South African ferrochrome furnaces need to regain competitive advantage, warns Roskill

15th June 2021 By: Simone Liedtke - Writer

South African ferrochrome furnaces need to regain competitive advantage, warns Roskill

Photo by: Bloomberg

The South African ferrochrome industry has benefitted from recent events in China, which commodity research consultancy Roskill says has removed significant global capacity through the closure of small furnaces.

While higher-cost furnaces in southern China have been able to fill the short-term gap, the demand expectations will require South African plants to remain operational throughout this year.

Taking this into account, Roskill predicts that the benchmark price for the third and fourth quarters of this year will maintain a premium to the South African cost structure.

However, beyond this year, the requirement of South African ferrochrome capacity to operate at its current high use rate remains at a tipping point, especially with new ferrochrome capacity already under construction elsewhere in the world to meet rising demand, Roskill warns.

Therefore, the consultancy warns that unless South African ferrochrome furnaces regain a competitive advantage, the benchmark price will likely drop below the higher-cost producers as supply tightness is relieved.

The consultancy points out that two key price publications for ferrochrome guide industry prices, namely the European Quarterly Benchmark and the Chinese Ferrochrome Tender price, which are published by Glencore-Merafe in South Africa and major stainless steel mills in China, respectively.

The quarterly benchmark prices are used in Europe as an input to calculate the alloy surcharge for stainless steel prices and the true spot price in Europe tends to fluctuate between the benchmark price, a discount set by the market conditions at the time and the trends of the Chinese ferrochrome tender price, which is adjusted monthly, Roskill explains.

The benchmark price is set by South African ferrochrome producers, which used to be the largest source of ferrochrome, before China advanced to that position in 2012.

However, South African ferrochrome remains a key source of ferrochrome outside of China and, as such, it is the cost of ferrochrome production in South Africa that underpins the lower limits to benchmark prices, the consultancy explains.

While the highest-cost producers in South Africa typically represent the downward barrier to benchmark prices, periods of more significant oversupply have seen the benchmark base set by South Africa’s mid-cost plants.

In these times, Roskill says, the highest-cost producers become uneconomical and at risk of closure, while, in times of tighter supply, the benchmark tracks a healthy premium above the highest-cost South African producers, as was the case over the 2017 and 2018 demand surge and has again been the case in the second quarter of this year.

China has, however, continued to increase its dominance in the ferrochrome industry since 2012, while South African ferrochrome producers face ongoing headwinds from a lack of reliable energy supply and rising electricity tariffs in the country.

Unlike the benchmark price, the Chinese ferrochrome tender price fluctuates between China’s lowest-cost producers, in Mongolia, and China’s highest-cost producers, in southern China.

Roskill says that with Inner Mongolia representing the largest ferrochrome hub in China and the location of ongoing capacity investments, the lower-cost Chinese operations have taken a growing role in setting the price trends, with the market being healthily supplied.

The downward pressure on prices from supply growth in Inner Mongolia has seen the premium of the European benchmark widen considerably over the last decade and more, the consultancy notes.

It adds that, with the Chinese tender price having declined month-on-month since March this year, “the question remains as to what the benchmark level will be for the third quarter and beyond”.

Roskill says there have been several coinciding trends that underpin the fundamentals of the ferrochrome industry and its price, with key points including that demand recovery is already “well on its way”, following the worst of the Covid-19 impacts, with record stainless steel levels in China supporting growth to record demand this year.

Additionally, at the end of 2020 and in the first quarter of this year, demand was exaggerated by restocking of low inventories at smelters and stainless steel mills. Ferrochrome production costs have also surged, with the rise in oil, energy and reductants costs, as well as surging freight rates impacting on the cost of ores reaching Chinese ferrochrome furnaces.

And lastly, Roskill says that Inner Mongolia’s government has initiated the closure of smaller less efficient furnaces as part of China’s fourteenth Five-Year Plan targeting high-energy consuming industries.