The debate about adding ferro-chrome as an LME contract is not as far fetched as it may first sound. As Roskill advises, the stainless steel industry is by far the largest consumer of ferro-chrome. The industry is dominated by just three countries of supply – South Africa, Kazakhstan and India, with South Africa by far the largest of the three. Still those three supply over 65% of the world market and with supply so dependent on just three countries of origin and with power costs making up a large proportion of the cost of production each ton takes between 3.6 and 4.2 MWhr according to MetalBulletin the market price is highly volatile. The whole supply chain therefore operates in a market in which prices can move significantly over comparatively short periods of time. In such markets players typically work on wider margins to protect themselves in the event of price movements. The ability to hedge price risk therefore, in theory at least, offers the opportunity for cost to be lowered as the supply chain offsets its risks via hedging mechanisms.
The Reuters report last week that started the current debate was at pains to point out that no immediate plans exist. The steel billet contract started in 2008 has recently been merged from two contracts one for Mediterranean delivery one for Asian delivery into a single contract to boost volumes. Arguably although volumes are increasing significantly now it has still not reached critical mass, nor gained widespread acceptance as a hedging mechanism outside of the billet market itself. (It was hoped the steel billet contract would attract hedging business in a variety of downstream products as say aluminum and copper have for semi finished products in those metals). Cobalt and molybdenum launched this year and are a long way from becoming established, underlining that it takes considerable time to build sufficient liquidity for the industry to trust prices as being truly representative of the market. Like the chicken and egg conundrum, volume comes from trust and trust comes from volume.
Nevertheless in the same way that nickel is crucial to the stainless market so is ferro-chrome. A futures market could, in time, provide similar opportunities for producers, consumers and traders to hedge their exposure in a beneficial way. Meanwhile, the ferro-chrome market is going through a current lull in line with stainless demand and price levels, but stainless demand is expected to pick up toward the end of the year and into next as we wrote yesterday. In a private investors report this year, HSBC expected that as stainless prices rise and demand growth resumes through next year, ferro-chrome prices will likely increase before capacity enhancements begin to ease supply constraints in 2012. Stainless steel is a highly cyclical business and after several years in the doldrums looks set to grow for at least the next couple of years. With power supply likely to be a problem for the world’s largest ferro-chrome producers, prices will remain volatile at best.