Energy prices remain dominant in ferro-chrome markets; reasons to be cheerful on the horizon

Rising power costs have continued to dominate headlines as 2022 begins, following a year in which they were a running theme, especially for energy-intensive industries such as ferro-alloy production

long and short steel pipes lay on ferro shop rack

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There has been a global squeeze on gas and energy supplies against a backdrop of rising demand after a cold winter last year and economic recovery from the Covid-19 pandemic, pushing wholesale prices up and causing costs to be passed on to consumers.

Towards the end of 2021 energy prices in Europe spiked again to historic highs, with newswires reporting costs across much of the continent soaring as high as €400 ($452.16) per megawatt hour (MWh), linked to rising gas costs. Nuclear plants in France – normally a net exporter of energy – also had to be taken offline after faults were found.

In Turkey, energy prices rose by as much as 125% for high-demand commercial consumers of electricity, according to newswires this month. One source said the cost had hit €350 per MWh.

The situation has been exacerbated by soaring inflation in the country; $1 cost 13.8 Turkish liras on January 12. The currency peaked at 16.40 liras against the dollar on December 20, 2021, a 19-year high, according to foreign exchange website oanda.com.

Implications for the ferro-chrome market

All this has been a source of some concern in the ferro-chrome market. A traditionally energy-intensive material to produce, even compared with other alloys, ferro-chrome production costs have risen dramatically as a result of surging energy prices.

Depending on the grade produced and the category of chrome ore used, it can take up to 4 MWh to produce 1 tonne of ferro-chrome. Assuming an energy cost of €350 per MWh - or $397.09 as per exchange rates on January 12 - the cost of production would be $1,588.36 per tonne, or 72 cents per lb, in terms of energy alone, excluding other costs such as raw materials. In Turkey, a major production hub for the alloy, that would equate to 21,893.5 liras per tonne.

In Albania, another production hub, power prices have been a similar cause for concern, especially since the country is a net importer of energy. At the same energy price and production cost in US dollars, it would cost 169,084 Albanian leks to produce a tonne of ferro-chrome.

Fastmarkets’ price assessment for ferro-chrome high carbon 6-8.5% C, basis 65-70% Cr, max 1.5% Si stood at $1.73-1.95 per lb on January 11.

Producers are now looking at what they can do to mitigate the impact of these issues; the trajectory of energy prices looks likely to continue upward, at least in the short term.

“These high energy prices will have eventually to be included in the sales price, whether in the form of surcharges, if producers see the effect as [temporary], or straight away in the price, if the effect persists and becomes structural,” a seller said.

At the moment, surcharges are already on the table.

Turkish industrial conglomerate Yildirim Group told Fastmarkets at the beginning of 2022 that it was in talks with its customers with regards to applying an energy surcharge to its ferro-chrome sales. The company produces high carbon ferro-chrome across operations at Eti Krom in Turkey, as well as Vargön Alloys in Sweden and at Tikhvin Ferroalloy in Russia.

Marketing and sales director Elif Ozturk said the increases in power costs in Turkey had led the company to begin discussions about adding a charge in order to pass some of the cost on. As discussions were ongoing, further details about how and when surcharges would be applied were unavailable at the time of writing.

“We’ve never seen such [energy] prices, but on the other hand, we need to produce to fulfil our obligations,” Ozturk said.

“We’re all in the same boat. We want customers to understand this position.”

The challenge, other sources have suggested, is in getting customers to accept these charges if they have the option to look elsewhere for material.

“It really depends on supply and demand fundamentals. From that point of view, it’s a question of whether there’s enough supply from others,” a trader said. “At the end of the day, it’s a price increase, and if customers need [material], they will pay.”

Others are looking at production cuts. Albania-based GSA has told Fastmarkets it is considering cutting production by 50% and expects to make a decision in the coming days. This would reduce output by about 2,000 tonnes a month and would need to last up to three months to allow time for furnaces to be restarted.

Similarly, Albchrome has already cut production by 50% because of energy costs, a source with knowledge of the situation said. The company, which is part of Balkan Finance Investment (Balfin) Group, has a capacity of about 50,000 tonnes per year with two furnaces, or 100,000 tpy with four.

The decarbonization agenda

Energy-related policy will continue to be a driving force, so adding surcharges to ferro-chrome sale - or otherwise raising prices - will help to stave off the short-term effects of rising production costs.

But in the longer term, the ferro-chrome industry will need to look to decarbonization. During LME Week in October last year, Fastmarkets reported that the market was facing growing pressure from downstream to decarbonize.

End users and downstream manufacturers could choose to work only with companies who make decarbonization a priority, making it even more important to do so to remain competitive.

Most of this pressure has been linked to the wider decarbonization agenda, but there are other factors at play such as the possibility that ferro-alloys, including ferro-chrome, could be brought into the European Commission’s Carbon Border Adjustment Mechanism (CBAM) at some point in the future.

Many ferro-alloys producers, including ferro-chrome producers, have already taken steps towards decarbonization.

“I think most ferro-alloys producers are now trying to reduce their carbon footprint, either by using cleaner reductants, like higher grades of coke, or by tuning the production process,” the first seller said.

“Tuning the process means using optimized solutions to consume less power,” the seller added.

Accessing cleaner, greener sources is also vital because of the quantity of energy the industry consumes.

For example, Yildirim Group president and CEO Robert Yildirim tweeted in November last year that Eti Krom has invested in solar energy production in Turkey, and that the company plans to achieve net-zero carbon emissions and “green” high carbon ferro-chrome production by 2030.

In Finland, electricity consumption at Outokumpu’s Kemi chrome mine will be almost entirely covered by wind power from the summer of 2023, following an agreement between the stainless steel producer and Nordic energy company Gasum.

Moving away from fossil fuel dependence would be a major step towards decarbonization for the industry, but switching to green energy sources may not entirely solve the cost problem or the consumption problem.

The production process for alloys would still be energy intensive and may still rely on coke-based reductants; furthermore, in some regions, such as those with climates less hospitable to wind or solar energy and where there is easier access to other sources, green energy may be more difficult and less cost-effective to source.

“It is difficult to use solar or wind energy in places like Russia or Kazakhstan, due to the harsh local weather conditions and the intermittent nature of these sources,” the first seller said. “These green sources wouldn’t necessarily offer a price advantage in these regions, because oil and gas is cheaper there, and nuclear power is vastly provided to heavy industries.”

Around the world

South Africa, another ferro-chrome production hub, has experienced various issues related to energy supply in recent years, with news reports emerging in January that Eskom, the state power provider, has said it may have to close 16,000 MW of capacity after the country rejected the company’s request to stay exempt from pollution standards on some coal-fired power stations.

There have also been ongoing difficulties linked to the pandemic, including shortages of truck drivers and unrest in the country during the summer of 2021.

In Finland - and to some extent in Sweden and Norway - nuclear power is a major source of energy so production costs have been less of an issue. Energy prices have risen, but not to the same extent as elsewhere in Europe; prices are lower in the north but higher in the south.

At the same time, Russia and Kazakhstan also have easier access to energy supplies, keeping costs lower.

Kazakhstan, however, is facing its own turmoil – violent civil unrest, sparked by soaring liquefied petroleum gas prices, persists.

The unrest caused temporary disruptions at Eurasian Resources Group’s (ERG) Donskoy Ore Mining and Processing Plant – part of Kazchrome and a major chrome ore mining plant – in the Aktobe region of the country. These have since been resolved, with production processes continuing as normal, the company said.

“The group has taken all necessary steps to avoid disruption to the normal course of business, deal with localized issues and minimize the impact of external factors on our enterprises,” ERG has said.

However, there could be other knock-on effects; internet shutdowns could affect communication with ports, potentially hampering the ability to get material out of the country, sources said.

Reasons to be cheerful

Producers of ferro-chrome still have reasons to be optimistic, despite the difficulties.

Fastmarkets’ assessments of ferro-chrome prices remained close to historic highs as 2022 began, which means it is still possible to remain profitable even at high production costs.

The quotation for ferro-chrome 0.10% C, average 65-70% Cr, delivered Europe remained at $3.65-4.28 per lb as of January 4, having risen for much of the second half of 2021, peaking in November at $4-4.25 per lb. Prices were last close to this level in November 2008.

The price was attributed to tight availability, with some producers reportedly switching their focus to ferro-silicon, where margins were wider.

The quotation for ferro-chrome high carbon 6-8.5% C, basis 65-70% Cr, max 1.5% Si, delivered Europe has also held firm, edging up to $1.73-1.95 per lb as of January 11.

Although price movements haven’t been as dramatic as for low carbon material, the comparable historic price for ferro-chrome high carbon 6-8.5% C, basis 60-70% Cr, max 1.5% Si, delivered Europe (discontinued at the end of 2021) was also last at this level around the end of 2008.

“Everyone is making money on [low carbon ferro-chrome]. Charge chrome producers are making money and high carbon ferro-chrome producers are making money, too,” a second seller said.

There was further support from the quarterly ferro-chrome benchmark price, with the ferro-chrome lumpy Cr charge quarterly, basis 52% Cr (and high carbon), delivered Europe remaining at $1.80 per lb for the first quarter of 2022. It had risen by 24 cents per lb (15.38%) from the third quarter to the fourth quarter.

Furthermore, stainless steel demand looks strong, especially from China; the push towards decarbonization is spurring capacity growth, which may strengthen demand for both chrome and nickel.

If product prices remain strong and energy prices come down in the spring and summer when temperatures climb and demand falls, there is also scope for improved margins.

“The expectation is that in April and May, we should see some balancing out [in energy prices],” the second seller said.

This article was originally published to the Fastmarkets Dashboard on Thursday, January 13.

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