Ferro Chrome on the Rise!

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The papers are all worrying about the power shortages being experienced in South Africa and reporting with various levels of alarm the likely impact on the price of precious metals, base metals, Ferro alloys and the stock of companies producing these materials. The reality is the recent outages in South Africa were a disaster waiting to happen. Excessive rain has made the coal reserves unusable at the plants of some of South African state power producer Eskom and power plants have been idled or on reduced production while the country struggles to share what is available.

Mines and metal smelting works have been closed this week and a limited number look set to resume working as agreements are reached with Eskom on what power it can reliably provide. The reality is this is a problem many years in the making as South Africa has failed to tell the whole story over major new power plant investment and infrastructure upgrades. It is no surprise therefore that Eskom says it will be 2012 before full service can be reliably resumed.

In the process two things have happened to the Ferro Chrome market, already tight from low inventories in Europe and the USA and driven by a strong world market for 400 series high chrome Stainless Steels. The first is simply that supplies will be disrupted. South Africa is home to 45% of the world’s Ferro Chrome production and the source for more than 50% of US consumption. Producers are gradually resuming production at 80-90% of normal capacity, but even so a reduction of even 10% will equate to a 4% reduction in world supply or 5% of US consumption ” significant.

As a consequence the second effect you will not be surprised to hear is the spot price has jumped to over $2/lb for European deliveries of High Carbon and to mid 1.70’s in the US. Expect this to remain firm. Supplies will remain tight as merchants are not able to rebuild inventories and take advantage of the situation to raise prices. The higher spot price will encourage chrome suppliers to push for higher prices when they negotiate new contracts underpinning the current inflated prices and making it difficult for producers to lower prices even if the supply-demand situation moves back into balance in a month or two. Driven by the same fundamentals, Ferro Vanadium is also rising strongly, up over 20% since December it is expected to exceed $50/kg in Europe next week ($23/lb) with some optimistic traders talking it even higher.

If you can still access reasonably priced material now, do so and lock in for the coming months. By the summer supply tightness may have eased and a less volatile pricing environment will allow the market to more clearly see where the medium term trend is heading. Demand from the stainless producers is currently strong but even though they are coming out with bullish predictions for 2008 we cannot see growth in the market when the USA, EU and Japan are staring a recession in the face. Demand should slacken as the year unfolds and with it the metal shortage that has created price volatility.

–Stuart Burns

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