China's ferro alloy futures maintain downward trend

Due to the apparent relaxation in China's ferro alloys industry's power rationing and increased supply, prices of ferro alloys futures have continued to fall since mid-Oct'21. Ferro silicon prices fell to RMB 9,930 /tonne (t) ($ 1,552/t)and silico manganese to RMB 8,800/t ($1,375/t).

Supply continues to rise
Recently, many ferro silicon plants in the Ningxia region in China issued notices for power outages at submerged arc furnaces. An alloy company's power plant in Guizhou has been subject to limited coal inventory which is indicating that there is a possibility of suspension of production. Power shortages on the supply side have occurred from time to time, but sustained thermal coal supply has ensured produced will continue to rise.

At the same time, steel production has increased. Latest data shows that the country's total output of five major steel products was 9.219 million tonnes (t), a slight rebound w-o-w. In the first three quarters of this year, domestic crude steel output increased by about 16 mn t compared to the corresponding period last year (CPLY), which is still far from the output reduction target set by the Ministry of Industry and Information Technology for the steel industry. Crude steel production is unlikely to increase significantly in November, and overall demand for ferro alloys is expected to remain weak.

After a sharp fall in ferro alloy prices, the volume of warehouse receipts dropped sharply. Significant discounts increased enthusiasm for the conversion of warehouse receipts to spot. In addition, the obvious cost-effective advantage of point prices, all contributed to a substantial decline in the volume of warehouse receipts. From the perspective of corporate inventory, the silico manganese inventory has declined slightly, indicating that supply is slightly tight.

After falling sharply, ferro alloy futures prices found support near the spot price. From the perspective of the latest production costs, ferro silicon is at RMB 9,800/t ($1,532/t), down by RMB 200/t ($31/t) from the previous period (specify), mainly due to the decline in prices of blue carbon. At present, blue charcoal prices are at RMB 3,000/t ($469/t), and coke futures have dropped sharply to around RMB 3,000/t ($469/t). The fall in blue charcoal prices in the later period is a huge risk in lowering the cost of ferro silicon. If prices of blue charcoal go down to around RMB 2,000/t ($313/t), the corresponding cost of ferro silicon will be around RMB 8,600/t ($1,344/t).

Similarly, the cost of silico manganese is at RMB 8500/t ($1,328/t). If the price of secondary metallurgical coke drops by RMB 1,000/t ($156/t), the cost of silico manganese will drop to RMB 7800 /t ($1,219/t). In the short term, the static cost support of RMB 9,800/t ($1,532/t) for ferro silicon and RMB 8,500/t ($1,328/t) for silico manganese is still effective, but in the medium term, prices of raw material still have downside risks which may lead to the fall in the cost of ferro alloys.

Spot market unstable
The basis of the ferro silicon 2201 contract is RMB 1,700/t ($266/t) and the basis of the silico manganese 2201 contract is RMB 1,500/t ($234/t). The substantial discount on the futures is one of the factors that supports the rebound. However, the current spot market sentiment is unstable and so is the momentum in futures. In addition, given the downward movement of spot prices, there is a high probability that the base spot price will drop catching up with futures.