FOCUS: Ferro-chrome quarterly benchmark still has its place in the short term, sources say

Market acceptance of the quarterly European ferro-chrome benchmark system will continue for at least the short term, according to market participants polled by Metal Bulletin.

Discontent with the settlement in previous years appears to have faded because of the stability it offers in relation to the volatility seen on the Chinese spot market.

The benchmark is set in negotiations between the buy and sell sides of the industry. Most recently the two parties have been represented by stainless steel mill Aperam and miner Glencore.

High-carbon ferro-chrome spot prices have dipped since the 20.3% increase in the European benchmark price for the second quarter of 2018 to $1.42 per lb from $1.18 per lb for the first quarter.

Metal Bulletin assessed the spot high-carbon ferro-chrome price, delivered into Europe, at $1.28-1.42 per lb on Friday May 11, stable week on week. As a result, spot prices are close to or even at the quarterly reference figure.

Meanwhile, Metal Bulletin assessed charge chrome at $0.86 per lb into Shanghai on Friday, an increase of 1.2% over the previous week.

The headline benchmark ferro-chrome number is typically much higher than spot prices. But actual realized prices paid on long-term contracts tend to be significantly lower because of discounts negotiated between producers and consumers for individual deals.

The size of the reduction is determined by the specifications, destination and quantity of the ferro-chrome contract.

Value identified
“We have seen a move back to faith in the benchmark system and fewer calls for a more transparent, market-driven price,” one source said.

No rationale for the decision is provided when the settlement is presented by Merafe Resources, which runs a ferro-chrome joint venture with Glencore in South Africa, to the Johannesburg Stock Exchange.

“It is unclear how it is made,” another source said. “But we do well out of it.”

Demand for the benchmark system is primarily driven by stainless steel mills. Mills use it as a relatively stable reference point from which to set their surcharges, as well as in buying discussions with ferro-chrome producers.

These alloy surcharges cover the costs of purchasing ferro-alloys and nickel, and are set monthly.

Discounts given to mills mean stainless steel producers earn a margin on the difference between the benchmark and the net price.

The benchmark provides “good visibility for market [price] evolution and reduced daily volatility,” a ferro-chrome consumer told Metal Bulletin.

Offering stability
A figure that is set for three months has the benefit of stability, which is highly prized by ferro-chrome buyers.

By comparison, the recent experience of the Chinese ferro-chrome market has been massive volatility in relation to the European and US equivalents.

A high benchmark in relation to the spot price can add greater flexibility into negotiations over discounts.

“I prefer a high benchmark with a discount,” a trader said.

But when the benchmark becomes too high or low in relation to the European spot price it can appear to be detached from the underpinning fundamentals, and this has drawn criticism from sources.

The benchmark can lose its meaning, one source said, who did not think it was likely to be replaced.

None of the ferro-chrome suppliers, stainless steel mills or traders contacted by Metal Bulletin advocated rejection of the system.

In 2014, however, a Metal Bulletin poll of readers showed 67% of participants thought the benchmark structure ought to be abandoned immediately, even without a viable replacement in place.

At that time, an analyst at Macquarie bank said benchmarking could be “on its last legs”. But recent sentiment indicates the benchmark will carry on for some time to come.