***SPOTLIGHT: Death knell for China’s ferro-alloy producers?

Beijing’s cancellation of electricity price discounts may have sounded the death knell for many ferro-alloy producers in China, already under pressure from low demand and prices.

Many ferro-alloy producers are expected to cut production or close down with electricity after March 15 expected to cost, at full price, up to 300-400 yuan ($44-59) per tonne more for ferro-chrome producers and 600-700 yuan per tonne more for ferro-silicon producers.

China’s ferro-alloy production plunged to about 20% of capacity in end-2008 as the bottom fell out of the market, gradually working its way back to about 30% this year.

“I think it may retreat to 10-20% in some areas in April,” said a trader in Beijing.

Beleaguered ferro-alloy producers can expect no sympathy from Beijing, however, which counts the ferro-alloy industry among the energy-guzzling polluters it wants to crack down on.

They can expect little help from the market either, which has so far rebuffed efforts by the producers to pass on higher costs through prices.

The market price for ferro-silicon of minimum 72% silicon, for example, is 5,500 yuan per tonne this week, the same level at which producers need to sell to make ends meet — before the discount was removed.

Beijing’s aim in cancelling the discounts was to better regulate China’s electricity prices, which varies widely depending on the region and the discounts given by local authorities.

It wants to encourage power consumers to negotiate prices directly with the power plants, instead of allowing local authorities to step in with discounts for companies and industries that they want to encourage, said market sources.

So, there will be new discounts in electricity prices, although ferro-alloy producers expect these to be much smaller than before.

Large power users can expect to negotiate a discount of just 0.01-0.02 yuan per kwh, much lower than the previous discounts of 0.05-0.08 yuan per tonne granted by local authorities, said a ferro-alloy producer in Inner Mongolia.

With electricity costs making up 40-70% of ferro-alloy production costs, a 0.01 yuan per khW price rise can mean a cost increase of 90-100 yuan per tonne, according to some estimates.

As demand for ferro-alloys continues to be weak, even the largest ferro-alloy producers may find themselves consuming less than enough electricity to be in a strong bargaining position.

“How much of a discount you can enjoy from the power plants depends on the amount you consume, but if we operate at a higher rate, we will be accumulate stockpiles,” said the Inner Mongolia producer.

With larger users expecting to bag bigger discounts, small and uncompetitive ferro-alloy producers may be priced out of the market soon, leading to greater industry concentration.
 
However, some feel that Beijing’s timing could have been better.

“It seems inappropriate to beat down the industry further,” said a producer in Beijing, citing the current extremely weak market.