2018 Episode: A New Hope

While China is enjoying its annul festivities, South Africa has become a center of attention for the ferrochrome and metals industry. The interest is primarily due to the country’s political change, the election of the new president and rapid strengthening of the Rand.

Over the last couple of months, South African Rand (ZAR) has appreciated by around 12% to US Dollar (as shown in the graph below). This jump made Rand one of the fastest growing currencies among all emerging countries.

The strengthening of ZAR does have an unprecedent impact on the South African ferrochrome industry:

  • The strengthening of the Rand will result in increased cost of production for South African ferrochrome producers. This is turn will impact their relative competitive advantage versus Chinese producers, that was in place during price downturn and weak Rand.

  • Still, we believe that appreciation of the Rand will likely force the SA mining and ferrochrome industry to increase the sales price of their respective products, including ferrochrome, chromium ore and UG2.
  • Despite possible increase in prices, we see this as an additional step to balance the ferrochrome market.

One of the main reasons for strengthening of the Rand was election of Cyril Ramaphosa as the new president of South Africa. His view on economy, specifically the mining sector showed that finally the government will address the issues plaguing the industry over the last decades. Furthermore, there is a strong believe that he will scrap completely the new Mining Chapter, thus attracting more investors in the country.

In conclusion we see both events as an important step in the history of the South African ferrochrome industry and expect it finally to get out of the recession.

"Back to the Future". FeCr Feb tender: more RMB means less Rands per unit

For the second consecutive month, stainless steel producers in China increased their ferrochrome tender prices by 600 RMB/mt, apparently the fundamentals support our expectations. Although this is an increase of 8%, we expect more growth towards the end of the quarter.

On top of the reasons discussed in the previous posts there is additional strong reason for further increase. This is a strong growth of South African Rand against USD, which has accelerated recently.


As the above graphs shows that weakening of South African Rand over 2016-2017 helped chromium and ferrochrome producers to keep their revenue in Rands through the period of low prices (USc/lb). Over the last quarter, Rand strengthened by around 10% relative to dollar, thus forcing producers to increase the price for both chromium ore and ferrochrome.

Now prices of domestic ferrochrome in China are up 8% in RMB/mt. This will translate into a more or less same increase of usc/lb CIF China import price for South Africa’s Charge chrome. Yet, producers from RSA will get no increase in Rands per mt to cover their rising costs.

Start of 2018: "For a few dollars more"

With 2018 being only two weeks old, some positive news seems to come. That will hopefully be a positive sign for the 2018 in the Chrome industry.

There are indeed some positive indications:

  • High Carbon ferrochrome spot prices continue to rise in China and Japan. Despite holidays and slow trading, the prices are on the rise, as some traders and stainless-steel companies are preparing to store material for Chinese New Year, according to FerroalloysNet.

  • Spot prices for chromium ore in major Chinese ports continue to increase. In December alone, the prices increased by 10%, thus forcing ferrochrome producers to push their prices upwards.

Unichrome’s view on global low carbon FeCr market has not changed despite the correction of the China domestic prices in Q4, while current LC weekly dynamic it is down, which we believe does not reflect the underlying demand\supply picture. Thus, we expect this trend to reverse soon.

January tender prices in China also started an upward movement after two/three months of decrease due to increase in chromium ore, coal price and electrode cost increase.

Low Carbon prices in USA also seem to pick up — due to slowdown of imports from China affected by domestic price increase and export cuts by traditional suppliers due to the long time history of disadvantage in netbacks.

Improvement within China carbon steel industry

According to China’s Ministry of Industry and Technology, despite capacity cuts, China carbon steel industry profits improved by 180%, whilst operating revenues also jumped by 20%.

What is the main reason to that? — In our opinion, the carbon steel industry will be more focused on quality and profit improvements, and, at the same time, cutting overcapacity, including shutting down all loss-making enterprises and merging smaller ones. These measures show that China is quite ready to implement rather radical ways. After resolving the carbon steel industry problems, the Chinese government might potentially turn to solving exactly the same issues within stainless steel industry. Therefore, one can expect that such changes will improve demand for higher quality ferrochrome products.

China HC Ferrochrome update

As we discussed in our end of the year report, we expected China spot prices to grow at the beginning of the year. Judging by the latest news, our expectations were justified.

As reported by Metal Bulletin, the prices are continuing to increase due to increase in power prices (resulted from coal price increase) and continues growth in chromium ore prices. Both issues might lead to decrease in domestic production, thus China will have to rely on imported ferrochrome.

"Tomorrow never dies" — What is ahead for ferrochrome?

Some positive news are coming this week between Christmas and New Year. As we expected in UNICHROME, major stainless-steel producers in China have announced increase in their tender prices. It is up by 200 RMB/T. We think this is a move in right direction and we believe that Q1 2018 tender prices will continue to rise. We base our believe on the following:

  • The current environmental shutdown in China, so far has not affected stainless-steel production but has affected some ferroalloys producers.

  • Demand within China for the stainless-steel hasn’t shown any significant signs of weakening, and we believe it will continue to strengthen

  • Imports of chromium ore have been growing over the three months untill October, as well as prices. snd then decreased in November following prices drop. This behavior is a classic sign of the strong market. Cr ore prices are growing since then and this should lead to increase of import. All in all this is supporting the cost and price for ferrochrome.

  • Spot prices in China was rising recently thus also driving the import prices up.

We believe that recent drops in tender price for three months were already enough if not more than enough to reflect actual supply/demand balance, and the market will grow again. In our view a decrease in market volatility will help stabilize the industry, which has been suffering from extreme volatile price development creating disproportionately in supply/demand balance since at least 2016.

"Live and Let Die" — a Couple of Thoughts on New Benchmark Developments

Recently, there has been quite a bit of a dynamic development on supply / demand and, obviously, prices for some of Ferroalloys. Let’s take FeSi and some other products like electrodes as an example, which have recently exploded. Seems, ‘security of raw material supply’ has a chance to be the-phrase-of-the-year after a decade of the domination of so called ‘supply diversification’.

And what is happening with Cr price today? We refer to our previous view posted during Lisbon Conference. Over the last two years, EU Benchmark followed the dynamic of tender price in China. This price went down by 1,400 RMB/mt or approx 17% during the last three months (which is equivalent to 17usc/lb in absolute and in relative terms of approximately 23 usc/lb decrease of EU Benchmark). However, the picture has recently changed, and the strong demand is driving the price today on the background of limited supply, but no longer opposite. Will it impact a Q1 settlement? Hopefully, yes, and the last two years trend will break out. Let’s see. In any case, this is a good example to illustrate that the system of pricing of FrCr and other Cr-contained products is outdated.

Going further on FeCr pricing discussion, one could notice a very interesting development recently, when Patrick Ryan has announced the launch of the new index. Indeed, the most important and significant difference, which makes his solutions much more relevant, is the idea to measure, average, and hopefully, publish volumes, and not only the price. The market price has not much meaning without the volumes traded at this price. However, this obvious fact was never applied to most of ferroalloys and FeCr and Cr are good examples. Thats why we believe that above idea will be a good development as it will introduce the index of average price by volumes. Though, it has to deal with the same flaws as the current publications reporting FeCr price: spot market is respectively small and spot deals have a little market representation, as most volumes in US, EU and Japan are traded by formulas and not at fixed prices. Thus the key for such index is to include big enough volumes. This may need to consider and include prices on the volumes sold on long term formulas, otherwise this index will be based on a very small market share. Another issue is the transparency and, how reliable the sources are.

Recent developments of internet trading platforms for ferroalloys and numerous start-ups, designed to apply the blockchain technology in commodity trading in order to ensure facilitation of the transactions, can also help as such platforms will automatically be able to provide the data on the average pricing and volumes. This will automatically solve reliability issue, but again it will require such projects to be successfuly introduced in the industry to attract big enough number of the transactions to have representativeness.

We believe, that the market of Cr-contained products does require new index or a benchmark to reflect new realities, so we would like to suggest the following options:

  • First idea would perfectly feet into Patrick Ryan’s concept: Some (or as many as possible) of major ferrochrome industry participants shall report their weekly average sales/purchase prices, both spot and contractual based on formulas, by the type of ferrochrome product (high, medium and low) as well as volumes, which will be confidentially used for weighted average calculations. In this sense, the published weighted average prices would give more profound representative understanding of the actual market as it will include non-spot sales.

  • The second option is to acknowledge one independent, recognized and responsible trader, who will publish on a weekly (or monthly) basis its public ‘offerta’ for the sales price and binding purchase price bid at, say 5% discount to above of sales price. The purchase price also will specify the quality of the material, but not the origin. The tradable amount should be at least 500 tons per week. This will mean that somebody takes responsibility and will, consequently, lose the money if this price is wrong. This would give markets the feeling that the above price is reasonable and reflects actual market situation.

  • A possible solution can be a company or a hedge-fund handling some quantity of different grades representing respective grade world share of consumption by grades, with the total volume of 300-600k Mt. In this case, main producers and consumers would have a confident share, but not more than 5-10% each. This constitutes approximately 5-10% of the annual consumption of the world ex China. This fund shall quote warrants for certain share of the stock and buy it back with some reasonable discount. No doubt, this trading mechanism will establish more transparent indicators for the price. The justification for the price will be established, and this will also create efficient hedging mechanism on this market. Now we are in the process of forming a group of the parties interested in participation in the creation of such a mechanism. This solution will give a possibility for the Cr market to be more reliable, hedge-able and transparent. Moreover, this system may become a good solution for the other, non-LME metals and ferroalloys to find more appropriate pricing instrument.

The above-mentioned solutions or combination of those are just a stepping stone in developing the pricing mechanism for ferrochrome industry. It won’t be a swift transformation, but it is a change that the market needs. And we do appreciate the support from the stakeholders of this market we received so far.

“You Only Live Twice…” Could 2018 be same or more turbulent for Cr than 2017?

Once again, the market is hit by a downward direction right before the end of the year. Chinese tender prices have dropped around 16-17% over the last three months. Still that drop is less than what the market experienced in the first half of the year.

What is different? — The overall market conditions. Stainless steel industry is having another growth year, with the estimated production being 48 million tons, a new record. The demand for steel is also improving globally. With the improved conditions in the stainless-steel industry, ferrochrome production is also on the pace for the record global production.

So why are the prices going down?
One could call this drop as overcorrection due to end summer over-recovering due to the previous overcorrection in May following over-recovery in Q1-17/Q4-16 which, in turn, was a result of far more deep than justified drop of the tender price in beginning of the 2016. Thus, it is generally expected that the prices will pick up once again in March as demand in China will start to improve.

Background for the drop can be attributed to the fact that China is planning a major 3-month shutdown of the industrial production around 28 major cities. This leads to a strong believe that demand for stainless steel will decrease in Q1 2018. Also supply of chromium ore to China is sufficient enough to maintain necessary levels of production.

Overall, we believe that the industry does not need this Cr and FeCr volatility as it makes whole industry look unpredictable and speculative which in turn makes long term planning impossible and put at risk future development from both consumer and producer prospective. This is again a confirmation that Cr and FeCr markets require new approaches in pricing system.

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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