The manganese ore market, after a sustained period of historically high prices, retreated to two-and-a-half year lows in the fourth quarter of 2019 amid oversupply and deteriorating downstream demand; these and other lingering themes continue to hang over the market into 2020.
Uncertainty over South African production outlook
Manganese ore suppliers have long been calling for South African production cuts to curb oversupply amid soaring exports, which have reached 1.5-1.9 million tonnes per month recently. As of December 20, 2019, no South African production cuts had been officially announced and miners are locked into maintaining the bulk of their exports through their “take or pay” contracts to transport material by rail.
Volumes offered for January have been cut, which helped lift prices in early December. Fastmarkets’ manganese ore index, 37% Mn, cif Tianjin climbed 3 cents week on week to $3.78 per dry metric tonne unit (dmtu) on December 20, having started the month at $3.30 per dmtu.
Most market participants attributed this to sales strategy, not lower output. Still, reducing sales without cutting production is a risky strategy.
“You can’t assume miners will cut production; some will only cut sales. But if you keep producing but sell less you transfer your cash to stock,” a miner told Fastmarkets.
Miners can cut volumes transported in trucks without penalty. In theory, they could cut production by 20-30% in line with the volume some of them transport by road, which some sources expect to see.
“We are definitely seeing trucking stopped, while rail will continue at the current rate. It is too soon to tell whether miners are cutting production but large ones truck a good 20-30% of their exports and can’t simply mine and stockpile so I anticipate production cuts,” a second mining source said.
But most miners are still trucking. While one major South African producer is understood to have cut some production, amounting to 7-10% of total South African monthly exports, there has been little or no reduction from others.
“There is a bit less material going to market but that’s more of a sales strategy. Lots of producers are still trucking. I expect only about 7% of exports will be reduced,” another source told Fastmarkets.
Price risk remains amid over-optimism
Some South African miners - and miners of less popular origins - continue to see lucrative medium-term opportunities for manganese ore prices and are still being deterred from cutting production.
“Due to the recent price rise - which was not demand-driven, but sentiment-driven - I am already seeing low grade, [non-South African] material that was out of the market being offered again, so some people definitely think there is going to be a quick recovery,” one supplier source said.
If such optimism continues, it could fuel oversupply, so the risk of a downward correction will remain, some sources have warned. This would eventually mean producers are forced to cut production further along the line, rather than making that move voluntarily today.
“People are hopeful for a price recovery and are producing too much, which will contribute to the stock build. This over-optimism could lead to quite a significant price correction and should force production cuts,” another source told Fastmarkets.
Frozen stocks in China
Rising stocks in China have a been a major feature of the manganese ore market this year.
Manganese ore inventories in Chinese main ports were assessed by Fastmarkets at 4.4-4.44 million tonnes on December 16, compared with 2.9-3.02 million tonnes at the start of the year.
But much of this stock is unavailable for trade because it was bought at earlier high prices and can neither be sold nor consumed without the position-holder recording a loss on their books, creating “frozen stocks” in the ports.
The sharpest price falls of 2019 occurred in October, during which the price of South African semi carbonate ore dropped to $3.50 per dmtu from $4.66 per dmtu. Material that arrived in October had been purchased six to eight weeks earlier and lost as much as 20% of its value on water. To take ownership of their cargoes, traders who pay financial entities deposits to open letters of credit (LCs) on their behalf must pay upfront deposits of 5-20% of the value of the cargo and pay the balance on arrival. Steep price falls means it is not worth taking ownership, leaving the financial entities holding cargo worth significantly less than they paid. Although traders technically have three months to pay for the material in full, such deadlines are often waived when the financial entity holding the material knows the trader will make a loss and struggle to repay the full amount.
“The companies that help open LCs want their money back and tend to give their clients more time to handle frozen stocks. They could sell off cargoes themselves if their clients could not repay loans on time, but the ore price is still much lower than the purchase price of the cargoes, so they would inevitably shoulder losses and it seems better to allow more time,” a Chinese market participant explained.
As a result, frozen stocks will stay in place, leaving inventories high but distorting the picture of how much material is actually available.
Smelters will keep adjusting purchasing according to market conditions
Varying purchasing habits among smelters will also continue while market conditions fluctuate. Smelters purchase five to 10 days’ or even as little as five to seven days’ ore for consumption when they expect ore prices to slide. They increase volumes when they expect price increases, or when they need to stock up for a major holiday.
When smelters only buy a few days’ worth of ore feed, it can create an impression of artificially high port stocks, when in fact low stocks at smelters would actually offset this. And a sudden flurry of buying by smelters that have unusually low stocks at their works could make a consumption increase seem more dramatic if they buy suddenly and simultaneously from ports. This effect is likely to continue into 2020, maintaining another factor that distorts the picture painted by port inventories.
Ore from Ghana will continue to provide feed for alloy market
Chinese imports from Ghana continued to soar in 2019, even exceeding Australian imports in the first half of the year.
China imported 2.58 million tonnes of ore from Ghana in the January-June this year, up from 1.26 million tonnes in the same period of 2018. Australian imports rose to 2.39 million tonnes from 2.27 million tonnes over the same period.
Ghanaian ore was traditionally destined for the electrolytic manganese metal market, much of it as captive supply for China's Ningxia Tianyuan Manganese Industry Co, the world’s largest manganese metal producer and owner of Ghana Manganese through is Jersey-headquartered Consmin subsidiary.
But the surge of supply from Ghana has spilt over into the raw material market for manganese alloy production, creating greater competition among established suppliers to that market.
“Total Ghana supply far exceeds the volume the electrolytic manganese metal market can consume. That’s why you see so much of it,” a market source told Fastmarkets.
While the ore from Ghana is a small proportion of stock in the main Chinese ports where alloy raw material feed sits, the increased competition will continue.