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03

May

Summit TV: Ferrochrome Outlook

  • Lara Smith
  • In the media,Multimedia

Summit TV speaks to Lara Smith from Core Consultants about why the recovery for ferrochrome producers after the recent price slump is going to take a while. To view the video please follow the link : http://multimedia.avusa.co.za//view_video.php?viewkey=4fe54277b1954f6cd4c5

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Summit TV: Ferrochrome Outlook

Summit TV: Ferrochrome may lack the glitter of gold and platinum, but it’s a vital part of our modern way of life. Why is ferrochrome so important?

Lara Smith: The main application is in making stainless steel where 80% of all ferrochrome produced is metallurgical – you can’t make stainless steel without chrome, although you can make it without nickel. There’s smaller foundry grade quantities of ferrochrome that goes into making glass and there’s chemical grades but the majority that’s produced in SA and globally is metallurgical.

Summit TV: AS we speak what are the supply and demand dynamics?

Lara Smith: Globally for the third quarter we are still waiting for price negotiations to be set – but it seems we are in a surplus market. Companies are currently trying to circumvent that by cutting production – SA producers have cut production drastically for the third quarter but that’s not uncommon because electricity prices go up and production gets cut back. For the first time we are seeing Tata Steel at Richard’s Bay cutting down completely and then companies as far way as Turkey are going to be operating at 50% capacity until December or until the market comes back into balance when they will produce again.

Summit TV: How have ferrochrome prices fared from the end of the financial crisis up until now?

Lara Smith: Prices have been volatile but improved after the crisis since 2009 because stainless steel demand is dependent on the health of the economy so prices dipped by around 60% year-on-year compared to the high in 2008 which was drastic. Prices have come back since then – in February when I presented at the Mining Indaba we put out a forecast of 133 US cents per pound where at the time the market was in a supply deficit. The market is susceptible to swings – now it looks like the market is again in surplus so prices are pulling back again but not to the extent of the financial crisis.

Summit TV: Given what you are telling us that there is underutilisation of capacity and demand is not that great given the global situation is the industry making money and what are margins like?

Lara Smith: At this point margins are not particularly good – we estimate the cost of production on a country basis where that’s gone up by around 11% last year and most South African producers are experiencing cost increases of 8% to 10%. Assmang has announced they’re going to be cutting back their ferrochrome production and instead going more into ferromanganese. They cited among other reasons that ferromanganese was probably more economic because they are sitting too high on the cost curve and we are seeing higher cost producers are starting to cut back production because the margins just aren’t there…

Summit TV: In you report you said you expect demand to contract in the third quarter…

Lara Smith: A number of reasons. Firstly we looked at China where they are going to be using existing stocks that are high – so they will use existing stocks of stainless steel. Also, the ban in Zimbabwe has prevented the export of ore so they will start running down stainless steel stocks. Elsewhere there are stocks that have not been sold like Sweden so we are looking at surplus supply. The market got a bit of a fright in February when the European price rose from 125 US cents which was benchmark to 133 US cents so there was an overnight spike and that was because we were in deficit and in response people produced more so now we are sitting with the opposite.

Summit TV: This dire situation do you think the industry is going to have the guts to invest in extra capacity anticipating global economic recovery?

Lara Smith: We are seeing capacity coming onstream but that’s companies that are able to produce lower down on the cost curve – so for instance there’s Xstrata where they are taking capacity up to 2.3 million tons a year and that’s low down on the cost curve.

Summit TV: Where will demand drivers come from when the recovery gains traction?

Lara Smith: Demand will come from Asia and particularly China and India that’s lobbying for a chrome ore exports ban because they feel need that themselves. The Indian vehicle production market increased by around 40% and construction which is the largest user of stainless steel is booming there and in China and that’s where the demand is, and also to an extent Brazil.

Summit TV: Ferrochrome prices over the medium term?

Lara Smith: Over the next two years we do expect prices to be lower – we are waiting for Europe to recover so we are looking at around 124 US per pound over the medium term. There is around 2 million tons of stainless steel production capacity coming onstream from China alone by around 2015 so the market should then be more in balance and ferrochrome will then increase to around 132 US cents per pound.

To view the video please follow the link : http://multimedia.avusa.co.za//view_video.php?viewkey=4fe54277b1954f6cd4c5

Summit TV: Ferrochrome Outlook article image

Lara Smith

Lara is the company’s Managing Director and founder. Lara began her career as an analyst for an asset management company in Cape Town, Foord Asset Management, where she gained experience in analyzing the South African platinum, gold, oil and soft commodity sectors as well as healthcare and gaming... Read More

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