FOCUS: Oversupplied Chinese FeCr market faces new challenge in coronavirus

Chinese smelters increased their high-carbon ferro-chrome production over the past year to an unprecedented level that exceeded demand from downstream stainless steel mills, putting pressure on both alloy and chrome ore prices.

But with the new year has come a new challenge in the form of a deadly coronavirus, that threatens to exacerbate the weakness in chrome markets by disrupting logistics and denting demand for ore and alloys.

Growing supply of high-carbon alloy
While China does not publish official figures regarding its production of high-carbon ferro-chrome, market participants told Fastmarkets that the country produced around 6 million tonnes of the material last year, which marks an increase of 14% year on year from the approximate 5.3 million tonnes produced in 2018.

The increase is said to be driven by bullish sentiment in the stainless steel market, new government policies as well as expanded capacity at some large-sized smelters.

“The steady increase in stainless steel output over the past several years has led to positive momentum in the production of its raw material: high-carbon ferro-chrome,” a smelter source said.

“2019 was the last year one could acquire a license to build up ferro-chrome smelters as part of the governments’ efforts to tackle environmental issues,” a second smelter source said, adding that it was the main driver for a number of newcomers to the market starting projects with last-minute issued certificates.

In that same year, some large-sized ferro-chrome smelters were also reported to have expanded their capacities.

“Small furnaces are now rarely seen at ferro-chrome smelters,” a trader said. “Most of them have been replaced by bigger ones that can produce two or three times more alloy.”

In addition to this increased domestic production, China imported 3.06 million tonnes of high-carbon ferro-chrome – including charge chrome – in 2019, up by 25% year on year, according to official but unconfirmed data seen by Fastmarkets.

On the demand side, however, the growth rate of China’s stainless steel output was not as fast as that of high-carbon ferro-chrome output and imports, creating an oversupplied market.

The country produced 22.49 million tonnes of crude stainless steel in the first nine months of 2019, up by 10.5% from the same period in 2018, according to data released by the China Stainless Steel Council.

“Massive amounts of ferro-chrome were pouring into the market, far exceeding demand from downstream mills,” a second trader said.

“At the same time, smelters have also became less powerful when negotiating prices with mills,” the second trader added.

Domestic ferro-chrome prices largely trended downward throughout 2019 despite a brief respite in July-September.

Fastmarkets assessed the price of ferro-chrome spot 6-8% C, basis 50% Cr, ddp China at a 44-month low of 5,600-5,800 yuan ($803-832) on December 27 after major Chinese stainless steel mills slashed their tender prices for January delivery against a backdrop of persistent market oversupply.

Shrinking profit margins did not result in the shutdown of ferro-chrome, however, with smelters lingering on the break-even point and waiting for the price to go up.

“Cash flow is the key to keeping operations running,” a mill source said. “Smelters are unlikely to cut their production as long as they can still make money.”

Smelters will find it hard to absorb a steady uptrend in chrome ore prices given the gloomy alloy prices, resulting in a similar downturn for ore prices.

Fastmarkets’ chrome ore South Africa UG2 concentrates index basis 42%, cif China sank to $129 per tonne on December 6, the lowest since its launch in January 2017. The index bottomed out in late December and stands at $136 per tonne as of February 7.

Coronavirus to affect demand in short-to-medium term
Then as we moved into February, the chrome alloy market underwent a prompt price rally due to the novel coronavirus (2019-nCoV) outbreak in China that had fueled concerns of near-to-medium-term demand disruptions.

There were reports of a small number of ferro-chrome plants close to the central Chinese city of Wuhan halting production, while other smelters reported shrinking feedstock reserves at their plants after road travel restrictions led to problems in sourcing raw materials, threatening to disrupt their operations.

Fastmarkets’ price assessment for ferro-chrome, spot 6-8% C, basis 50% Cr, ddp China was 5,900-6,100 yuan per tonne on February 7, up by 200 yuan or 3.3% from 5,700-5,900 yuan per tonne week on week.

Despite the sudden jump in alloy prices, some market participants highlighted the potential for a slide in demand amid the coronavirus outbreak.

The difficulty delivering alloys to stainless steel mills and strict quarantine guidelines, which encourage employees to work remotely, have forced some mills to cut their production, a second mill source said.

Alloy prices are traditionally underpinned in April due to a seasonal pick-up in demand from the stainless steel sector, but market participants suspect that this demand recovery may be delayed due to the coronavirus.

“If stainless steel remains lackluster, the already poor projections for material demand will loom large,” a third smelter source said.

The longer-term demand outlook, however, suggests the stainless steel sector will sustain its growth due to the steady rise in demand experienced in China.

“The fact that stainless steel consumption per capita in China is still much lower than that in developed countries manifests the potential development in the foreseeable future. We are hoping this will support the alloy market,” the first smelter source said.