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Tide turning after price famine in steel alloying agents

By Anthony Poole

July 17, 2009 - Looking at the roller-coaster fortunes of the steel industry over the last year, it comes as no surprise to those supplying steelmakers with raw materials that their own destinies have been turned upside down by the financial turmoil of the last eight months.

Now suppliers are seeing prices turn around on some alloys, as the supply chains have diminished, following dramatic cuts in production and as steel mills have worked through raw materials inventories, getting them down to more manageable levels.

Many have gone from feast to famine, with the price of the commodities they produce or supply crashing to near record lows after seeing record highs in the first half of 2008.

While the cost of alloying agents represents a relatively small proportion of the raw material costs for carbon steelmakers -- compared with iron ore, coke and energy costs -- steel companies have been actively engaged in delaying the deliveries of alloys purchased under long-term contracts and, in some cases, suppliers and customers have been unable to come to an amicable agreement, resulting in litigation.

Traders, suppliers and steelmakers broadly argue that demand for alloying agents by steelmakers is roughly half of what it was a year ago, when the world's carbon steel producers were running flat out and producing record volumes of steel.

However, the apparent demand from the suppliers' viewpoint has often appeared lower, because steel mills have had huge inventories, carried over at the end of last year, to work off. In many cases steel mills are still working off those inventories.

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In response, producers of key ferroalloys have cut production dramatically and the impact is beginning to be felt in the supply chain, resulting in prices for some alloys bottoming out and even rising incrementally since the beginning of May.

In the US, one of the most aggressive ferroalloy price increases since the end of April has been seen in ferrosilicon, largely because the market is so heavily dependent on imports, with China, alone, normally responsible for supplying half of the US market, typically shipping around 125,000 metric tons a year.

In the first four months of this year, ferrosilicon imports are less than 10,000 mt. (See chart: Platts US ferrosilicon, cents/lb, FOB Pittsburgh)

Anecdotal evidence from a warehousing operator in the Pittsburgh area confirms this trend on imports. In the month of April, this operator handled just two barges of ferroalloys compared with a normal monthly volume of around 50 barges.

At the same time, there is evidence that some of the US mills have worked off large inventories of ferrosilicon and have been in the market securing supplies.

According to traders, this has meant that suppliers have been able to gradually sell off some of their large inventories, albeit at a loss. With little or no replacement material coming into the country, there is upward pressure on the price, even though there is scant evidence that underlying consumption by the steel mills has improved discernibly in the second quarter compared with the first.

Most ferrosilicon consumption is in flat-rolled steel, whose fortunes are too enmeshed with the crippled automotive industry. While there have been increases in US crude steel production in May and June, most of the increases have not been in the flat-rolled sector.

The price of some alloying agents have given some indication of likely moves in steel prices for certain grades of steel.

For instance, a look at a chart of the Platts US high-carbon ferromanganese price plotted with steel rebar prices shows strong correleation, with ferromanganese, moving slightly in advance of rebar, in both directions, despite there being no obvious metallurgical links between the two. (See chart: Platts US high-carbon ferromanganese (cents/lb), FOB Pittsburgh)

Ferromanganese typically goes into flat-rolled steel, whereas producers of rebar and long-products, or constructional steels, obtain their manganese units from silicomanganese.

A similar correlation exists between the Platts high-carbon ferromanganese price and the Platts US hot-rolled coil steel price, ex-works, Indiana, but it is not quite as close as the ferromanganese/rebar correlation.

A look at the price charts for ferrovanadium for the Platts European and US prices shows as much about steel mills' buying habits as it does about the collapse in demand seen in the last quarter of 2008.

Going back to 2004, when ferrovanadium prices soared in the second quarter on strong demand and a supply squeeze, steel mills began to substitute with alternatives, such as ferroniobium.

In the US, prices peaked at around $60/lb but fell away quickly. Most mills put almost all of their purchases on long-term contracts on either formulas or fixed prices.

In 2007, ferrovanadium spot prices showed little movement and several steel mills decided that, in 2008, they would take their chances on the spot market.

South Africa is the world's biggest supplier of vanadium and in early February 2008, the South African power crisis ignited the market as major electricity consumers, including mines and metallurgical facilities, endured a compulsory 10% power shedding move by the country's sole, state-owned electricity provider Eskom.

Ferrovanadium prices soared as steel mills panicked and rushed to the market to secure supplies.

Again, this resulted in a rapid spike in prices and forced several mills to take out contracts for the remainder of the year, resulting in minimal liquidity on the spot market for the remainder of 2008.

Then demand and prices collapsed in the last quarter of the year.

Mills carried huge inventories over into the first quarter of 2009 and prices collapsed further in the first quarter as supplies in the supply chain began to thin out, due to the large cutbacks in production by the main mining companies.

Ferrochrome prices have also shown a sharp rebound of late, although its fortunes are more closely linked to stainless steel.

Demand in the stainless steel sector fell long before the collapse seen in carbon steel.

As a result, ferrochrome prices began to fall from record highs seen in May 2008, although the decline was incremental until the last quarter of 2008, when the market collapsed. (See chart: Platts US high-carbon ferrochrome, $/lt, FOB Pittsburgh)

The major ferrochrome producers in South Africa -- the world's biggest producer -- and in Kazakhstan were quick to respond with massive production cuts.

Xstrata Merafe, the world's biggest producer of charge chrome, cut production by 76% in the first quarter of this year compared with the corresponding 2008 quarter.

The joint venture between Xstrata and Merafe Resources had 17 out of 20 furnaces, equivalent to around 80% of its production capacity, out of action throughout Q1.

In March, Merafe Resources estimated that the world's ferrochrome industry had cut production by around two-thirds in response to the slump in demand.

It said that in the first half of 2008, global ferrochrome production averaged 2 million mt/quarter, which was up 6% over the corresponding period, but that output had fallen significantly in the first quarter of this year.

Samancor Chrome, South Africa's second largest producer suspended all production in the first quarter of this year.

Meanwhile, Eurasian Natural Resources Corporation, the largest producer in Kazakhstan, cut its output by 34.1% in Q1 2009 compared with Q1 2008.

While most of the recent price increases in ferrochrome have been attributed to the squeeze on the supply side, there are indications in parts of Europe and in Japan that stainless steel production is increasing after a recovery in orders.

However, the rise in orders could be attributable to an increase in nickel prices and service centers and distributors taking advantage of the alloy surcharge mechanism.

With the two-months time lag, the average nickel and ferrochrome price for June will not be reflected in surcharges until August.

With the June average likely to be above that for May, orders for July delivery are likely to be at a lower price compared with those for August shipment.

Molybdenum oxide and ferromolybdenum have seen a strong recovery in price from lows seen in late April. This has been due largely to strong Chinese buying and the fact the county became a net import of oxide at the end of 2008. (See chart: Platts Dealer Moly Oxide weekly, $/lb)

Following a collapse in price in the fourth quarter of 2008, China's fragmented and inefficient pure molybdenum mines could not compete and stopped producing.

This resulted in domestic moly oxide prices rising above those in Europe and North and South America, triggering an arbitrage between the West and China, which saw strong shipments of oxide to China.

US/Canadian pure molybdenum producer, Thompson Creek, said that 25% of its sales in the first quarter of this year were to China.

And traders believe that most of the remaining 75% of its sales went indirectly to China through European traders.

European and US traders, saddled with huge inventories after the collapse in demand among European and US stainless and carbon steel producers, took advantage of the price arbitrage to sell out their inventories, albeit at substantial losses, with no prospect of any recovery in demand in the West.

In the US, one laggard in the recent increase in ferroalloy prices is silicomanganese. This is largely due to the massive inventories in the hands of the two main producers: Eramet Marietta and Felman Production.

Felman restarted its largest silicomangaese furnace in late January, with a capacity of 180 mt, working alongside its two smaller furnaces, producing 90 mt/day each.

The larger furnace had been besieged with technical problems for over two years, meaning that Felman was unable to cash in when ferroalloys prices were much higher in the first half of last year.

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