Ferrochrome Market Overview 2017

Transcription

1 Ferrochrome Market Overview 217 Presented by: Mark Beveridge Principal Consultant CRU Nickel, Chrome, Stainless Steel Group

2 Key Themes Which factors define the chrome market? 1. Chinese demand and the stainless steel cycle - Chinese credit creation - Inventory levels - Trade - Real demand 2. Chinese Production costs 3. South African Cr ore supply and price Explaining recent events Outlook global demand and supply Conclusions

3 24 Q1 25 Q1 26 Q1 27 Q1 28 Q1 29 Q1 21 Q1 211 Q1 212 Q1 213 Q1 214 Q1 215 Q1 216 Q1 217 Q1 Recent History Chinese delivered price (ex-vat) US c/lb (LHS axis) Chinese delivered price (ex-vat), ZAR-terms (RHS axis) 18 1,8 16 1,6 14 1,4 12 1,2 1 1, looks like a high-side outlier in terms of pricing Too much ore stock in China, but otherwise current market fundamentals fairly neutral Market defined by Chinese FeCr production costs over the long term. Chinese production costs dependent on chrome ore price Risks to ore supply likely to grow but barrier to entry into chrome mining fairly low

4 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Understanding China: Real demand, apparent demand and production 3 25 Manufacturing FAI Real Estate FAI Infrastructure FAI Stainless Steel production, y-y % growth (RHS) 3% 25% % 15% 1% 5% % -5% -1% Data: CRU, NBS,NBS

5 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Chinese apparent stainless steel demand and the credit cycle Allowing for some lag, there is correlation between credit creation growth and apparent consumption of stainless steel in China y/y % change 22 Stock of TSF + Local govt bonds (LHS) Qtrly Crude SS Apparent Consumption (RHS)

6 21 Q1 21 Q3 211 Q1 211 Q3 212 Q1 212 Q3 213 Q1 213 Q3 214 Q1 214 Q3 215 Q1 215 Q3 216 Q1 216 Q3 217 Q1 217 Q3 Understanding China: real vs. apparent demand China s stainless steel inventory cycle not yet carrying excessively high stock Stainless steel stocks, crude steel basis, week's supply in hand Long-term average stock levels 2

7 Understanding China: stainless steel production and the stocking cycle Q-Q volatility in Chinese stainless steel production well reflected in the changing stock levels 16 3% Q1 China, stainless steel stocks, wks supply on hand (LHS axis) China, quarterly crude SS apparent consumption, y-y % change (RHS) 214 Q2 214 Q3 214 Q4 215 Q1 215 Q2 215 Q3 215 Q4 216 Q1 216 Q2 216 Q3 216 Q4 217 Q Q2 Q3 25% 2% 15% 1% 5% % -5% -1% -15%

8 Chinese stainless steel production less dependent on exports and that s before Indonesia starts up LHS axis: y-y change in global stainless steel production, tonnes, split by export/domestic market; RHS axis: % y-y change 1,5, Export Differential (LHS) Domestic Production Differential (LHS) 1,, 5, Total Crude Production (RHS) , -1,, -15

9 US cents/lb Explaining recent events in the chrome market China HC FeCr domestic spot, ex-vat Market fundamentals played an important role in the price volatility of late-216 and mid Low Cr ore stocks, fast rising SS output Cr ore stocks recovered, severe SS destocking Sentimentdriven price rally; Chinese SS restocking Latest price rally harder to justify in terms of market fundamentals A deeper look at recent price volatility suggests circumstances of 216/17 were exceptional

10 Explaining recent events: Chrome ore stocks Late 216/early 217 prices defined by critically-low ore stocks in China and surge in demand (liquidity-driven) Pull back in prices in Q2 217 coincided with collapse in demand, credit creation slowdown LHS: Weeks Consumption in Hand, RHS: ' tonnes Chrome Ore (Gross Weight) 1,8 1,6 1,4 1,2 1, 8 3% 25% 2% 15% 1% China HC FeCr consumption y-y % change 4 6 5% 2 Jan-16 Mar-16 Cr Ore Stocks: Weeks consumption in hand Chinese Monthly Cr Ore Imports May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep % -5% -1% 216 Q1 216 Q2 216 Q3 216 Q4 217 Q1 217 Q2 217 Q3

11 21 Q1 21 Q3 211 Q1 211 Q3 212 Q1 212 Q3 213 Q1 213 Q3 214 Q1 214 Q3 215 Q1 215 Q3 216 Q1 216 Q3 217 Q1 217 Q3 Explaining recent events: Stainless steel stocks Stainless steel stocks, crude steel basis, week's supply in hand Long-term average stock levels China s stainless steel inventories also had a role to play they grew rapidly in Q4 216/Q1 217; then fell in Q2 217 CRU doesn t believe that stocks are currently close to problematic levels even with large SS output in Q3, stainless steel stock only slightly higher than the longterm average

12 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Explaining recent events: China s credit cycle Recent price rally influenced by sentiment credit creation eased in July 217 Positive sentiment on raw material prices, supplemented favourable inventory position y/y % change, wide indicator of credit creation in China (TSF=Total Social Finance) Stock of TSF + Local govt bonds y/y % change Stock of TSF + Local govt bonds (LHS) Qtrly Crude SS Apparent Consumption (RHS) Data: CRU, NBS

13 Jan/16 Feb/16 Mar/16 Mar/16 Apr/16 May/16 Jun/16 Jul/16 Aug/16 Sep/16 Oct/16 Nov/16 Dec/16 Jan/17 Feb/17 Mar/17 Mar/17 Apr/17 May/17 Jun/17 Jul/17 Aug/17 Sep/17 Oct/17 Explaining recent events: BM price moves EU charge chrome benchmark has stuck to established trend EU BM (gross) China HC FeCr domestic spot, ex- VAT

14 216Q1 216Q2 216Q3 216Q4 217Q1 217Q2 217Q3 217Q4 218Q1 218Q2 218Q3 218Q4 y-y % change Y-y % change Outlook on FeCr demand: China Credit tightening, FAI slowdown contribute to slowing stainless steel demand growth Output growth to move in range between 3-5% y-y, Chinese IP Chinese IP

15 Outlook on FeCr demand: China s trade LHS axis: y-y change in global stainless steel production, tonnes, split by export/domestic market; RHS axis: % y-y change 1,5, 1,, 5, Export Differential (LHS) Domestic Production Differential (LHS) Total Crude Production (RHS) , -1,, -15

16 Outlook on FeCr demand: Eurozone Steady growth forecast: investment growth to trend up in short-term, IP down Stainless steel output growth projected to be flat import competition to intensify y-y % change Q1 216Q2 216Q3 216Q4 217Q1 217Q2 217Q3 217Q4 y-y % change Eurozone IP 218Q1 218Q2 218Q3 218Q Eurozone IP Investment (Gross capital formation)

17 216Q1 216Q2 216Q3 216Q4 217Q1 217Q2 217Q3 217Q4 218Q1 218Q2 218Q3 218Q Y-y % change Y-y % change Outlook on FeCr demand: USA IP, investment growth forecast to increase in 218; decline thereafter Stainless steel production growth range forecast at 1-1.7% y-y running up against effective capacity limitations North American IP USA IP Investment (Gross capital formation)

18 Outlook on Global HC FeCr demand The combination of Chinese, Indonesian and Indian demand will define HC FeCr market in coming years HC FeCr demand growth forecast to be relatively flat over forecast period HC FeCr consumption, ' tonnes gross weight China India 14, RoW Indonesia 12, 1, 8, 6, 4, 2, HC FeCr consumption, y-y % change 3% 25% 2% 15% 1% 5% % -5% -1% China India RoW (ex-indonesia) RoW including Indonesia

19 Outlook on Global FeCr supply Our forecasts expects supply growth from South Africa, Indonesia and India Chinese supply will swing into the market in response to pricing signals 15, 1, RoW (excluding Indonesia) Indonesia India Kazakhstan China S. Africa 2% 15% 1% S. Africa China RoW (including Indonesia) 5% 5, % -5% %

20 Global HC FeCr supply/demand balance Market balance Global HC FeCr will tend towards oversupply over the forecast period However, deficits will be required in order to prevent excessive stock accumulation Chinese supply will swing in and out of the market depending on pricing signals

21 Production costs Rising power costs in South Africa (ZAR-terms) will push up production costs; effect will be offset by depreciating currency But South African marginal production costs will not be as important for global prices as Chinese production costs ZA power price increase in US$ terms (15% LC y-y increase post-217) ZAR nominal ex-rate vs US$ (RHS) 14% 12% 1% 8% 6% 4% 2% % -2% -4% -6% -8% Data: CRU ZA FeCr producers, delivered costs, US c/lb (ex-vat), 221 projection 1, 2, 3, 4, Thousands

22 Chinese production costs and ore Chinese supply will balance the HC FeCr market in the long term; cost of production is vital and is largely defined by price of South African chrome ore 5, 4,5 (' tonnes gross weight) 4, 3,5 3, 2,5 Chinese Production S.African Production 2,

23 China s dependence on ZA ore supply m tonnes, ZA Cr ore production requirement 3 ZA UG2 production ZA conventional Cr ore required South African ore production projected to need to rise by about 2.5mtpy by 221 Outlook for PGM prices is not particularly positive yet more UG2 concentrate is needed, or else expansion will have to be entirely conventional ore Costs will rise, but barriers to entry are low

24 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 China s dependence on ZA ore supply ZA chrome ore exports responded quickly to the acute shortage of material in late 216 RoW supply also shows signs of being reasonably elastic China's monthly Cr ore imports, t 1,8 1,6 1,4 1,2 1, RoW South Africa monthly total imports average

25 m tonnes UG2 ore milled China s dependence on ZA ore supply South African ore production projected to need to rise by about 2.5mtpy by 221 CRU s outlook for PGM prices is bearish; risks to supply are acute m tonnes UG2 concs capacity Δ 1.2m tpy forecast 221 forecast 6, 5, 4, 3, 2, 1, Δ 7.5m tpy Total Eastern Limb Total Western Limb

26 Conclusions: Short-term outlook dominated by chrome ore stocks in China Chinese stainless steel stock levels not overly worrying at the moment but there is the twin threat posed by bullish nickel market and Indonesian imports Long-term trend towards lower global stainless steel production growth, but it retains late-cycle commodity characteristics Chinese stainless steel cycle will determine when domestic Chinese HC FeCr production is required to swing into the market. HC FeCr production cost in China will be key and that will be determined by ore availability and price South African chrome ore is the key variable in the Chinese production cost calculation 26