Ferrochrome Waking Up From An Eight Year Nightmare

Merafe published its European ferrochrome benchmark for 1Q17 at $1.65/lb, up from $1.10 in the fourth quarter. These higher prices loook like they’ve been accepted by consumers, in particular, the Chinese stainless steelmakers.

At a price of $1.65, this will translate to around $1.50/lb, CIF, which means there is still $0.15/lb on the upperside.

The global chrome ore and ferrochrome market collapsed in the fourth quarter of 2015 when Glencore sold 600,000 tonnes of South African concentrates at the extremely low price of $78/tonnne, CIF, China. The recovery came in the second quarter of this year when South Africa was unable to meet China’s demands. As South Africa’s market share is around 75%, the impact was most effective.

Due to a number of reasons, mainly production cuts and logistic and infrastructure challenges, supplies of chrome ore reduced drastically. This coincided with stocks at Chinese ports hit an all time low in August 2016 of below 800,00 tonnes, leading to an acute price hike. Low stocks still prevail at around 900,000 tonnes, up 15-20%, but still well below the levels targeted by China.

As such Chinese domestic prices are breaching the RMB11,000/tonne threshold for high carbon ferrochrome with the last price reported to us at RMB11,400/tonne.

There is currently no sign that supplies will increase from South Africa, Turkey, Albania, Iran or Pakistan for either chrome ore or ferrochrome in the near future. In fact, South African producers are claiming to have problems with their production, but some market participants believe that this is an overreaction and a ploy to keep prices high.  Similarly, Chelyabinsk indicated that they would reduce production during winter, but again it is believed that producers are merely manipulating the market by ensuring that there is reduced material available for prompt delivery.

Be that as it may, given the above picture, the prediction is that the first half of 2017 will see higher prices and there is scope for prices to increase by a further 15-20% from these levels. The second half of the year could go either way depending on the supply from South Africa.

From our perspective, while we acknowledge that consumption has not picked up substantially and there are a myriad of reasons why prices could decline sharply such as global economic and political developments, its seems that the ferrochrome and chrome ore market is awaking from an eight year nightmare, but industry participants may be too weary to acknowledge this, having been downtrodden for so long.

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Lara Smith

Lara is the CEO and founder of Core Consultants. She has been an analyst for over thirteen years and has focused on commodity markets for just over a decade. She began her career as a buy-side analyst at Foord Asset Management in Cape Town, before taking a Head of Research role at a mining corporate finance and investment firm.

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