COMMENT: Could China’s ferro-chrome futures be a game-changer?

The Shanghai Futures Exchange’s plans to list ferro-chrome futures, potentially this year, will bring welcomed hedging opportunities and may weaken the dominance of China’s stainless steel mills in the ore and alloy markets, participants told Fastmarkets.

While no definite date or specifications of the ferro-chrome futures have been announced, Fastmarkets asked participants what changes these contracts might bring to their businesses and if they could be a game-changer in the traditional pricing mechanism for the chrome ore and ferro-chrome markets.

Indeed, many ferro-chrome producer sources in China hold positive expectations because these financial derivatives would provide hedging opportunities to better control their production costs, especially in purchasing seaborne chrome ore.

“Smelters tend to accept high-priced seaborne chrome ore when they are bullish about the alloy market. But it sometimes happens that when chrome ore arrives in one or two months’ time, alloy prices have already fallen sharply. The expensive raw material costs and lower alloy prices therefore can cause us severe losses,” a ferro-chrome producer source said.

“But with the futures market, smelters can, under the same scenario, take a short-selling position to lock in the current alloy prices and purchase seaborne chrome ore, and rest assured that they won’t incur major losses even if the alloy market subsequently collapses,” he added.

Likewise, the same hedging approach can also be applied by downstream buyers of ferro-chrome to eliminate uncertainty, therefore allowing them to make purchasing decisions more confidently, market participants said.

Fastmarkets’ price assessment for ferro-chrome spot 6-8% C, basis 50% Cr, ddp China stood at 8,700-9,000 yuan ($1,336-1,382) per tonne on March 16, unchanged from a week earlier. The price had been as low as 6,050-6,300 yuan per tonne on January 5, the first assessment of 2021.

In addition to risk management, a futures contract would benefit Chinese ferro-chrome smelters, who currently lack negotiating power with the large stainless steel producers in the country, by bringing them more potential buyers such as large traders and financial sector participants, according to Fastmarkets senior analyst Robert Cartman.

“In general, a futures contract also improves pricing transparency and reduces the possibility for collusion on prices in an industry dominated by a small number of either large buyers or large sellers,” Cartman said.

This view was shared by Chinese ferro-chrome producer sources, who acknowledged the benefits afforded by having a wider selection of buyers.

“With around 80% of ferro-chrome in the market consumed by stainless steel mills, smelters are heavily dependent on the revenue generated from those buyers. Therefore, more places to sell our material would definitely be beneficial for us, especially when the tender prices are not satisfactory,” a second ferro-chrome producer source said.

Major stainless steel mills typically set their monthly ferro-chrome tender prices after little negotiation with producers. And their absolute power in price-setting through tenders may be diluted once ferro-chrome producers are capable of generating cash flow from elsewhere, Fastmarkets understands.

But market participants have also identified several pitfalls associated with ferro-chrome futures.

One concern is that a futures market may empower those mills with solid financial backgrounds to grow their influence in the alloy market.

“Futures is always a game of capital,” a mill source said. “Major stainless steel mills like Tsingshan [Group] with an absolute advantage of capital over any existing ferro-chrome smelter will become the ultimate beneficiary.”

“Unlike ferro-chrome producers who mainly sell to the market, mills can be more flexible in their procurement strategies. For instance, they can speculate in the futures market and purchase or sell in the spot market at the same time,” he added.

Further uncertainty surrounds how the listing of ferro-chrome futures will affect the upstream chrome ore market.

To answer this, some market sources pointed to the influence silico-manganese futures has had on the manganese ore market.

“Overall the emergence of futures did not fundamentally change the way in which manganese ore is priced, but it has become a key driver of market sentiment affecting buyers’ decisions, and therefore has weakened miners’ power in price-setting to some extent,” a manganese and chrome ore trader said.

Despite its influence on market sentiment, there is little-to-no difference in measured volatility between commodities that are traded on futures markets and those that are not over the long term, Cartman said.

“Chrome itself is a good example of this, with prices often showing considerable volatility without the presence of a futures market. Much more important are the underlying fundamentals for any given commodity. In this sense, dynamics such as a potential export tax on chrome ores from South Africa, or the growth of production in Zimbabwe, are given much more weight by us when we put together our price forecasts,” he added.

Fastmarkets’ chrome ore South Africa UG2 concentrates index, basis 42%, cif China settled at $172 per tonne on March 16, down by $8 per tonne (4.4%) from $180 per tonne a week earlier. The index has risen steadily since the beginning of the year, when it was calculated at $140 per tonne on January 5.

Overseas repercussions
Some ferro-chrome suppliers in the international market downplayed the impact that ferro-chrome futures can have on market prices.

“If it allows for speculation in ferro-chrome then that’s far removed from the demand/consumption of chrome ore that drives what we do on a day-to-day basis,” an international chrome and manganese ore trader said.

“Ultimately the large tender pricing will still be decided by the large steel mills through negotiations with the ferro-chrome producers. This will not be removed simply due to the fact that there is a futures contract,” he added.

Some international smelters allied themselves with their Chinese counterparts.

“I don’t think Indian producers will take much of a position initially,” an India-based ferro-chrome producer source said. “But surely if it is a good thing for Chinese ferro-chrome producers, it may well benefit us given we export most of our material on a spot basis based on domestic prices in China.”

Given that much uncertainty still remains, most market participants have decided to take watch-and-see approach.

“The importance of it [the SHFE’s listing of ferro-chrome futures] will depend on how much depth it will have, what volumes will be involved, how much liquidity there will be,” a fourth ferro-chrome producer source said.

“While change is always welcome, it is difficult to judge the reaction of stainless steel mills in the Chinese market,” he added.

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