Metal Bulletin reported last week that the widely-expected reduction in the third-quarter settlement is likely to be smaller than previously anticipated, due to strengthening ferro-chrome markets, particularly in China, which increasingly sets the tone for other regions.

The supply chain surrounding the benchmark is always a contentious one that can leave both ferro-chrome producers and stainless steel mills’ customers irked by the potential for the stainless steel mills to earn large margins in the middle.

The benchmark price often comes with a discount for large, loyal consumers, meaning mills can pay less than the headline price, yet pass it on in full to their own customers through their alloy surcharge systems.

Changes in the markets mean negotiations have moved on from the old, basic formula involving consumer complaints that the benchmark overshoots spot prices and producer assertions that mills should not complain because they earn back the difference - and more - through the discounts and alloy surcharges.

Discounts have shrunk dramatically in recent years and are closer to 10% today, compared with as much as 35% in 2015, according to most market sources.

The larger discounts were partly blamed for a number of ferro-chrome producers going out of business in 2015 because discounts are locked in long-term contracts and a sharp drop in the quarterly settlement leaves producers selling significantly lower than they would have expected when they signed.

Surviving producers are reluctant to revive that trend, a ferro-chrome consumer source told Metal Bulletin.

“No reliable producer is offering those wide discounts today,” the source said.

“The higher the benchmark is, the more producers can afford to offer wider discounts, but as soon as the benchmark drops again, they are stuck with the discounts,” the source added.

Meanwhile, long-standing consumer calls for parity between European benchmark and spot prices have waned over the past two years because those two markets are relatively in line and it is no longer unusual for spot prices to trade above the benchmark level.

Still, market sources predicted some familiar topics would be raised, such as consumer calls for parity between the benchmark and spot prices in China, as well as producer demands for a price that reflects rising production costs in South Africa, although consumers will argue that today’s weakening South African rand at least partly offsets that.

Calls for parity between European and Chinese prices carry some weight because the gap has been relatively wide in the past year, particularly in the second quarter.

The second quarter ferro-chrome benchmark, announced in March, stands at $1.42 per lb, including delivery.

Metal Bulletin’s price quotation for charge chrome, cif China, stood at 99 cents per lb on Friday June 22.

On the other hand, there is also a wide gap between European and Chinese stainless steel prices and this is likely to form an argument against dropping the European benchmark more in line with Chinese prices.

Metal Bulletin’s price quotation for Chinese domestic grade 304 stainless steel cold-rolled coil stood at 15,200-15,600 yuan ($2,347-2,409) per tonne on June 21, equivalent to €2,027-2,081 per tonne.

Metal Bulletin’s assessment of the European transaction price for 304 stainless steel cold-rolled sheet was significantly higher at €2,503-2,585 per tonne, fob North European ports, on June 22, although it should be noted that sheet trades at a premium of up to €100 per tonne compared with coil.

“Consumers are talking about China, China, China. But they don’t sell their steel into China. There is a large gap on stainless prices between Europe and China,” a ferro-chrome supplier told Metal Bulletin.

Consumers counter that the comparison does not tell the full story because although there is a wide gap between prices in China and in some European regions, European mills must still be competitive in certain regions. This means mills must cut their base price to have a chance of booking in those weaker markets and the alloy surcharge may not fully cover alloy purchase costs.

“We see a lot of pressure from imports into Europe. In southern Europe there are some extremely low prices and these are not covering the high purchasing cost of chrome. Mills have to lower their base price; whether it’s the left or right pocket, in the end, you don’t get the price you need,” a ferro-chrome consumer source told Metal Bulletin.

Ultimately, the third-quarter benchmark will be a forward-looking number reflecting a compromise based on producers’ and consumers’ view of prices over the next few months.

Production cuts in China, for environmental reasons, have tightened the market and bolstered prices at a good time for producers hoping for a small benchmark reduction.

Some say this refutes claims that the second-quarter price was too high and should be corrected in third-quarter talks.

“In the second quarter, people said the benchmark was too high and China was collapsing but actually, we are still in the second quarter so the benchmark does not look so bad anymore. The third quarter is looking better so we are not needing the massive correction everyone said was needed in Q2,’ a second ferro-chrome supplier told Metal Bulletin.

Most sources approached by Metal Bulletin over the past two weeks have predicted a small reduction for the third quarter, while one or two have called for a rollover.

Metal Bulletin’s ferro-chrome benchmark indicator stands at $1.42 per lb, in line with the second-quarter price.