2Q'2017 Market Situation Overview

The Cr market, in particular Cr ore and HC FeCr, started the year 2017 at record high since 2008 price levels. The main reason for this was a combination of robust demand from stainless steel industry with the slowing Cr contained raw material production affected by extremely low-price level pressure through the most of 2016.

Stainless steel industry experienced historically high level of production and grew at a very high pace in 2016, while Cr and FeCr industry was in the process of production cuts, restructuring and bankruptcies until the very last few months of the year.

Due to the above two factors, the stocks of FeCr and Cr ore were driven the low levels in respect of consumption which had not been seen for a decade. Supply security of Cr contained raw material came to a picture after years of negligence, which forced prices to rocket up two to three-fold in order to ensure steady supply.

The production level of Cr started to grow while the growth of stainless steel production slowed down, and stocks together with the fresh production supply flow reached normal levels.

By the end of Q1, beginning of Q2 2017 the pricing kept staying at the extremely high level, while the supply, demand and stocks were no longer so extremely tight and some moderate correction looked more and more justified by the fundamentals. However, correction did not happen. The prices crushed in May. For example, RSA Cr ore price indications collapsed three-fold in few weeks!

The drop in Cr ore prices cannot be explained or justified by official information regarding stock levels in China, either in April or in May. Stock raised and reached 2015 levels, but this was still at a historically low level - less than a two-month consumption. The concept about additional "uncounted" stocks in different locations can be equally applied to historic data.

The two major factors which impacted Cr ore price were actual and big decrease of new purchase/import in April (getting balanced after the record in high of previous months) and a lot of information regarding the stocks, although not supported by any official data sources.

After the sharp price drop in April, the import of Cr ore to China in May climbed back to March level, showing an indication of good demand and big sales in Cr ore market.

The simultaneously big decrease of the announced HC FeCr bid price by biggest consumers was exactly in line with the average cost reduction due to Cr ore cost adjustment.

An illustration of this fact: the June FeCr 'tender' price in China was below Q1 2016 level in RSA Rand terms for more than 10%. This did not correspond to many other indicators of the world and situation in Chinese stainless steel industry.

Therefore, the market participants should expect stronger decrease of supply as a reaction, and the price in China should rebound above the June level latest in Q4.

Other markets have followed China’s recent drop in Q3 and will keep under pressure until China rebounds. Good illustration is the drop of Q3 BM announced in June, which was approximately in line with CIF China May level, but disregarded the

June additional big drop of bid price. Rebound of bid price in July has proven that this was correct and June bid price was far too below reasonable level.

The market price development in Cr industry during last two years has proven that it does not serve its main purpose: to measure the balance of supply and demand taking into account the product cost and its value. This, combined with impossibility to hedge, makes the industry decision making for the investment and development extremely hard and create long term unsustainability for all key stakeholders in the Cr related industry.

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