The Ferro Silicon market has gone through some rapid price escalation over the last 12 months, but finally appears to be drawing breath. To understand what drives the price does not require any great insight. Ferro Silicon is produced from silica (usually a form of sand), coke, a source of iron (such as scrap or furnace metallics) and of course a lot of power. Larger electric arc furnaces are used to make higher Silicon content FeSi of about 15% and up. On the demand side most FeSi is used in the steel industry for a number of applications, including alloying in a wide range of iron based materials and deoxidizing, in addition to the production of magnesium from dolomite via the Pidgeon process (that’s the inventor not the bird!). Steel production has undergone huge growth these last few years and is still growing globally at a robust rate. So with rising input costs in the form of coke and energy prices, and rising demand from the steel sector it is no surprise FeSi prices have risen 50% in the last year.
Author Archives: Stuart Burns
Ever heard of Indium? Me neither. Well, not entirely true, I had heard of it but never taken much interest. According to Wikipedia it is a soft white rare metal, similar to aluminum or gallium and produced as a by-product of zinc. And therein lies the problem. Indium is the magic ingredient in making LCD screens, demand for which is defying a downturn in western consumer markets and growing at 25-30% per annum. Indium was plentiful a year or so back as zinc production boomed and new mines were opened up. But with the collapse of the zinc price many mines have scaled back or even closed and with them so has the availability of Indium. In addition, the largest producer China (who else) is stockpiling material, further restricting availability and pushing up the price. At $ 650-700/ton Indium cannot be said to be expensive, and the small amount required in each LCD screen means at approximately $3/screen manufacturers can afford to pay a lot more for the metal without it seriously impacting the cost of production. So with rising demand, dwindling supply and a relatively cost blind consuming industry it is no surprise funds are springing up to invest in Indium stocks. Investors are looking for $ 1,000/ton this year and higher, seems like something of a one way bet.
- Sourcing Strategies
Have you noticed as the summer vacation period approaches the level of activity tends to gradually decline? Maybe this week is worse because we have a (well deserved!) July 4 Friday coming up and the prospect of a long weekend. It’s times like this when business is a little slack that good sourcing practitioners take the opportunity to re visit those to-do’s that have been gathering dust for the last few months. We thought a few reminders would not go amiss. Read more
We just love it when a developing technology opens up a new demand for metals. Wind power cannot be said to be new, but advances in technology are rapidly making wind power a viable alternative to conventional power generation.
The critical point will come, according to an Economist report this week, when a carbon tax is levied on coal fired power stations. Even the industry widely believes this will happen, as witnessed by the dozens of new coal fired power plants stuck in the project stage pending a ruling on how much and when. Read more
There has been much talk about decoupling in the economic press this last year or so. The story goes something like this: even as the western economies slide into a period of stagnation or worse recession the emerging markets will continue to power ahead fuelled by massive infrastructure investment and domestic consumption. So far, so good; the US, Japan and western Europe have indeed been experiencing a difficult time these last 12 months and share prices have reflected this as investors have realized growth prospects are limited in the short to medium term. Meanwhile Asia, South America and Russia appear to have continued to achieve rapid growth rates between 6 and 12% year over year.
If a recent survey by Merrill Lynch is correct that tide has turned and investors, often those with their eyes focused most firmly into the medium term, have concluded run away inflation is for the emerging markets what the credit crunch was for the industrialized markets. The exodus from any emerging market that is reliant on imported oil, minerals and food has been dramatic as investors view inflation as being out of control. So if there is a massive flight of capital out of emerging bourses where has it gone – Europe? No, the 204 Fund managers interviewed by Merrill Lynch believe Europe is in for a tough time as the ultra hawkish ECB raises rates even as growth slows.
Apparently the smart money is on the USA, re-emerging as a safe haven where trusted institutions command a premium. Manufacturing has proved to be surprisingly robust in the face of high oil prices, a dramatic fall in construction and a tightening of credit. On average the fund managers reported themselves a net 23% overweight on US equities, the highest level since 2001, and there they intend to stay.
- Supply & Demand
The high price of oil is spurring demand for more fuel efficient engines. As airline accounts slide rapidly into the red, they demand both engine upgrades and new aircraft with engines that consume less fuel per passenger mile. Consequently, Rolls Royce and General Electric are drawing on military technology and using exotic minor metals like Rhenium to introduce super alloys that can run at higher temperatures and in the process use less fuel. As a result, Rhenium prices have soared to $11,250 a kilogram, more than double last year’s level and up from about $1,000 in early 2006. Rhenium is often obtained as a by-product of molybdenum production, with supplies coming from Chile and Kazakstan there is the possibility of supply disruptions and further increases in price. Chromium and cobalt have also been affected by the same demand from engine makers. Chromium rose this month to a record of $11,000 per ton, up from about $6,800 last year and less than $4,000 in 2000. Cobalt as we have reported previously
was at US$ 52/lb earlier this year although as we predicted prices have eased a little recently. Airlines are caught in the cross hairs between rapidly rising fuel costs, a fickle market that will shed demand if airfares rise and an uncertain economic future in terms of the global economy and demand for air travel. The one near-certainty is that fuel costs will stay high for the foreseeable future, even if the oil price drops back from $140 per barrel. So like it or not, airlines have to intensify the pace of aircraft upgrade as they struggle to remain profitable. Rhenium may have been the last naturally occuring element to be discovered but today it is certainly center stage in development of super alloys for aero engine makers.
Who would have thought the UK which sits at only fifth in the world league tables based on nominal GDP and for which manufacturing only accounts for 1/6th of national output could also hold the position of the world’s largest arms exporter in 2007? It may explain why the UK still has a robust metals distribution market; the defense industry is a large consumer of high quality metals. The UK won $10b of export orders last year giving it 33% of the world market and with it there will be a multi-billion dollar demand for specialist steels, aluminum, titanium and other exotic alloys. Even averaging over the last five years Britain is second to the USA at $53b relative to the US’s $63b and way ahead of the next placed Russia at $ 33b or France $17b. Orders were spread over a wide range of product areas too. These areas include typhoon jets for Saudi Arabia, warships for Oman and the Caribbean plus extensive joint venture engagements with US defense contractors for the US market. Despite having only the 27th largest armed forces, Britain has the second highest military expenditure in the world, due to the high reliance on expensive advanced technology. Arguably Britain is well placed to support a large domestic military industry. With the weakness of the US dollar this may represent yet another export opportunity for US manufacturers, already Britain’s largest partner in defense projects.
Driven by high prices in 2006/7, many miners poured money into new mines or expanded existing ones. Prices rocketed as the world market moved into deficit, but galvanized and alloying demand slackened just as new mines came on stream. As a result, the market went into over supply last year and prices have come steadily down in response. CBH Resources has recently spent $85m developing their Endeavour lode in eastern Australia, boosting production from 1.05m tons this year to 1.3m tons next year whilst at the same time reducing man power by 33%. The net result will be a much lower cost per ton of product and the ability to ride out the down turn in the market. Brave but prudent, one may say if prices stay permanently low, but the belief by some in the market is prices will rise again in the medium term. BMO Capital Markets predicts the prices will bottom at around $.85/lb through 2009 even as production rises at 9% this year and 7% in 2009. They say that prices will be supported by high Capex and energy costs. That may indeed limit the ability of some producers to follow the market down but the reality is there are high and low cost producers — so in a period of over supply as we will have for the next few years, the price will be set by the low cost producers who can still supply as prices decline. Unless there is a dramatic pick up in the galvanized steel market, we can’t see Zinc prices bouncing back anytime soon. Indeed, the next move may be further down.
Last week we read of the explosion at Apache’s massive gas handling plant at Veranus Island about 60 miles off Australia’s northwest coast. The disruption to critical gas supplies will take four weeks to bring back on stream and meanwhile deprive numerous metal processing and mining operations of energy supplies when they are all operating at maximum capacity to meet demand. Then this week, BHP was forced to close down the furnace at its Kalgoorlie nickel smelter nearly a year early because it has become unsafe. The furnace has been running flat out to meet demand and the strain has taken its toll, the next major maintenance program was not planned for another year from now. The closure will halt production at BHP’s Kwinana refinery for at least four months and cut global supply by almost 2%. It is estimated the shutdown of Kwinana will cut BHP’s nickel sales by 28,000 mt over the next 12 months, total sales in the year to June 2007 were about 101,000 mt from Kwinana. BHP’s share price fell 4.4% while nickel prices jumped nearly 6% this week to US$24,585/mt, before easing yesterday. Traders in Sydney have commented they see the price going much higher and wouldn’t sell stocks under US$ 25,000/mt.
So what’s the reality — is nickel heading for another spike driven by supply side issues? Our take: no. The nickel price has drifted off from a record high of US$51,800/mt a year ago due to falling demand from the stainless steel industry that takes some 75% of production and new production coming on stream which has pushed the market into a sizable surplus. The problems at Kalgoorlie are not good news for BHP or for the Kiwana refineries contract clients but the market as a whole will be able to meet the shortfall.
Mr Agarwal would probably like to think so and may yet prove to be. Having established his largely non ferrous metals focussed industrial group Vedanta Resources in the UK via a London listing and expanded internationally into Africa and more recently the USA (his Sterlite subsidiary purchased the assets of Asarco Copper for $ 2.6b following that company’s liquidation) Mr Agarwal can be said to be sitting on a global metals business valued at some $6b. Interestingly he is now turning his attention back to his roots with plans for investments of up to $20b in non ferrous metals mining and refining operations and power plants.
Demand for Copper in India is growing 8-10% a year, aluminum 10-12% and zinc 13-14%, Vedanta said. India produces 89 minerals and is one of the world’s most resource-rich countries, ranking third in the production of coal, fourth in iron ore, sixth in Bauxite ” used to produce aluminum ” and 10th in refined aluminum itself. However, due to insufficient investments in mining and a limited role for the private sector, less than 10% of the Indian land mass has been explored, Citigroup wrote in a recent report. Read more