Going short or going long?
During the last week of 2019, major Stainless-steel mills in China have announced their bidding prices and as anticipated before these prices decreased:
- Tsingshan lowered its bidding price by 200 RMB, settling at 5797 RMB/t, while in USD denomination this equals to 0.66 USD/lb
- Baosteel lowered its bidding price by 200 RMB, settling at 5800 RMB/t, while in USD denomination this equals to 0.66 USD/lb
- TISCO switched back to monthly pricing and lowered its price by 900 RMB/t (in line with our expectations), to 5600 RMB/t (roughly 0.64 USD/lb), returning to pricing parity with Tsingshan and Baosteel.
Right before the New Year holidays, Merafe Resources announced the European Benchmark at 1.01 USD/lb, a decrease of 1 cent or 1%.
One can see that despite the currently depressed market, the Benchmark decrease was much lower than the decrease of the China Bidding Price (1% vs 10%). In our view, there are a couple of reasons that affected both prices.
- China currently has an ample supply of material, both domestic and imported. With chromium ore prices being at the lowest level, stainless mills can drive down the Bidding Price for ferrochrome, while simultaneously decreasing imported prices.
- While negotiations for the European Benchmark most likely used improvement in spot sales of ferrochrome in Europe to justify the small decrease - from Q3 to Q4 the price in Europe increased by 5%. Despite that we see that this recovery is based on shift in supplier’s strategy, namely, while the European prices were decreasing, suppliers shifted cargoes to China, thus decreasing the oversupply.
- Additionally, new production cuts in South Africa, Zimbabwe and India might be announced, hence keeping the supply/demand balance in shape.
The Benchmark announcement also continues the latest trend in reestablishing itself as the leading market indicator. As addressed in June of 2018, in past few years prior to 2019, the European Benchmark settlement was heavily influenced by Bidding Prices in China, following their changes with a quarterly lag.
Quarterly change normalized to Q1 2015, with Q1 2020 Bidding Price corresponding to January announcements
Contrary to that, in 2019, the Benchmark settlement seems to be more focused on supply/demand outlook and taking into account actual and possible production cuts ex-China. Also, the above graph illustrates that the annual volatility for European benchmark and bidding price is steadily decreasing, which seems to be a good development.
With two globally relevant indexes European Benchmark and Chinese Bidding Prices going in different directions, it remains to be seen which way the market will move during Q1 and in Q2. Whether new possible production cuts help to balance ferrochrome supply/demand, and move the prices to more suitable levels? How much will the latest geopolitical news affect ferrochrome and stainless-steel supply/demand balance?
In general, most of the forecasts by major investment institutions are optimistic for commodities in 2020, despite several obvious risks. Hopefully, these positive expectations will materialize for Cr related industries.