FOCUS: Chinese alloy smelters mull output cuts amid coronavirus outbreak

Some silico-manganese producers in northern China may consider curtailing their alloy output in the coming weeks if they continue to be unable to transport ore from port to plant because of the coronavirus outbreak in Wuhan, market sources have told Fastmarkets.

Many alloy smelters have found it hard to locate vehicles that will deliver ore from ports to their own plants in the week ended Friday January 31. As part of the efforts to combat the spread of the coronavirus, many counties and villages have not been allowing trucks to travel through their regions, according to market sources.

“The [road transportation restriction] measures are very strict,” an alloy smelter in China said. “We just could not find transport teams now, even though we want to buy more volumes [of ore].”

Before the Chinese new year holiday began, scheduled for January 24-30, most alloy plants in China stocked sufficient volumes of ore to allow them to maintain their normal production rates until February 8-13. They planned to purchase additional volumes in the week beginning February 3, market participants said.

But an extenstion to the traditional week-long break has been announced by the Chinese government, to February 2, due to the worsening of the coronavirus situation.

The infection broke out in the central Chinese city of Wuhan and has since spread to many provinces and regions in the country, because many students and migrant workers in the city returned to their home towns for the new year celebrations.

Many other regions including Shanghai city, Zhejiang province and Guangdong province have required local enterprises not to resume operations until after February 9 to help contain the spread of the infection.

The extension of the new year break, together with the tightened measures to constrain road transport in various regions, has forced alloy plants to depend on consuming their own stocks without being able to replenish them.

This means that alloy plants will sooner or later run out of ore, if they cannot restock the reserves at their plants in the coming weeks. If that becomes a danger, they will have to curtail at least part of their production to ensure that their remaining stocks would enable them to maintain normal operations for a longer time.

“We will have to consider cutting some of our output in the coming weeks, given that it’s hard to transport ore from ports to plants,” a second alloy smelter in China said.

“We even considered turning to rail transport, but that turned out not to be feasible,” he added.

“Currently, we have not drafted a detailed plan for how much and when we will cut output, but if we still cannot source ore in the coming weeks due to the lingering logistics difficulty, it’s possible that half of our output will be affected,” he said.

Fastmarkets’ assessment of the price of silico-manganese, 65% Mn min, max 17% Si, in-whs China, was rolled over at 6,000-6,150 yuan ($858-880) per tonne on January 31, in line with Fastmarkets’ pricing methodology, because the Chinese market was closed for the extended new year break.

Doubts on SiMn output cuts
Despite the fact that some alloy smelters have spoken of their plans to trim silico-manganese output in the near term, several market participants remained doubtful that these alloy plants would eventually implement production cuts.

This was partly because domestic sentiment has been somewhat buoyed by a few tender prices at values higher than expected for February-delivery silico-manganese from mills in southern China.

One such mill in southern China, for example, raised its tender price to as much as 7,200 yuan per tonne (delivered to warehouse and including value-added tax) in order to source abundant alloy, due to the joint effects of the logistics problems and the relatively tight supply in the region, according to market sources.

“Though this is the price in the southern area [which is usually higher than that in the northern area], I think this is a good sign, and mills in northern China will probably raise their tender prices as well if they want to purchase sufficient volumes,” a third Chinese alloy smelter said.

“In fact, some mills have urged us to deliver alloy to them as soon as possible because they do not have much in stock at the moment, so it’s likely that tender prices [in northern China] will also see an uptick,” the alloy smelter added.

Predictions by some market participants that the February-delivery silico-manganese price would rise made them doubt whether the domestic alloy plants would be willing to curtail their output.

“If the silico-manganese price for February delivery is quite good, I do not see much impetus for alloy plants to reduce their output,” a Chinese market participant said.

“They may try every possible means to deliver ore, including taking the initiative to increase transport fees,” he added. “After all, there are always some people [in the transport trade] who will run the risk of being punished to make more money.”

Lower demand to undermine alloy price?
The strict virus-driven restrictions on road transport also encouraged a number of domestic mills to draft plans either to reduce production or conduct maintenance in February, market sources said.

“Mills are also facing transportation problems,” a second Chinese market participant said. “It’s not easy for them to transport raw materials to warehouses either.”

Furthermore, the possibly delayed resumption of operations at manufacturing and construction sites would also mean slower demand for steel products, and would further lead to the piling-up of steel product stocks at plants and damp their enthusiasm to maintain full-capacity operations.

Despite the production reductions already announced by a few mills, some market participants played down the effect on the upstream alloy market.

“Unlike us, mills won’t easily cut production. We have not heard that many mills have done this so far. So we believe the demand for alloy products won’t shrink significantly in the short term,” a fourth Chinese alloy smelter said.

“We have received notice from some mills that they will cut part of their production,” a fifth alloy smelter in China said, “but I do not think output cuts will be carried out profoundly and extensively, because the services industry has already been adversely affected by the spread of the coronavirus. The country may not allow the steel industry to become stuck in the same situation, or the [financial figures for the first quarter of the year] will be quite discouraging.”

A few market participants have said, however, that the continued uptrend in the alloy price over the months ahead will ultimately depend on downstream performance.

“If mills cannot sell out their products smoothly, or steel prices move down sharply due to slow demand and abundant supply,” a third Chinese market participant said, “I have no reason to believe that mills will be willing to pay a higher price for alloy products.”

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