FOCUS: What are the differences in manganese ore ‘frozen stocks’ between 2020, 2019?
The rapid and significant falls in manganese ore prices in 2019 and 2020 have created “frozen stocks,” which are believed to have acted as a buffer for the ore market while also demonstrating some different characteristics over both years, sources told Fastmarkets.
Fastmarkets’ manganese ore index 37% Mn, cif Tianjin ended 2019 at $3.92 per dry metric tonne unit (dmtu), a decline of $2.19 per dmtu (35.8%) from $6.11 per dmtu at the beginning of that year. This preceded the index surging to a two-year high of $6.79 per dmtu on April 24, 2020, amid supply concerns as a result of the nationwide lockdown in South Africa to stem the spread of the Covid-19 pandemic. But the upward move was soon reversed and the index settled down by 39.3% from that high at $4.12 per dmtu on December 29, 2020.
Similarly, Fastmarkets’ manganese ore index 44% Mn, cif Tianjin tumbled by $2.61 per dmtu (38.3%) to $4.20 per dmtu on December 27, 2019, from the start of that year. Again, this preceded a significant jump to a 15-month high of $6.55 per dmtu on May 1, 2020, before the index slid by 34.8% to settle at $4.27 per dmtu on December 29, 2020.
What exactly are ‘frozen stocks’?
‘Frozen stocks’ generally refer to cargoes held at ports that owners, traders or alloy smelters are reluctant to sell or consume because doing so will make them incur severe financial losses, market sources said.
Basically, when the gap between the purchasing cost and portside price exceeds 20% – the usual amount required as an upfront deposit related to the value of a cargo that some buyers who desire to buy but have no right to open a letter of credit (LC) pay companies to help them do so and pay the balance on arrival – some stocks will become ‘frozen’.
“If the purchasing costs are equivalent to around 50 yuan ($7.65) per dmtu, when portside prices fall below 40 yuan per dmtu and there’s no sign of near-term stabilization or rebound, some buyers won’t want to take delivery of their cargoes purchased earlier at higher prices because doing so represents more losses for them,” a Chinese ore trader said.
The real situation, however, varies among market participants with different tolerances for losses and different expectations for near-term market performance, sources told Fastmarkets.
‘Frozen stocks’ come into being in a rapidly falling market and, in turn, can help stem dropping ore prices because when portside prices decline to a low level an increasing number of cargo holders become unwilling to sell or consume those high-priced cargoes, resulting in more volumes of ‘frozen stocks’ and correspondingly fewer tradable stocks, sources said.
In this case, even if port inventories held at high levels, when smelters find it is not easy to source cargoes to meet production needs, they tend to pay higher prices, market participants said. When traders detect the growing buying interest, they will raise their offer prices accordingly, which will usually stop price falls and even lead to rebounds, though sometimes temporarily, sources added.
So what then are the differences between the ‘frozen stocks’ of 2019 and 2020?
Fastmarkets summarizes some of the characteristics of ‘frozen stocks’ for this year and the last after widely seeking opinions from major market participants.
Smaller volumes of ‘frozen stocks’ in 2020 compared prior year
Though many market participants that spoke to Fastmarkets said it is hard to tell exactly how many ‘frozen stocks’ there are among total port inventories, they generally agreed that the amount of ‘frozen stocks’ in 2020 is comparatively smaller than in the preceding year.
“Seaborne [manganese ore] prices hovered at high levels for more than half a year in 2019, while in 2020, prices stayed relatively high for only three months. It’s also worth noting that when seaborne cargoes were sold near $7 per dmtu, the actual availability was very limited,” a Chinese market source said.
Indeed, seaborne manganese ore prices in 2020 were generally much lower than they were in 2019.
Fastmarkets’ manganese ore index 37% Mn, cif Tianjin averaged at $4.45 per dmtu in 2020, a 13.6% drop from the average price of $5.15 per dmtu in 2019, according to Fastmarkets’ database.
Similarly, Fastmarkets’ manganese ore index 44% Mn, cif Tianjin averaged $4.67 per dmtu this year, a 16.3% fall from the average price of $5.58 per dmtu last year.
Who owns the ‘frozen stocks’?
In 2019, many ‘frozen stocks’ were said to be in the hands of traders, who therefore suffered significant losses due to the rapid and significant price decline in the second half of the year with some even facing the risk of being phased out of the industry, sources told Fastmarkets.
In 2020, however, many traders who had learned from the past year kept cautious amid relatively high prices, Fastmarkets heard. This left mostly smelters to place orders at that time, with those volumes becoming ‘frozen’ as a result of steep portside price falls since May, sources said.
But it is uncertain whether smelters hold more ‘frozen stocks’ than traders this year, a few sources pointed out.
“After sitting on the sidelines when prices were quite high, some traders have been purchasing seaborne cargoes since then either to maintain a cooperative relationship with miners or their own market share. Some of their cargoes also translate into ‘frozen’ ones in the falling market,” a second Chinese market source said.
Different financial burden
Many traders may face less financial pressure than what they confronted in the past year, however, because they generally made handsome profit margins when portside prices climbed to multi-year highs on supply fears emanating from South Africa’s nationwide lockdowns from late March, market participants told Fastmarkets.
“I believe most traders liquidated their high-priced cargoes bought in the previous year for profit during the price surges [in April 2020]. Additionally, selling the cargoes bought earlier this year at relatively low prices also brought in considerable profits at that time,” a third Chinese market source said.
“Even though some buyers suffered losses in the second half of 2020, their financial situation should be better than last year because at least there were times they made money this year,” the above source added.
In contrast, traders in general shouldered the intense financial stress in 2019 after having bought many high-price cargoes while continuously falling prices led to large losses when those cargoes arrived at ports and lost value, sources said.
So, are there any similarities with regards to ‘frozen stocks’ in 2020 and 2019?
‘Frozen stocks’ are flowing
Despite their differences, there is no denying that ‘frozen stock’ volumes changed along with the ore price movements in both 2020 and 2019.
“No matter which year, the volumes [of ‘frozen stocks’] are not fixed. Instead it’s constantly flowing. When portside manganese ore prices climb to a level that prompts some cargoes holders to sell off certain volumes, ‘frozen stocks’ are translated into tradable cargoes in the market,” a fourth Chinese market source said.
“We estimate the average purchasing cost of low-grade ore, for example, to be at around 35 yuan per dmtu, while portside prices have almost risen to that level so we don’t think there are many ‘frozen [low-grade ore] stocks now,” a second Chinese ore trader told Fastmarkets.
Fastmarkets’ manganese ore port index, base 37% Mn, range 35-39%, fot Tianjin, China was 34.40 yuan per dmtu on December 29, up by 2.10 yuan per dmtu from 32.30 yuan per dmtu on December 18.
Smelters have more than one choice
No matter in 2020 or in 2019, alloy smelters that hold high-priced cargoes always have more than one choice, sources said.
Smelters can gradually consume their high-priced cargoes by mixing them with some low-priced ones bought from ports to reduce overall production costs.
“Almost no smelters will completely use high-priced cargoes bought earlier to produce silico-manganese because that means high production costs and, therefore, a high likelihood of suffering losses when selling alloys. The mixed use of expensive and cheap ore cargoes can sometimes leave them some room for profits,” a third Chinese ore trader said.
Also, smelters can either postpone the delivery of high-priced cargoes or only take delivery of part of them after being urged by companies that this helps them open LCs, sources said.
When portside prices are near to the purchase costs of the high-priced cargoes, smelters tend to take delivery of their previously purchased seaborne cargoes that arrived at ports, sources added.