FOCUS: Why is the low-grade seaborne manganese ore price rising despite fundamentals headwinds?
Despite lingering oversupply and high levels of ore inventories at major Chinese ports, the low-grade seaborne manganese ore price in China registered a weekly rise of 12.1% on Friday December 6 after many Chinese buyers placed orders at higher-than-expected prices.
Fastmarkets’ manganese ore index, 37% Mn, cif Tianjin climbed by 40 cents week on week to $3.70 per dry metric tonne unit (dmtu) on December 6.
The drastic increase of the low-grade ore index came after it plummeted by 46% to $3.30 per dumtu on November 29 from $6.11 per dmtu in early 2019, Fastmarkets’ price archive shows.
Fastmarkets summarizes three main factors that have supported the evident rise in the seaborne low-grade manganese ore index in the past week.
Miners’ reduced sales volume for January delivery
Several low-grade manganese ore miners were heard to have significantly reduced their sales volume for January delivery, leading to the relatively tight availability of seaborne ore material. This forced many Chinese buyers to place orders even though the agreed price is above their expectations, according to market participants.
Miners had limited pressure to sell for January delivery because they had reduced sales volume targets, providing them with leverage in price negotiations with buyers.
“This is quite normal, because these miners have already completed their sales targets in 2019 and they do not have much sale pressure in the first month of 2020,” a Chinese market participant said. “Even if they could not sell off volumes for January-delivery, they would rather sell the remaining in the following months of the year instead of cutting prices too much now.”
“We planned to buy some volume [of low-grade ore] at a price similar to the level seen in the last round of offers but miners were reluctant to accept the bidding prices,” an ore buyer in China said. “We had to finalize the deal at a higher price in the end.”
Though many Chinese market participants said it remained to be seen whether there will be a significant, sustained reduction in volumes offered out of South Africa, some eventually decided to accept the higher-than-expected prices out of fear of being unable to secure certain volumes in the near future amid the apparent tightness of supply.
“There is a big difference between reducing sales volume in a certain period of time and cutting production,” a market source warned.
Smelters’ fear of missing out
In addition to limited volume for January delivery of low-grade material, Chinese alloy smelters’ buying appetite grew for low-grade seaborne material and this contributed to the eye-catching price surge growth last week, market sources said.
Some Chinese buyers, especially a number of Chinese alloy smelters who had failed to secure seaborne low-grade manganese ore when the price was at $3.25-3.50 per dmtu in early November in anticipation of even lower prices, showed great enthusiasm in purchasing volumes to avoid missing out on ore at relatively low prices this time.
“Consumers refrained from buying when the price was going down and some of them therefore missed the bottom. It is not a price rally or recovery, it is demand from people who wanted to buy at the bottom but feel they missed out,” a supplier said.
Furthermore, comparatively steady demand for low-grade ore and concerns over being stuck in an unfavorable situation of insufficient supply later also stimulated many alloy plants to re-enter the market to restock on January-delivery seaborne cargoes.
“For many alloy smelters, semi-carbonate is a necessity for the production of silico-manganese, and they are well aware they cannot depend too much on portside cargoes, so they have to accept whatever high prices are offered by traders,” a second Chinese market participant said.
“Moreover, a price of $3.70 per dmtu is still much cheaper than the prevailing portside ore price. Though there are still enormous uncertainties ahead, alloy plants know that the price level won’t incur them great losses. January-delivery cargoes will not arrive and be consumed until late February and early March when the alloy price may possibly not be as low as it is now,” the market participant added.
Fastmarkets’ manganese ore port index, base 37% Mn, range 35-39%, fot Tianjin China stood at 33.80 yuan per dmtu (equivalent to $4.15 per dmtu, excluding value-added tax and port handling fees) on December 6. This was down by 0.10 yuan per dmtu week on week.
In addition, the desire to average out the overall cost of manganese ore positions has driven some ore traders to build some positions of seaborne cargoes as well.
“Ore traders have been suffering great losses so far this year due to ore prices dropping too quickly and significantly, and it is also because of this that they want to buy some low-priced cargoes to average out their general costs. And usually the more volume of high-priced cargoes they have at ports, the more low-priced seaborne cargoes they want to purchase for the moment,” a third Chinese market participant said.
‘Frozen stocks’ offset spot ore availability
Although portside manganese ore inventories have continued to pick up due to constant new arrivals and alloy smelters’ cautious restocking, the volume of tradeable material is in fact comparatively limited, leaving many alloy smelters worrying they could face high portside prices some time later, market sources said.
Fastmarkets’ assessment of manganese ore inventories at the main Chinese ports of Tianjin and Qinzhou had been rising for eight consecutive weeks to 4.56-4.69 million tonnes on December 2, the highest level since Fastmarkets began to record inventories in April 2017.
But the latest assessment recorded a slight week-on-week decrease of 3.4% to 4.40-4.54 million tonnes on December 9 due to alloy smelters’ stockpiling to maintain normal production.
Many ore traders hold a large quantity of portside material which was purchased at a comparatively high price and therefore they are do not want to sell in today’s market because in doing so, they will suffer several losses. This has led to many so-called “frozen stocks” at ports.
The cost of some semi-carbonate stocks in the hands of some traders is as high as around $5.30 per dmtu and traders will not sell these stocks easily at the current low price, according to market sources.
“There is an abundance of material [at ports] but there is no abundance of tradeable material because of the [current] low price. End users and traders don’t want to consume or sell [their high-priced cargoes] because [doing that] will show losses on their [financial] books, resulting in a lot of material ‘frozen’,” the first supplier source added.
“Back in 2017, [China’s portside] stocks hit 3 million tonnes and was on the way to 3.5 million tonnes, but the price still increased because of the existence of frozen stocks,” the source added.
The temporary tightness of portside cargos as a result of the existing “frozen stocks” motivated some Chinese alloy smelters to purchase seaborne cargoes in case they become disadvantaged by a reliance on portside cargoes, according to market participants.
But oversupply remains a headwind
Despite the upswing in the seaborne low-grade manganese ore price in the past week, many market participants believe that oversupply will remain a headwind to both seaborne and portside ore prices in the near future.
“The fundamentals have not changed at all, and oversupply is still dominating the market now,” a fourth Chinese market participant said. “If there is no significant cut on the supply side, the price gains will only be short-lived.”
But market sources told Fastmarkets the latest manganese ore price rise has widened the profit margin for miners and they will not be easily persuaded to reduce production or sales volumes.
“At the current price, the non-mainstream ore miners will not have the motivation to curtail their production and reduce the volume of their shipments. And in that case, large volumes of ore will continue to flow into China, weighing on both sentiment and ore prices as a result,” the market participant added.
“If the problem of oversupply cannot be resolved fundamentally, seaborne ore prices cannot shrug off the downward pressure either. And maybe the [fall to the] bottom will be steeper when the market is choked by the persistently excessive supply next time,” a fifth Chinese market participant warned.
China’s imports for manganese ore totaled about 27.7 million tonnes in the first 10 months of this year, a rise of 25.4% from around 22.1 million tonnes over the corresponding period of 2018.
Many market sources expect China to import a total of around 32 million tonnes of manganese ore over the whole of 2019, an increase of approximately 15.8% compared with 27.6 million tonnes in the whole 2018.
Downstream, China produced 829.2 million tonnes of crude steel over January-October this year, a rise of 7.4% over the corresponding period of 2018, according to data from China’s National Bureau of Statistics. The year-on-year growth rate has slowed from 8.4% over January-September.