Power costs, demand to propel ferrochrome market

Power costs, demand to propel ferrochrome market

[miningmx.com] -- Ferrochrome prices could rise sharply this year because of higher electricity costs in top producer South Africa and increased buying by stainless steel mills as demand recovers.

The global economic downturn saw demand crash for ferrochrome, used in stainless steel to prevent corrosion.

But as financial packages to stimulate economic growth feed through, a rise in stainless steel demand in recent weeks could snowball and result in massive ferrochrome re-stocking.

"During the second half of this year, we're going to see a cross-over where the stainless market de-stocking ends and (steel) producers start to crank up production," Jim Lennon, an analyst at Macquarie Securities, said.

"You could get a whiplash upwards in demand ... the price could move up quite sharply."

Ferrochrome traders forecast prices to rise above $1 a lb this year, well below the more than $2.50 a lb in April last year, but up from less than 70 U.S. cents a lb last month.

South African ferrochrome producers, who cut output due to the price collapse and currency movements, may be forced to make further cuts should an expected rise in power prices force production costs higher.

In South Africa, which supplies about 40-45 percent of the world's ferrochrome, state-owned electricity firm Eskom is seeking a 34 percent tariff increase to fund expansion.

Eskom, which provides 95 percent of the country's power, has been battling an electricity shortage since January last year.

"Anything to do with power costs going up has to be passed down at some point, but you won't be able to do that while the demand is so low," Virtual Metals analyst Carl Firman said.

Ferrochrome prices surged about 60 percent in the second quarter of 2008 on the back of power shortages and subsequent production shortfalls in South Africa.

Global economic growth has since nosedived, which has seen metal prices crash and widespread production cutbacks.

Since December, Xstrata, the world's biggest producer of ferrochrome, has suspended 80 percent of capacity.

Second-ranked Samancor Chrome, the world's second-largest ferrochrome producer, had a complete shutdown in December. Another leading producer, Hernic Ferrochrome, a unit of Japan's Mitsubishi Corporation, shut its four furnaces in January.

Some producers have begun to restart production.

Samancor Chairman Danko Konchar said South African ferrochrome production costs are 90 U.S. cents per lb, with power charges currently accounting for 20 percent.

"High carbon ferrochrome prices must go up this third quarter," he said. "It is only a case of how much, not if."

STEEL DEMAND

More than 90 percent of ferrochrome demand comes from stainless steel mills, where activity appears to be rising.

"The (stainless steel) trough appears to be behind us," Deutsche Bank said in a recent note.

"We are starting to see the first signs of improvement. We anticipate a large improvement in (the second half of 2009) and a return to normalized levels by 2010. Re-stocking is likely around the corner."

But not all agree that ferrochrome prices will rise or that steel markets are ready to bounce back.

"There have been noises that demand is picking up a bit in China but there are conflicting reports," said Khayyam Jahangir, an adviser at metals consultants Roskill.

"The price will increase given production costs are increasing, but this doesn't mean they will be able to pass on 100 percent of that increase...It doesn't mean those mills in China are going to accept huge price increases," he said.

About 3.4 million tonnes of ferrochrome was produced in South Africa last year, compared with a total of 8 million worldwide. Roskill forecasts a 24-25 percent fall in global production in 2009.

Jahangir said given the sharp price falls, a pick up of one or two months was to be expected and should not be overstated.

One senior manager at a stainless steel mill, which consumes more than 20,000 tonnes of ferrochrome per month, is expecting the worst.

"Ferrochrome producers are indicating big price increases for Q3. However in these difficult market conditions it will be very difficult for stainless producers to absorb," the manager, who did not want to be named, said.

"At this stage all indications are that the increases from the power supplier will be extremely high."