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|FeCr's Dual Pricing Stirs Benchmark System (Part 2)|
|= China's sharp rise in stainless steel production is making a structural change over the ferrochrome market =|
Continued from Part 1|
On the other hand in China, its domestic production of ferrochrome is expected to sharply rise in the near future as it did with stainless steel. China's share in crude stainless steel production in 2011 was about 40% (China: 13.20 - 13.50 million tons versus World: 32.60 - 33.00 million tons). Based on the big stomach for ferrochrome from the stainless steel sectors, China may become the biggest producers of ferrochrome in 2015 when most of green/brown-field projects (including plans of furnace-shifting to ferrochrome production) are expected to come on stream with an increase in the capacity of 1.76 million tons, which makes, when added up with the actual production in 2011 of 2.50 million tons, as much as 4.26 million tons annually, well over the actual annual production by South Africa of 3.50 million tons in 2010 and 3.30 million tons in 2011, or almost equal to South Africa's designed production capacity of 4.35 million tons.
It was in February 2008 when ESKOM, the South African power company, announced that it would reduce power supply by 10%, and when the nation's power supply crisis surfaced. ESKOM at that time explained that the crisis would be solved by 2012 when the planned increases in power supply will be able to meet increased and new demand for power including from new production capacities of ferrochrome, but the power company now says the crisis will be solved only in 2015 at earliest. In addition, earlier this year, ESKOM was obliged to buy back power as an emergency measure solve the inbalance of supply and demand of power, resulting in ferrochrome production curtailment.
The power crisis in South Africa in 2008 drove ferrochrome prices up. The European benchmark price for the Q2 of 2008 jumped by US¢71/lb from the preceding quarter to US¢192/lb Cr, but at that time benchmark pricing system was more widely and commonly accepted than now, making all the participants in the stainless steel industry feel that the sharp increase was a kind of risks everybody involved in the industry had to evenly bear as an increase in production costs.
However, the recent increase in the benchmark of US¢20/lb has a very different meaning from the big rise in 2008, although the number is much smaller, because the presence of China in the industry is now much bigger, or even gigantic. Between 2008 and 2011, China quickly became the biggest producer of stainless steel from almost a nobody, now holding about 40% of production share in the world. China's exports of stainless steel products in 2011 amounted to 1.70 million tons, most of which were shipped to Europe where production of stainless steel in 2011 was 7.60 million tons, i.e. China became a strong rival to European mills. For Japan and other Asian countries, this is not a fire on the other side of the river. So the US¢20/lb increase in the benchmark of this time for the European and Japanese mills means a much more seriously negative impact than in 2008 when an increase of US¢71/lb was agreed, as the Q2-2012 increase basically applies only to purchases by non-Chinese mills.
In order to reduce reliance to charge chrome supplies from South Africa, the European/Japanese mills have been gradually increasing intake from Kazakhstan and India, but it will not drastically increase, as China is also a good customer for the suppliers. Kazakhstan announced in March that it entered into a contract with the biggest stainless steel mills in China to supply 1.50 million tons of ferrochrome from this year for the coming five years.
Posco (a Korean stainless steel mill) and Yieh-United (a Taiwan stainless steel mill) are taking a little different approach to the current situation through their production plants located in China since several years ago, where procurement of ferrochrome has been done solely from local suppliers at an advantageously lower cost (so-called " the China merit") than the Europeans/Japanese mills can buy.
|last modified : Mon 23 Apr, 2012 [11:34]|