It is crunch time for the ferrochrome market. Core Consultant’s January Monthly Monthly Chrome Supply Chain Analysis Report focuses on ferrochrome bids prices from major Chinese stainless steel mills which dropped consistently between October and January by a total of RMB200/tonne ($30/tonne), and South Africa’s chrome ore exports have fetched less than $200/tonne for the same period. Chrome ore prices are currently held down by ongoing trade tensions, the ramp-up of integrated capacity in Indonesia, and Chinese stainless customers sourcing direct supply agreements with Tsingshan, forcing traders to lower prices in competition.
In October, Tsingshan offered fixed-price long-term contracts on stainless with no alloy surcharge. The company mines its own nickel and chrome and recently realised 3m t.p.a of integrated capacity in nickel-rich Indonesia. Tsingshan’s low-cost stainless now meets more than 15% of global demand and could be closer to 20% when planned capacity is brought online by 2020. China is exporting much of its stainless capacity in favour of carbon-steel production at home, simultaneously aiming to eliminate the import of all stainless waste by the end of 2020. The continued investment in capacity and infrastructure outside of China, through a combination of Tsingshan and Delong projects and the state-sanctioned ‘belt & road initiative’ (BRI), is expected to divert some of the flow of ores, concentrates and alloys away from China in favour of vertically integrated producers with extremely low-costs, such as those in various stages of development in Indonesia, India and Zimbabwe.
We expect the price of chrome ore to fall dramatically during 1Q19, followed by a period of consolidation that will favour the lowest-cost producers. The economic development of BRI beneficiary countries through rail, power and industry is slated to grow demand for all steel products, but even the first of these effects may not be significant until well after 2020 – most of the Chinese projects are still very early on in the rail and power stages. We expect the oversupply problem to persist for much of this year as more cheap capacity comes online, keeping ore prices subdued and growth limited.
As of the 7th January, total chrome ore inventories at Chinese ports had climbed to 3.03m tonnes compared to 2.89m on the 10th December. It is highly unlikely that the ferrochrome market will see a growing trend in 2019. Demand has slowed, and capacity is too great. By 2021, China will have eliminated the import of stainless waste and will likely have exported substantially more stainless capacity to its cheapest neighbours, friends and colleagues. We expect that, during this ‘off-loading’ period, overcapacity will be a persistent problem as new mills are ramped-up close to low-cost and plentiful supplies of raw materials.
Throughout November, December and January, China released import and export data that has been absent since 2Q18. The import of HC-FeCr into China remained high at an average of just under 400,000 tonnes per month, although material from Mozambique and Russia replaced some of that coming from Zim and S.Africa.
Looking at South Africa’s ferrochrome exports for 2018, overall shipping was consistent at around 325,000 tonnes per month, but material heading to China declined in favour of shipments to Indonesia throughout the year. Indonesia imported over 15% more ferrochrome from S.Africa than China for September, October and
November. We expect these changes to import and export to continue through 2019 as stainless capacity is ramped-up outside of China, noting the potential for India to offer better pricing on occasion.
The start of January saw ore producers raising prices slightly in the face of tightening margins. However, our view is that the chrome market is facing yet further price falls driven by poor demand and additional low-cost capacity coming online during a time of extreme surplus and disappointing growth. Larger, vertically integrated producers offering low-cost, long-term contracts for stainless has been enough to force traders to lower their own contract and spot prices to maintain adequate market share.
As it stands, prices are already unsustainable for some Turkish and Albanian miners, with reports of financial difficulty and potential long-term suspension expressed by at least one Turkish producer. The market is facing a period of consolidation in which capacity must be reduced. The most economical stainless operations at this time have proprietary nickel and chrome deposits in low-cost regions, as well as modern, efficient production capabilities.