China’s ferro alloys producers to cut 50% production to stem losses

• Chinese smelters incur losses because of high input costs
• Output cuts to directly impact domestic, global prices
• Supply shortage may increase ferro alloys imports
• Opportunity for Indian exporters to supply to China

Morning Brief: Chinese domestic ferro alloys industry has been reeling under losses due to high production costs.

To deal with this situation and to turn the tide of industrial losses, the manganese special committee of China’s Ferro Alloys Industry Association, on 28 October, proposed to take resolute measures to reduce losses of ferro alloys producers. The 40 member companies agreed to the association’s proposal of cutting down production to 50%, as per a notice issued on 29 October.

It may be mentioned that such a decision was also made in May this year when the devaluation of RMB, high imported manganese ore prices and soaring coal and coke prices led to a sharp rise in the production costs of manganese alloys, thereby putting pressure on producers.

China’s position in global ferro alloys market

China is the world’s largest consumer and producer of crude steel and thus by default, is also the largest ferro alloys producer and consumer.

The country’s ferro alloys output is around 36 million tonnes (mnt) per year, holding over 78% share in global output (46-47 mnt).

The Asia-Pacific region is the largest market for ferro alloys, accounting for over 60% of total global demand. China is the largest market in the region, accounting for over 35%. Other major markets include India, Japan, South Korea, and Taiwan.

Key reasons for production cuts-

• Rising imported manganese ore prices: South African manganese ore Mn 37% grade is largely imported by China’s ferro alloys producers. Due to supply disruptions caused by Transnet’s workers’ strike, imports of manganese ore have become costlier. The hike in wages of workers as well as transportation issues to port have pushed up ore prices.
  
  As per SteelMint assessment, the monthly average prices of South Africa-origin manganese ore rose by 3% m-o-m to $4.18/dmt CNF Tianjin in October 2022.
• Soaring freight rates: China’s major ferro alloys producing provinces such as Ningxia, Inner-Mongolia and Shanxi have seen a significant rise in Covid-19 infections lately which led to the lockdown situation in these regions.
  Limited labour availability and disruptions in logistic operations amid lockdown restrictions have resulted in a hike in freight rates in China. The freight costs jumped RMB 20-30/t after recent Covid lockdowns.
• High coal, coke prices: China’s coking coal and met coke prices increased by RMB 95/t and RMB 40/t respectively, marking their first rise since August. While coking coal price was assessed at RMB 2,800/tonne (t), met coke was at RMB 1,950/t on 11 October 2022. The rise came amid curtailment in coke production and suspension of operations at coal mines ahead of major political conference on 16 October.
  
• Weak domestic demand: Ferro alloys demand in the domestic market has been weak because of steel production cuts there. This was further weighed down by rising Covid-19 cases and subsequent lockdowns in several Chinese provinces. Demand is less likely to recover anytime soon at least until the lockdown eases. This is further putting pressure on mills, making it difficult for them to continue operations at such high production costs.

Possible impacts of ferro alloys production cuts-

• Fall in imported manganese ore prices: The ferro alloys production cuts in China will ultimately lead to a drop in demand for imported manganese ore. This would result in oversupply in the global market which may drag down ore prices in the near term.
• Domestic prices to rise: Ferro alloys production cuts will lead to supply shortage in the domestic market. Thus, it is highly likely that prices of ferro alloys will go up. As China is the price driver, global prices may also increase. Hence, to maintain parity with global prices, Indian producers may raise domestic prices as well.
• Opportunity for Indian exporters: If production of ferro alloys is reduced but steel production continues to remain steady, demand for ferro alloys will be there. Thus, amid domestic supply shortage, Chinese steelmakers will have to import the material from other countries. This would turn out to be an opportunity for Indian exporters.