High-carbon Ferrochrome capacity release Chinese provinces in November 2018 (source: Ferroalloynet.com)

  • Guizhou November output is expected to be around 27,900 tonnes, which represents 34% of the total monthly capacity. The drop from October is around 2%.
  • Sichuan November output is expected to be around 33,000 tonnes, which represents 24% of the total monthly capacity. The drop from October is around 17%.
  • Hunan November output is expected to be around 13,000 tonnes, which represents 23% of the total monthly capacity. The drop from October is around 17%.
  • Northwest Region November output is expected to be around 21,200 tonnes, which represents 25% of the total monthly capacity. The increase from October is around 8%.
  • Shanxi November output is expected to be around 36,900 tonnes, which represents 40% of the total monthly capacity. The increase from October is around 2%.
  • There is no final output data for total Chinese ferrochrome production for November, but it is likely that the total output will decrease.
  • The obvious factors for the production slowdown are decrease in China tender prices for November, which put a lot of meltshops in a disadvantage due to high cost of production and ongoing environmental shutdowns.
  • Additionally, the above-mentioned provinces house a considerable amount of small ferrochrome meltshops. There is a chance that after environmental inspections some of them won’t return to the operations.

3. Despite decrease in ferrochrome production in South Africa and China it remains to be seen how the supply/demand balance will be affected. The question marks are the stainless-steel production further direction during slower winter months, environmental shutdowns in China and drop in stainless-steel prices on the background of various trade tensions concerns.

4. In these circumstances there are no good reasons for upward or downward movement for the ferrochrome market, unless one of the above factors starts to outweigh another.

Weekly Market Overview: October 22-26, 2018

Eskom wants to increase electricity prices by 15%

  • This is a continues issue that plagues South Africa, despite recent price hike, Eskom still wants to increase it, 15% annually for the next 3 years
  • Price hikes coupled with shortages of electricity and blackouts is one of the main reasons why big portion of South African ferrochrome capacity is either idled or operates at the low utilization rates
  • On the other hand, if NERSA (National Energy Regulator of South Africa) approves these price hikes, it most likely will force ferrochrome producers to hike their prices for both ore and FeCr

TISCO lowers HC FeCr bidding price for November 2018

  • TISCO was the first major stainless-steel mill to announce November prices, with the price being down 100 RMB/t (6750 RMB/t)
  • This price drop can be attributed to some domestic Chinese factors:

    1. The upcoming environmental measures most likely will affect both ferrochrome producers and consumers. It looks like TISCO believes that stainless steel mills will have to stop production on the larger scale, thus creating an oversupply of ferrochrome
    2. Secondly, TISCO itself is placing some of the production lines on repairs, thus decreasing its personal demand for ferrochrome
    3. Current supply is more than plenty, especially since TISCO mills are surrounded by ferrochrome producers

  • Most likely by the end of the next week other major stainless-steel mills will announce their bidding prices
  • After those prices are released, we will see of TISCO decided to seize the market opportunity by being the first to publish new price

Mouse or Elephant?

If you see a mouse under the inscription of an elephant, do not believe your eyes!

EU Benchmark vs CIF China South African FeCr price

The above graph represents one of the most puzzling aspects of the ferrochrome industry. The chart shows the gap between European Quarterly Benchmark and CIF China South African FeCr price. It is the same or similar material but the numbers represent the price indexes for two different markets. Needless to say that logistic cost difference is just a few cents and has nothing to do with the huge gap in numbers. While in the past the delta between the two markets was volatile, over the least two quarters it remains stable, on average a 50 cents difference.

Indeed, the existing pricing system does not reflect actual market reality. The same product might have a slightly different price, depending on geographical location and volumes, but such a difference illustrates how the existing system is misleading and that the global FeCr market requires something more reliable to measure actual supply and demand balance.

And the pendulum continues to swing

The trade tension between China and the USA is gearing up on the daily basis. Recently United States announced that it will implement a 10% duty on all the ferroalloys imported from China. Despite the fact that China is a minor player in the US market, the news immediately created negative sentiment within ferroalloys industry in China and worldwide. Currently analysts expect the August tenders to drop to the levels of June Tender Prices.

This once again proves, that like European Quarterly Benchmark, China Tender Prices does not have a value of a true market indicator but rather reflect the speculative sentiments at the moment of settlement. Both suffer from the same issues such as no transparency to the deals, are rarely based on the actual supply/demand and could move for 10% and more in one go with no big change in the background market conditions.

The same case applies here, because the news of 10% duty and other trade tensions news completely overshadowed that China started another stimulus program, thus possibly offsetting negative impact from Trade War.

Over last week China has done the following:

  • Cut its 7-day Treasury rate by 103bps

  • Launched quasi QE

  • Told banks to flood the system with liquidity

  • Sent the Yuan tumbling

  • Warned more easing is coming

  • Provided and additional tax cut of 65 billion RMB (9.6 billion USD) to companies with R&D expenditure

  • Expedited non-budgeted special bond sales to assist local government infrastructure financing

  • Eased restrictions on banks’ issuance of financial bonds for small firms

Combined with the recent data on chromium ore imports, stocks and ferrochrome production, these measures should be looked upon for pricing clarity.

Chromium ore stocks are now over 3 million tonnes, which represents about 2.5-3 months’ worth of production, the highest level seen from 2011. Ferrochrome production for H1 2018 is about 10% higher than H1 2017 and 25% higher than H1 2016. This shows that demand in China is still growing, and the new stimulus package should help settle the domestic demand at even higher level.

Additional upside comes from India, where due to severe rains and floods in Odisha state has caused delays in chromium ore mining and ferrochrome production. This coupled with all India truckers strike, even further complicated delivery of raw materials and finished goods from mines and plants. India is one of the largest suppliers of HC FeCr to China, in 2017 it accounted for 12% of total imports, while in 2018 it accounted for about 10%. The issues India is facing wont last forever, but it should help keep the market in China more balanced, until the impact of simulus will come into effect.

When the smoke is going down

Let’s look at the latest announcement of 700rmb/mt increase for July of ferrochrome bidding price by biggest stainless producer in China. This is widely regarded as the result of the environmental shutdowns in local ferrochrome industry combined with the demand fueled by the monetary easing measures. Restarted by financial authorities in April by decreasing of the banking reserve requirements and repeated in June. This comes in the background of recent announcement of the European Benchmark settlement for Q3 with just a cosmetic correction to previous quarter and at the level of about 10 usc/lb higher than many market participants might have anticipated.

This time European Benchmark has played a role of a leading indicator for the ferrochrome market. It was rather looking forward at the supply/demand picture than following bidding prices dynamics in China as it was the case for at least the last two years.

This is a change of the game and might be a sign that consolidated South African ferrochrome industry is taking more significant role in the market development. The news comes combined with the other factors in the country industry such as chrome ore export duty discussion, electricity cutback risk reappearance in the news and changes in China domestic production where the main recent topics were environmental production interruptions and closure of non-profitable ferrochrome producers.

There was a time in the early 2000’s when ferrochrome market in China depended on import and was following international trend. After 2008 it was moving in its own direction, not so much correlated with the international one. It was leading the market ex China for the past three years, and now the game is changing again. Hope to see in the second half of the year that it is going to be something new or is it a pendulum swing?

From dusk till dawn. Possible environmental cutbacks and global ferrochrome market in Q3 2018

Currently, the ferrochrome prices have started rising due to potential environmental cutbacks, which are currently being implemented in China. Nevertheless, the effect from the cutbacks will not last long.

As discussed, modest increase in China tender prices from May to June (200 RMB/t) was a positive sign. It was based on the actual fundamental factors, such as: improvement in stainless steel demand in China and an overall attempt by China’s ferrochrome industry to find a firm market ground for its further development.

On the other hand, there is a speculative factor of possible shutdowns or production cutbacks of ferrochrome producers in Inner Mongolia. Ferrochrome spot prices in China have increased by 400 RMB/t over the last weeks, according to Ferroalloynet.com. The market experts estimate that China tender prices for July will follow the rising trend.
However, if the prices go up rapidly this might counterweight the progress of stabilizing ferrochrome markets in China and worldwide.

In present market situation the optimal solution would be to continue moderate and calculated price approach in China, for both spot and tender prices.

EU Benchmark vs. China Tender

  • The benchmark values are published with one quarter lag, Q3 forecasted price corresponds to Q2 timeline
  • Orange square represents a base scenario for the EU Benchmark decrease in Q3
  • Green square represents Scenario 2 for EU Benchmark decrease in Q3

Q3 European Benchmark will probably continue its trend to follow China’s big mills bid prices and decrease for Q3 due to price dynamics in China from Q1 till now and a usual holiday slowdown in EU in Q3. While tender prices will be showing opposite tendency building a positive background for Q4 BM negotiation process.

Q3 2018 more of the same or change in trend?

As we expressed in our last column, the necessity for FeCr China Tender prices to break 7,000 RMB/t is apparent. Following the latest announcements by stainless-steel mill in China, it is safe to assume that this price is now a new support level.

Despite the modest increase of 200 RMB/t, we view it as a positive sign, taking into account continues growth in the spot market of both chromium ore and ferrochrome in China. These growths also come heading into Q3, which is widely considered the slowest time of the year for both ferrochrome and stainless-steel industries.

Will this growth continue? We believe so, especially based on the latest news of output reductions in the provinces of Fujian, Sichuan, Jiangsu and Hunan due to profitability issues. Additionally, there is a concern about possible future output disruptions and possible shutdowns in the major production hub of Inner Mongolia, after central China’s environmental inspection team arrives there.

These problems might push next China Tender Prices even further up, and though it is good news for the industry, be see increased volatility as a major problem. It would be preferable to continue modest price increases of few hundred RMB/t over the next quarter, rather than a thousand RMB/t or more jump, followed by 2-3 months slide.

China Tender Prices (Quarterly Averages) and EU Quarterly Benchmark

As you can see from the graph above, currently benchmark and China Tender Prices are continuing their trend, where benchmark continues to follow Tender Prices from China with a lag. Looking forward to Q3, benchmark might have to adjust to drops in China Tender Prices during Q2, and to summer period slowdown in stainless-steel production in EU.

A Few thoughts on the second half of 2018

With the first half of 2018 almost over, we would like to point out couple of observations which we believe are important for the market in the nearest future.

China Tender prices recently have been decreasing over the last three months. Although the current drop is much steadier than last year, now it seems that the market has found a footing floor, below which the supply might not be sustainable.

As the graph below shows that over the last two years, when the price drops below 7,000 RMB/t, the availability of the FeCr in China decreases.

Thus, a 7000 RMB level is rather a technical floor for tender prices in China in present circumstances. As the result, we expect the prices to start picking up again in the second half, though with a more calculated and moderate pace.

Another interesting development which has happened during the last couple of years but might not have been fully recognized by the market, is continuous consolidation of the ferrochrome industry in South Africa. The diagrams below illustrate that by 2018 only a few producers remain.

The main reasons behind the closures or production suspensions in RSA are as follows:

  • Generally difficult market conditions and unhealthy demand;
  • Lack of chromium ore deposits or high mining costs; and
  • Constant shortages and price increase for electricity

With potential acquisition of Hernic by Samancor, South African ferrochrome industry will be controlled by two major players: Glencore and Samancor. However, it is unlikely that Samancor will take over Quarterly Benchmark negations.

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