Ferrochrome is one of those raw materials consumed in the steel making industry that has no futures exchange market and, compared to say nickel, limited speculative activity. So for once we can focus more on the supply and demand fundamentals rather than worry about the impact of ETF’s, financial hedging activities, or forward dated squeezes.
Demand is driven principally by consumption in the stainless market. Stainless demand has been recovering steadily and although some mills are going through a seasonal Q3 repair and maintenance program that has softened demand temporarily most analysts expect the market to continue with solid single digit growth later this year and through 2011. HSBC in a recent note said they see 2011 stainless steel and by extension ferrochrome demand to grow by 8-10% in 2011 and by 6% in 2012. Both stainless and non stainless consumption are seen likely to rise by the bank through to 2013 continuing a long term trend interrupted only by the significant dip in 2008/9.
The supply side is equally supportive with 40% of supply coming from South Africa and the high consolidation in production among a few suppliers allows efficient management of supplies to maintain balance. Eskom recently announced that South Africa may be experiencing power tightness as early as 2011 and power supply will continue to be rationed until new plants start coming on-stream from 2013 onwards. Power related problems will continue to cause a lot of nervousness and put upward pressure on prices. Generally rising power costs in other locations, driven by carbon taxes, environmental controls and rising thermal coal prices will continue to support prices and put upward pressure on ferrochrome manufacturers costs.
Although a lot of capacity has been re-started this year demand has continued apace and the market has remained in deficit this year. Not only that but many expect the market to remain in deficit until 2012 maintaining high carbon ferrochrome prices at levels comparable to current prices through to the end of next year.