Ferro Alloy Prices Supported By Fundamentals

China’s ferro-alloys production has been hit by the same energy restrictions that curtailed aluminum production in the third and fourth quarters this year. A Metal-Pages report states the government had ordered many ferro-alloys producers to shut down in the last few months to meet its energy saving targets. However, the National Development and Reform Commission, the country’s top planning body, said the targets for the period of “11th Five-Year Plan have been achieved in advance. “This could be a sign that power rationing on the ferro-alloys industry will be eased in the following months, said an industry source.

A Bloomberg report suggests Chinese stainless steel production may rise 13 percent next year and Alloy Metals & Steel Market Research is predicting a 4.8 percent increase globally. Worldwide stainless steel production in 2009 was only 2.4 percent and crude steel 97.6 percent of total steel production, according to industry analyst Heinz Pariser. Analysts expect stainless steel demand to recover faster than that for crude steel, where government spending and construction activity have stalled. Demand trends for stainless steel are different from crude steel. Stainless steel is used extensively in consumer-related applications like cutlery, sinks and household appliances, while crude steel’s biggest customers are in infrastructure and construction. Even so, crude steel production is likely to rise on resurgent manufacturing activity in northern Europe and the USA; even if China’s growth rates cool, they will remain positive.

Ferro-alloy prices are generally expected to be supported not just by demand but by rising power costs. Thermal coal prices have been rising and are expected to rise further next year as we wrote recently, and even on current coal prices, some major producers like South Africa are facing rising costs. South Africa’s state power producer Eskom was allowed 25 percent tariff hikes in 2010, 2011 and 2012 by the regulator in February, and the utility has also warned of potential power outages from next year, until the first new large-scale generation plants come on stream. South African power is no longer cheaper than Russia’s or Ukraine’s and is 30 percent more expensive than even in Colorado.

Steel and stainless steel producers alike are caught between the proverbial rock and a hard place, with rising raw material costs but insufficient capacity utilization to raise prices for finished steel.

–Stuart Burns

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