Is Manganese at the Point Of No Return?

In the first week of March, we released our Manganese Monthly publication.  In the issue prior to this release, we proffered that manganese stocks couldn’t possibly climb any higher. We were wrong! Manganese stocks in the first week of March, climbed from a massive volume of 2.45m tonnes to even more ridiculous levels of 3.5m tonnes! Needless to say the ability to reduce this excess inventory is becoming increasingly challenging.

Chinese traders are reneging on contracts, only to purchase their requirements on the spot market at more than half the price. As such more and more unsold material is simply sitting, building up at the ports.

In terms of the individual ports, as of 28 February 2017, Tianjin stocks climbed 42% m.o.m while Qinzhou stocks rose 34% m.o.m. We have also received notice that a further 612,000 tonnes of ore was delivered or due to be delivered to Tianjin between 11 February and 11 March 2017.

In response to these stock levels, spot market prices have fallen more than 50% m.o.m. If we look at specific grades we note that Australian 45.5% lump has come off 47% in the first three months of the year, South African 37.5% lump by 59% and Brazilian 44% lump by 129%.

To mitigate this, South African suppliers are turning their attention to other markets, including Japan, South Korea an India rather than China.

Downward pressure on ore prices has impacted ferroalloy prices. 65/17 SiMn material in China has come down sharply, falling from RMB7,000/tonne ($1,076/tonne) at the end of January to RMB5,000/tonne ($724.6/tonne) in the first week of March. In response, suppliers have tried to keep manufacturing facilities closed in an effort to try and stabilise prices. What we note  in our Ferrochrome Monthly Report, published on the 19th of March,  is that the effect of lower manganese ferroalloy prices, has resulted in Indian and Chinese producers switching their smelters over to ferrochrome where the margins are relatively better. From this practice, we can understand how challenges in one market, present a risk of oversupply in another.

Looking more downstream, the steel market remains heavily oversupplied. China has pledged to remove another 50m tonnes of capacity by the end of the year. This, together with the 65m tonnes from last year, would have fulfilled China’s target of eliminating 100-150m tonnes of capacity by 2020. As such, it is uncertain whether China will continue eliminating capacity beyond 2017 or not. The concern here is that even with the capacity reduction, China still has around 300m tonnes of excess capacity!

We therefore expect protectionist measures from other countries to remain in place. USA is investigating anti-competitive behavior in the steel plate market. This follows the EU’s imposed anti-dumping duties of 65.10-73.7% on Chinese heavy plates and non-alloy steel products.

With regards to European steel, key steel-consuming sectors have improved. Transport equipment continued to expand at a healthy pace and all in all, activity in Western Europe’s steel-using sectors are estimated to have improved 1.8% in 2016. Prospects for 2017 are expected to be positive. Towards the end of 2017, we should see improving demand for capital goods across most sectors, especially as the UK’s budget revealed an expectation of 2% growth for this year and additional support for export-orientated sectors which are benefiting from the weaker Euro and Sterling.

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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