LMEWEEK-ANALYSIS-Ferrochrome to test new highs on demand surge

Thu Oct 14, 2010 10:08am EDT

* Stainless steel demand, low stockpiles support prices

* Production costs in South Africa set to rise

By Michael Taylor

LONDON, Oct 14 (Reuters) - Steel ingredient ferrochrome will test new highs within the next 12 months, as production fails to keep pace with a jump in global demand and current stockpiles are too low to fill the gap.

The bullish outlook for the minor metal, used in stainless steel to prevent corrosion, is further enhanced by rising output costs in top producer South Africa, due to a strong rand, higher power costs, labour and transportation problems.

Although high carbon ferrochrome FECRO-HC-RU traded this week at about $1.22 a lb on the European spot market -- well below levels above $2.80 a lb in April 2008 -- the industry expects rises in 2011.

"We could get a good run on numbers for next year," said one South African producer. "Above $2 is possible. For the direction, it has got to be up.

"Supply is not there to fully meet the requirements, and the cost of production is only going one way."

The global economic downturn hit ferrochrome prices, which touched a two and a half year low at 68 cents a lb in May 2009, before climbing to about $1.34 a lb in April 2010.

But last month, consultancy CRU Group said consumption of high carbon ferrochrome and charge chrome would rise by 21 percent to a new all-time high this year at 8.27 million tonnes, led by the stainless steel sector. [ID:nLDE68L1NX]

"We will get higher prices," said Heinz Pariser, a ferrochrome and stainless steel industry researcher. "By the end of next year, we will possibly be between $1.80/$2 a lb."

"In 2010, the volume of crude stainless steel was almost 31 million tonnes, and next year we are going up 6-7 percent," he added.

"China has some stockpiles (of ferrochrome) but stockpiles in other parts of the world, in the hands of producers or consumers, are very limited." <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

For an LME story on ferrochrome, click on [ID:nLDE68721Q] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

London-listed International Ferro Metals (IFL.L) said late last month that it too expects ferrochrome spot prices to increase in the next two to three months as stainless steel makers look to boost production. [ID:nSGE68Q095]

CRU Group, which sees global ferrochrome production at 8.30 million tonnes this year from 6.07 million tonnes in 2009, said demand growth would be 5.98 percent per year over the next five years.

WILD FLUCTUATIONS

"Ferrochrome demand has certainly picked up strongly and has returned to pre-recession levels in the first quarter of this year," CRU analyst Vanessa Davidson said.

"The shortage of stocks creates the potential for some fairly wild fluctuations in spot prices in the coming months, if demand exceeds expectations," she added. "We would expect prices would continue to rise at this point."

Supplies and production costs in South Africa, which has more than 70 percent of the world's chrome ore reserves, have been affected in recent years by power problems, labour strikes and a strong rand ZAR=.

South Africa's national grid nearly collapsed in early 2008, forcing mines and smelters to shut for days and costing the country billions of dollars in lost output.

State-owned electricity firm Eskom [ESCJ.UL], which provides 95 percent of South Africa's power, is increasing tariffs to help fund an ambitious power expansion programme. [ID:nWEB1997]

In May, a nationwide transport strike paralysed railways and ports and forced mining groups Xstrata and Samancor to declare force majeure on ferrochrome exports. [ID:nLDE64B1GM]

"Nothing has changed since 2008, in terms of the supply side," the South African producer said. "The cost pressures are there -- not just from supply and demand."

"The rand is staying strong and forecast to stay strong, electricity prices are increasing, transportation issues, labour union wage demands -- cost of production is only going to go one way next year," he added.

South Africa has a nearly 40 percent share of the market, while Asia accounted for almost 70 percent of global ferrochrome consumption, said CRU.

South Africa's production of ferrochrome is forecast to more than double to 4.6 million tonnes by 2015 compared with the output for 2009, Pariser said last month. [ID:nLDE68S1W2]

"Ferrochrome capacities are limited," said Pariser. "We have expansions coming onstream but not before 2012, and that is going to drive the price up."

South Africa produced 2.2 million tonnes of ferrochrome last year.

"Even at today's prices the South Africans are not making much money," said Jim Cochrane, chief commercial officer at Kazakh miner ENRC ENRC.L.

"If they want to make anything, then clearly the risk is to the upside because it's difficult to see that, even in the worst case, it can go backwards much." (Editing by Anthony Barker)

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