China switching to ore for chrome units

China switching to ore for chrome units

 In 2011, China’s chrome ore imports increased by 9% YoY to a new record of
9.4mt gross weight. In contrast, China’s ferrochrome imports fell by 1% and at
1.8mt were 17% below their peak in 2009. As the country’s stainless steel
continues to rise, it is choosing to source more of its increasing demand for
chrome units from overseas ore and to produce chrome alloys domestically,
with important implications for producers elsewhere, especially in S. Africa.
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 Base metal prices closed lower on Friday, zinc was the worst performing
metal on the day, down 2.6%.

 US GDP growth was reported at 2.8% in Q4 2011 at a seasonally adjusted
annualised rate, which was the strongest gain since Q2 2010, but markets
were disappointed by the fact that a significant part of the gain came from
inventory building (1.9%) while fixed investment (0.4%) contributed less than
consensus market expectations had anticipated. Falling government spending
dragged the growth rate down by 0.9%. Inflationary pressures moderated,
which suggests conditions are conducive to policy makers maintaining very
loose monetary conditions. Meanwhile, US consumer confidence is rising.
The UoM index increased to 75.0 in January, from 69.9 in December.

 China’s MNI sentiment survey improved in January with the headline index
increasing to 56, from 52.3 in January. The new orders component of the
index hit a four-month high and the credit component climbed back above
50 for the first time since September. However, the future conditions
component of the index dropped to 56.5, from 60 in December.

 We attended and presented at the Global Steel 2012 Conference in Delhi on
Friday. While India’s obvious growth potential was highlighted, much of the
discussion focused on the challenges facing its steel sector. Unsurprisingly,
the difficulties for non-state owned mills in obtaining iron ore were highlighted
as a major problem and challenges related in investment in new capacity were
flagged in many presentations, including land acquisition, lack of raw material
security and political obstacles. We expect a shortfall in capacity additions
will lead to India reverting to a net importer, particularly of steel long products.

 Brazil’s Vale has been granted an operational licence for its high-grade
Carajas-based N5 Sul iron ore project allowing it to open a new ore body at the
N5 mine. Start up of this expansion has been pushed out to 2016, from 2014.

 The latest SteelBenchmarker price assessment by World Steel Dynamics
has shown a rebound in all ex-China steel prices over the last two weeks.
The European recovery continues, with a $17/t gain in hot rolled coil to $662/t.
Meanwhile, World Export and US HRC prices both gained $14/t to $643/t and
$816/t, respectively. However, Chinese prices showed only minimal movement.

The price arbitrage between the US and the rest of the world remains very
wide and we reiterate our view that this will lessen over the coming months.
In our view, EU prices have another $40-50/t upside, which will help boost cash
margins from levels, broadly speaking, as weak in Q4 2011 as in Q1 2009.

 UC Rusal, the world’s largest primary aluminium producer, has said that it
could reduce output by 6% this year. Based on estimated output of ~4.1mt in
2011, this would work out to ~250,000t. However, we are anticipating a surplus
in the aluminium market of ~900,000t in 2012. As such this is a step in the
right direction but aluminium would remain a market in surplus.

China switching to ore for chrome units
 Ferrochrome is used primarily in stainless steel and alloy steel making. Indeed, it is chrome that
makes steel stainless, for which the minimum chrome content required is 10.5% although most
commercial stainless steels contain at least 12% chrome and some grades can contain up to 26%.
China’s stainless steel production has been rising strongly in recent years and set new records in
2011 when output was up by 17% YoY to ~14.3mt (Fig.1). This in turn is driving strong growth in
China’s ferrochrome consumption (Fig.2).

 Since China is short of chrome ore resources and must import much of the chrome it needs this
might be thought to be good news for ferrochrome producers elsewhere in the world. However,
China has been switching progressively the proportion of chrome units it sources from overseas
into ores, which it then processes to produce ferrochrome locally, rather than importing alloys.
The latest data released for December, completing totals for 2011, confirm that this trend
continues (Fig.3 and 4).

 China’s imports of chrome ore, including UG2, rose by 9% YoY to reach a new record of 9.4mt
gross weight in 2011. This was driven almost entirely by S. Africa, from where imports were up by
51% YoY to 4.7mt, accounting for almost 50% of the total, compared with only 36% in 2010.
Imports from India also increased although total volumes were less than 10% of imports from S.
Africa while imports from most other countries fell, including from a 17% drop in imports from
Turkey, the second largest supplier, to 1.6mt. Figs 5 and 6 show clearly the rise in ore imports
from S. Africa and its increasing share of the Chinese market.

 Meanwhile, S. Africa’s ferrochrome producers are struggling. Production costs, in particular
power prices, are rising steeply and their main export market is stagnant as China switches from
importing ferrochrome to importing chrome ore. China’s FeCr imports fell by 1% YoY to 1.8mt
gross weight in 2011, which was 17% below the peak in 2009 (Figs 7-8).

 Some S. African ferrochrome industry interests are calling for restrictions on the export of chrome
ore – which, in contrast to ferrochrome (or, more accurately, charge chrome), remain comfortably
profitable. We think, on balance, this is unlikely and would ultimately be self-defeating. As such
we expect China to continue sourcing proportionally more of its increasing import demand for
chrome units from ore ahead of alloys. This has important implications, of course, for the
ferrochrome industry, especially in S. Africa.