FOCUS: Coronavirus-linked tight cashflow, weak demand push China’s SiMn price lower

The Chinese domestic price for silico-manganese has drifted downward significantly in recent assessments because some alloy smelters reduced their offer prices to attract buying interest and generate cash amid the sluggish demand circumstances created by the outbreak of the 2019-nCoV coronavirus, market participants have told Fastmarkets.

Fastmarkets’ latest assessment of the price of silico-manganese, 65% Mn min, max 17% Si, in-whs China, was 6,000-6,200 yuan ($854-882) per tonne on Friday February 21.

This was down by 6.2% from 6,400-6,600 yuan per tonne a week earlier, and down by 7.6% from 6,500-6,700 yuan per tonne on February 7, just after Hebei Steel, China’s second-largest steel mill, announced a month-on-month rise of 600 yuan per tonne in its purchase price for February-delivery material.

Alloy smelters reduce prices
Many domestic Chinese alloy smelters, especially those that failed to secure long-term contracts with steel mills, have been reported by market sources to be slashing their offer prices to attract buying interest and generate cash.

“Some small to medium-sized alloy smelters do not sign contracts with mills and usually sell their cargoes to traders, because the latter pay them more quickly than mills,” one Chinese market participant said.

“Traders, however, have generally been very cautious in their dealings during the current situation, so the alloy plants have constantly had to cut their offer prices to secure business,” he added.

“They need money coming in to buy raw materials to sustain their normal operations,” he said. “After all, the room to make a profit was still appealing given the mills’ latest tender prices.”

The February tender prices from many mills left a large number of alloy smelters, especially those in northern China, room for a profit margin of 500-1,000 yuan per tonne, market sources said. This room, however, has been narrowing amid the persistent falls in the alloy price.

Furthermore, an increasing number of alloy plants have chosen to cut their offer prices to facilitate spot deals, as part of their efforts to generate cash after mills delayed their payments for orders placed earlier.

Mills usually pay alloy plants in cash 20-40 days after the delivery of cargoes, but some alloy plants have yet to receive payment from mills for cargoes delivered in December, market sources told Fastmarkets.

Mills pull back on output cuts
A growing number of Chinese mills are showing less interest in buying more volumes of alloy products because they completed their restocking in early February and have gradually curtailed their output due to the constant uptick in steel inventories that is a consequence of low steel prices.

Many domestic mills were heard to have either cut their output or conducted maintenance in the face of the constant build-up of inventories and the sluggish demand from downstream sectors such as infrastructure and construction. The resumption of normal working in these sectors has been widely postponed by the efforts to stem the spread of coronavirus.

“It’s obvious that buying interest from mills has waned significantly recently,” a Chinese alloy smelter said. “This is partly because they made purchases earlier this month but also because their recent output cuts have capped demand for raw materials, including silico-manganese.”

China’s spot market inventory of five major steel products – rebar, wire rod, hot-rolled coil, cold-rolled coil and plate – in 20 large cities totaled 17.35 million tonnes on February 20. This was up by 2.64 million tonnes or 17.9% from 14.71 million tonnes on February 10, according to the latest data from the China Iron & Steel Association.

Meanwhile, Fastmarkets’ price assessment for steel reinforcing bar (rebar), domestic, ex-whs Eastern China, fell to 3,420-3,450 yuan per tonne on February 27. This was down by 6% from 3,640-3,670 yuan per tonne on January 23, the final assessment before the start of the Chinese new year holiday break, which was originally scheduled for January 24-February 2.

Traders on the sidelines
Many Chinese traders have been quite cautious about purchasing silico-manganese since February. One reason, according to market sources, was their concerns about their ability to engage the vehicles needed for transport operations amid the strict road-use restrictions in various areas of the country, which were part of the efforts to contain the spread of the coronavirus.

“We would be wary of stepping into the alloy trading business in February even though the price is not bad,” a Chinese alloy trader told Fastmarkets in early February. “It would be quite annoying if we placed orders but could not find the vehicles necessary to deliver cargoes to mills.”

The falling futures price also sapped traders’ interest in placing orders for silico-manganese.

The most-traded May silico-manganese contract on the Zhengzhou Commodity Exchange closed at 6,050 yuan per tonne on February 27, down from a recent high of 6,700 yuan per tonne on February 5.

“Traders would not dare to re-enter the market to do business with alloy plants when the futures price is on the decline because it’s quite risky to do so,” a second Chinese market participant said.

Will alloy smelters curtail output?
Expectations that mills would cut their output have emerged since late January, when some alloy smelters were heard to be considering cuts because of the difficulty in finding trucks, as well as truck drivers, that could transport ore from ports to their plants due to the road transport constraints.

It turns out that most mills in northern China maintained normal production levels in February, prompted by the handsome profit margins available because of the higher-than-expected tender prices from mills for February-delivery cargoes.

“Alloy smelters could still make money even after cutting the [silico-manganese] price by a few hundred yuan [per tonne],” a third Chinese market participant said. “And they won’t easily slash output when they can make a profit, even if it is thin.”

But some domestic alloy smelters were said to be considering further cuts to their output due to the recent rapid fall in the alloy price and the available profit margins. Whether they will eventually put this thought into practise will depend on how much the tender price for March-delivery cargoes from mills goes down, market sources said.

Many market participants are keeping a close eye on the official announcement of the March-delivery silico-manganese tender price from Hebei Steel, which is usually taken as a signpost by the rest of the market, Fastmarkets understands.

Bearish outlook on March tender price
Chinese market participants generally believed that Hebei Steel will significantly lower its purchase price for March-delivery silico-manganese because of reduced demand, relatively abundant supply and the falling futures price.

“A big increase in the February [silico-manganese] tender price is beyond expectation, and we have to admit that it’s not totally driven by fundamentals,” a fourth Chinese market participant said. “Instead, the transportation disruptions caused by the coronavirus outbreak have played an important role in the process.”

Indeed, there was a decrease in alloy output after some alloy plants in southern China, which had suspended production before the new year break, failed to resume their operations due to shortages of staff and raw materials.

Many workers either could not return to their workplaces due to strict lockdowns in their home towns, or had to go through a quarantine period of at least 14 days before being allowed to start work.

The reduction in demand due to mills’ output cuts has exceeded the drop in supply, putting downward pressure on the alloy price, market sources said.

Hebei Steel had not, at the time of writing this article, made any announcement about how much silico-manganese material it will buy for March deliveries, and some market participants did not expect the tender price to be revealed until early in that month.

“It’s unavoidable that the March tender price [for silico-manganese] will drop a lot,” a fifth Chinese market participant said. “It’s likely that it will give up the [600 yuan per tonne] gains achieved [in the tender price for February-delivery cargoes], and maybe the drop will be much steeper.”