DAVIES ON ORES: South African manganese shipments flush out the market’s top concerns

Soaring manganese ore shipments from South Africa have spooked market participants into doubting the sustainability of recent price rises as they balance the threat of a new stock build against recent strong demand from China and India.

Metal Bulletin’s 37% manganese ore index, which tracks fob-based cargoes from South Africa, rose 13 cents to $4.23 per dmtu on Friday July 20.

Metal Bulletin’s 44% manganese ore index, cif Tianjin, rose 8 cents to $6.10 per dmtu.

The price increase was fuelled by a flurry of demand early last week after silico-manganese futures prices reached a 2017 high of 7,224 yuan ($1,069) per tonne.

By the end of the week, the futures contract had backed off from its highs but remained up on the previous week.

Market sources, including suppliers, have cited a number of reasons why prices could be vulnerable to a downward correction in the near future.

For months, there has been widespread underlying scepticism over the state of demand, which comes from the knowledge that much of it is driven by speculation.

Traders in China have been able, over the past year or so, to build huge positions quickly, squeeze inventories and raise prices to make large profits. Such rallies can easily unwind, so too can those fuelled by the highly volatile silico-manganese futures prices.

These concerns seem ever present but there are a few other factors that have been looming closer in recent weeks, even as suppliers take comfort in overall healthier demand year-on-year.

South African exports
Perhaps most importantly, sources say the sharp increase in exports from South Africa over the first half of 2017 is bound to lead to oversupply and high inventories in China, which undermine sentiment and prices.

“Exports from South Africa have been huge. Last month they reached 1.5 million tonnes, which is 18 million tonnes annualised. It’s way too much,” a market source told Metal Bulletin.

Some producers have long since been warning of the implications of what they deem to be a lack of supply discipline among fellow miners in South Africa.

“Everyone is just pumping out the volumes,” one miner lamented.

Strong demand from India in recent weeks has faded, meaning the excess material will be more visible in the weeks to come, sources added.

“In my view, India is no longer there to support the market. All the excess will go to China and stocks will build,” a second market source told Metal Bulletin.

“I have seen exceptionally strong consumer demand, which is good, but I don’t think the manganese alloy smelters are as well informed as traders are on what is coming to China [in terms of volume]. We will see a change to the downside soon but not necessarily a crash. The problem comes when demand decreases when there are high stocks. At the moment no one cares about that because there is good demand,” the source added.

Frozen stocks
Also nagging at producers – or anyone with a long position – is the prospect of the mass liquidation of China’s “frozen stocks” which have been locked up for months because their owners have been reluctant to part with them at loss-making prices.

In their eagerness to cover losses, a number of position-holders in China continued to buy after prices dropped, to “average out” the total purchase cost of their complete position.

Much of that stock was bought as high as $6-9 per dmtu on a cif basis – depending on the grade – and averaged down when South African prices were closer to $2.95 cif and high-grade prices were closer to $4 cif.

At today’s prices, releasing it starts to become profitable, sources say.

“Frozen stocks have not been liquidated but they are no longer frozen. At today’s market price and average cost of stock – taking into account that it has been averaged down by cheap purchasing – there should be no more losses and probably even a small profit,” one trader told Metal Bulletin.

Mind the gap
Finally, the price gap between low- and high-grade manganese ore has been growing in recent weeks.

Metal Bulletin has observed a trend in which a widening of the gap often precedes a price fall and a narrowing often precedes a price rise.

Today, low-grade material is worth just 69% of the price of high grade, compared with 79% on May 26 just before prices jumped and 74% on June 16 just before they dropped again.

Usually, a marked movement in the price following a significant change in the size of the gap takes one to three weeks.

“Remember that thing about the gap? It is time to revisit it,” a producer told Metal Bulletin.

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