Q4 2017/Q1 2018

This quarter once has again shown that the market is under the shadow of uncertainty of where the demand from China will go

The EU Benchmark for Q4 jumped 26% from Q3, following China tender prices strong behavior during Q3, while in China itself tender has changed the trend down both in October and November. The drop so far was 600 RMB (around 7 USC/lb, less than 35% of only September tender increase), and the December tenders will show if those drops were to balance the market and prices, or it is a start of the downward trend supported by the demand fundamentals.

On the other hand, quite strong performance of the industry form USA, EU and Japan economies showing best performance for more than 6 years, a steep drop in Q1 Benchmark is not anticipated.

The current chrome ore stocks being on the level of around 7 weeks, which are higher than the minimum seen year ago but still much lower than historical average. This again shows that demand for the ferrochrome in China is searching for direction.

Over the last couple of months new issues within the Ferrochrome industry started to pop up:

China tightening ecological norms and control:

  • The continuous tightening of the environmental controls in China so far has not affected FeCr industry on the large scale;
  • However, there is a strong possibility that in the near future China will have to close older ferrochrome smelters and steel factories, that would obviously have an effect on the demand for FeCr;
  • These controls also will have an implication on the use of scrap, which in turn will decrease the demand for FeCr.

Mining rules in RSA:

  • With the court date set in December, the mining industry is hoping for a negotiation that will satisfy both sides;
  • Yet, with a possibility of the new law being passed, that will further hurt South African industry, because future investors will be more cautions in investing in the country where they might not have enough power to make decisions.

LCFeCr anti-dumping probe in EU:

  • So far, the case has been put on hold, due to other anti-dumping issues between China and EU currently taking place;
  • With the increase in prices for refined FeCr in China, we believe that this situation will resolve itself, due to decrease in future imports into EU

Graphite electrode shortage and surcharge

No doubt, new development for the industry as stainless-steel mills is adding additional surcharge due to increase in cost of production.

  • The main issue is shortage of graphite electrodes and the fact that China supplies around 80% of total production;
  • On one hand, it shows that production is increasing and thus improvement in demand, but on the opposite side, increase in the prices for electrodes will become unsustainable for some of producers, thus resulting in production cuts;
  • This development once again proves that in order to have a stable industry it is vital to have a secure supply of raw materials, otherwise the disbalance and volatility will continue.

The above-mentioned issues show that now ferrochrome industry moved from simple supply/demand industry to an industry surrounded by political risks on the global scale.

UNICHROME presentation at the 3rd CIS Ferroalloys Conference in Tbilisi, Georgia

Mid Q3 Market view: Never say never. Could H2 2017 dynamics of Cr-contained ore and alloys become a "déjà vu" of 2016?

This is to follow up the previous view regarding the market development in the first half of 2017 made in the end of June.

It is worth to stress out that the main conclusion was that the price fall in China in May – June 2017 was overdone, looked artificial and should rebound by Q4 latest.

Now this has become almost evident. The actual demand in China was not actually down — starting May, import volumes of the ore to China were on the high level. And from the other hand FeCr price was driven to the level below the edge of sustainability for the most of the production in China, unless the ore in turn would go below the reasonable cost justified number as well. This scenario has not materialized due to the straightforward reasons of the costs support.

The demand continues to keep the high level and the prices for Cr ore have moved up from the bottom reached in June, despite the stocks, which continue growing slowly to the level of 2.5mln mt- reasonable number of appr. two month consumption. This is again a prove of the fact that the extend of the price fall in May was way more deep then the stock level would justify, as many believed.

FeCr prices in China have started moving up in July and again accelerating in August and this justifies the view that one could naturally expect another sharp increase in the price as soon as the summer slowdown will be over and, consequently, Cr contained raw material supply security reasons will be recognized as a main trigger.

Again, as this happened one year ago.

And the quicker prices in China will be adjusted higher to the reasonable level, the more likely that it will stay stable in a comfort zone to ensure supply/demand balance in a long term. The later this happen the more up it will go.

Above revision of the situation in China happens on the background of other consuming regions including EU and Japan continue to show growth numbers have not seen for a long and general view by many analytical agencies on the steel industry keep improving continuously.

From the other hand there is no sign that the Cr industry is going to expand for the extend which may be required in order to support consumption growth.

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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