2017 REVIEW: Manganese ore ends year in typical form with fresh rally

What better way to end a year of volatility than to start another unsustainable rally to the highest prices the manganese ore market has seen since its protracted rally-and-crash cycle began?

Manganese market participants drove low-grade manganese ore deal prices to an average of $6.20 per dry metric tonne unit (dmtu), based on the latest cif offer prices, from $5.12 per dmtu at the start of December.

Metal Bulletin’s 37% manganese ore index stood at $4.97 per dmtu, fob Port Elizabeth, as of mid-December, up from $4.43 on December 1.

Metal Bulletin’s 44% manganese ore index gained one cent to stand at $6.17 per dmtu, cif Tianjin.

It is not the rally of the year in percentage terms; the steepest weekly increase came late in March when prices soared by 32%.

March was an exceptional month and one of the earliest prominent cases of Zhengzhou Commodity Exchange (ZCE)-traded futures price levels driving ore prices; a theme that has been dominating the market until the latest rally.

The market was reeling from the crash that followed the September-to-November-2016 rally in which low- and high-grade prices peaked at $7.96 per dmtu and $9.22 per dmtu respectively before crashing late in November and sliding for three-and-a-half months.

Sporadic end-user demand into 2017 left traders with plenty more opportunity to accumulate material, particularly amid limited supply discipline in South Africa.

Despite futures volatility and early warning signs that traders were starting to rebuild positions, when low grade prices hit $2.33 on March 10, most market participants did not expect that to be the floor for the year and the start of another rally.

By the time prices rebounded, rallies were viewed with such suspicion that many felt unable to enjoy the upside.

Wizened by the crash, producers in particular warned that a recovery to 2016 levels while inventories were rising in China would lead to mass liquidation of stocks that had been stuck in Chinese ports since their values dropped and that small producers would come back onstream, prompting oversupply.

Prices never returned there and the market continued to rise and fall every few weeks, driven by silico-manganese futures, trader positioning and the occasional fundamental factor such as logistical disruptions in South Africa temporarily restricting supply or soaring exports arriving in China, turning the market bearish.

Instead of mass liquidation, a new trend developed among market participants who lost money in the previous crash and decided it was better to have large, moderately undervalued positions than small seriously undervalued positions.

To make their ill-timed purchasing decisions look better on paper, those who had built positions at 2016 highs resumed buying, lowering average prices for their whole position. This artificial demand fuelled prices.

A first-half price cap of about $4.50 per dmtu for low-grade ore and $6.17 for high-grade, coupled with the practice of averaging, balanced the inevitable drawdown in stocks over the next few months. While market participants worked on averaging out their positions, the release of stocks was dependent on average prices becoming acceptable to position-holders so it was therefore gradual.

Other new practices emerged, such as traders offering premiums in downward markets to secure large volumes of material against producers’ better judgement.

Despite preferring to sell to end-users and concern about trader influence, producers pocketed the premiums to make up for the lack of direct consumer demand when stocks were high in China.

Producers struggled with a lack of end-user demand for much of 2017, reporting that they had been getting more direct inquiries from smelters toward the end of the year.

But this did not stop them pumping out material, particularly amid high prices.

Manganese ore supply hit a record of 2 million tonnes in October, largely driven by soaring South African exports.

Although there was the ever-present prospect of contract reneges and price crashes, 2017 was an unprecedented year for producer profits.

Still, 2017 ended with significant price risk. Traders have now reversed some of their earlier tactics and are paying premiums to keep purchase volumes low when buying on behalf of smelters who want limited inventories on the ground in case prices crash.

And to date, not one source has told Metal Bulletin they expect this latest run to last beyond January 2018.