FOCUS: Potential for monthly or spot European ferro-chrome benchmark in longer term
A shift to a monthly European ferro-chrome benchmark or an index based on a number of regional markets are some ways the negotiated contract figure could be improved to bring more stability and keep it relevant in a sometimes volatile market, ferro-chrome participants told Metal Bulletin.
The role of the quarterly European ferro-chrome benchmark is set to continue in the short term, according to sources polled by Metal Bulletin. Discontent with the system appears to have fallen over the past few years.
But some market participants told Metal Bulletin they had reservations about the current benchmark structure.
“The existing system is working but there can be some improvements,” a ferro-chrome consumer said.
A common goal for an improved benchmark from many market participants, especially buyers, was for greater stability and an ironing out of the big movements that can emerge between quarters.
“The benchmark price is reasonable but it should not move so sharply,” a ferro-chrome producer said, referring to the 20.3% increase between the first and second quarters of 2018.
“Big steps in the benchmark cause turmoil in the market,” another ferro-chrome consumer said. “A monthly price could be better, it could ease instability in prices.”
A supplier source said the benchmark would continue to have an important role, but the European market could also follow movements in China.
“China is the heartbeat of the world chrome market,” he said. “As it is the biggest consumer, we need to follow it.”
Yet a closer link to the Chinese market could add volatility to the market. Ferro-chrome European prices have historically been more stable than their Chinese equivalents.
One alternative suggested by the supplier source was a monthly index made up of various factors including the European spot market as well as prices from China and Japan.
This could potentially be a development of the current Metal Bulletin benchmark indicator, which calculates the likely settlement based on a statistical model and historic data.
Demands for change need to come from ferro-chrome buyers to prompt a shake-up of the established, stable benchmark system and a move to a system based on spot prices, a number of sources said.
“Stainless steel producers need to do something about it if they want it to change,” a second producer said. “It would be difficult but not impossible for them to switch.”
Other commodities markets, such as iron ore and coal, have seen a move away from a benchmark system to the spot market for price referencing.
When the iron ore benchmarking system broke down, contracts were adapted to use reference spot market prices, typically based on quarterly or monthly averages.
What discounts are agreed?
Confidence in the benchmark system have improved in the past five years since the disconnect between the benchmark and prices paid has narrowed.
But there were reports that discounts had recently increased in response to the higher second-quarter benchmark.
At the current benchmark of $1.42 per lb, one source said the discount his company would offer vary from 0% for a single truck for immediate delivery to less than 15% for a delivery of large, regular, quarterly quantities of 50,000 tonnes.
Other sources said company discounts had opened up in response to the 20% rise in the benchmark in the second quarter, and they now negotiated from 9-12% to as high as 21-22%.
“Four or five years ago, the discount hit 30-35%,” a producer said. “The benchmark is now more reasonable so the discount has reduced significantly.”
Additionally, European stainless mills have widened the discount for ferro-chrome in scrap, paying around 75% relative to the high-carbon ferro-chrome benchmark, compared with 78% previously, Metal Bulletin reported previously.