Bad things come in two’s

The current economic situation continues to affect the FeCr market. This is a combination of oversupply of chromium ore, outbreak consequences, and global financial markets volatility massive risk-off.

Even before the latest negative factors came onto play this year, the Cr industry situation in 2019 was already adverse. Recently RSA announced that its GDP contracted by 1.4% in Q4, but the drop in ferrochrome business, in the country which represents 30% of global production, was much more significant. The four ferrochrome producers, who kept operations in 2019 reported:

  • Large producer:
    – The ferroalloys segment registered a 22% drop in revenue in 2019 compared to 2018
  • Large producer:
    – Does not publish official numbers, but Hanwa (20% stake holder) is expected to have a loss of USD 59 million from their chrome operations
  • Smaller producer:
    – The ferroalloys segment registered a 25% drop in revenue in 2019 vs 2018. The company reported a loss of EUR 60 million, compared to yesterday’s close market cap at slightly below EUR 72 million.
  • Smaller producer:
    – Reported a 1,3-billion-rand loss, roughly equaling to 87 million USD.

Year on year the European Quarterly Benchmark has dropped by 16%. Despite being a substantial decrease, it is significantly less than the revenue drops listed above. The latest information from the above-mentioned companies indicates large drops in revenue for each of them as well as cuts in production. Thus, in the short-term FeCr production in RSA will continue to decrease.

On the positive side, ongoing introduction of various stimulus packages could help and enhance demand for raw materials and metals sooner or later. Central banks in China, USA,UK and the EU have already made decisions and more help is expected.

People's Bank of China is expected to cut reserve requirement ratio by 50 to 100 points, which could free from 300 ($43.18 billion USD) to 700 billion Yuan ($100.75 billion USD) in liquidity for the companies that have been impacted by the epidemic.

The U.S Federal Reserve cut the interest rate by half a percent last week down to 1-1.25%. The last time the rate was this low was in June of 2017. Further rate cut is expected soon.

An interesting comparison between a few major commodities prices in June 2017 and now:

  • Brent: 47.92 USD/barrel, currently 33.72 USD/barrel
  • LME Ni: 8924 USD/t, currently 11830 USD/t
  • Iron Ore: 64.80 USD/t, currently 90.15 USD/t

To chrome related products such as:

  • EU Ferrochrome Quarterly Benchmark: 1.54 USD/lb, currently 1.01 USD/lb
  • HC FeCr spot Europe: 1.20 USD/lb, currently 0.89 USD/lb
  • LC FeCr spot Europe: 1.98 USD/lb, currently 1.77 USD/lb
  • UG2 Cr ore CIF China: 170 USD/t, currently 127 USD/t

Each commodity has its own fundamentals; however, it looks like there is some potential upside for the chromium related products.

China recently reported record levels of steel stocks, but market sources indicate plans by the government to provide additional financing to large infrastructure projects, such as bridges, railroads and airports, hence consuming the current steel surplus. That in turn should provide a boost for additional steel production and FeCr demand.

The latest exports/imports data shows severe drop in exports from China (17.2%), while imports decreased marginally (4%). Among imported goods, copper poised a 7.2% increase. It remains to be seen how this will affect ferrochrome supply/demand balance domestically in China , but market analysts believe imports should get in line with exports in the short-term.

This week global markets were hit by crash in oil prices, with financial markets recording huge daily drops since the financial crisis of 2008. The uncertainty about market direction and possible longevity of the crisis could continue weighing on the metal markets recovery.

The above factors show that in 2020 there is a possibility of FeCr shortage, but when it will happen depends on how fast the stimulus packages improve the economic outlook and how RSA FeCr producers deal with the current market downturn. Fundamentals are still in place. But new risks are tough, thus the road to recovery for the ferrochrome industry will be longer than anticipated in January.

*Sources: Link 1, Link 2, Link 3, Link 4

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