China's power crisis implications on ferro alloys sector

China's unprecedented power crisis is having avdirect fallout on its ferro alloys industry, the world's largest. The government has been quick to move in with the dual measures of power supply tightening and consumption curbs. But, it is well-known that ferro alloys are a highly power-intensive segment. A silico manganese plant's consumption is at 3,650 units per kiloWatt hour (kWh). A ferro manganese plant consumes 3,000/kWh, while a ferro chrome's is 4,000/ kWh. Ferro silicon manufacturing involves a huge 8,500 units per kWh. Under such circumstances, many of the units are having no option but to close down temporarily to tide over the electricity supply crunch.

China's ferro alloys production

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 total ferro alloy production is at around 25.6 million tonnes (mn t) against the global 44.1 mn t.

China is the largest ferro chrome importer and producer with an average monthly production of 0.50 million tonnes (mn t). Total ouput over Jan-Aug'21 was at 3.83 mn t against 3.61 mn t in the corresponding period last year (CPLY).

In silico manganese and ferro manganese, China tops the global production and consumption charts with no presence in the exim trade. Its production of silico manganese in Jan-Aug'21 amounted to 7.86 mn t compared to 7.53 mn t in CPLY. Ferro manganese output in this period was at 1.42 mn t against 1.30 mn t* in CPLY while ferro silicon was at 4.09 mnt against 3.40 mn t in CPLY. Exports of the latter are at a mere 1,600-2000 tonnes, mainly to India.

Production cuts

However, production cuts have been rampant since early September. China's total ferro alloys production eroded by 24% m-o-m in September to a provisional 1.60 mn t against 2.11 mn t in August, as per SteelMint data. There was production loss across all four segments in September over August. Ferro chrome output dropped 24% m-o-m, silico manganese by 29%, ferro manganese by 20% and ferro silicon by 17%.

Reasons for the production cuts

First, China's dual power control policy is being implemented strictly. Major power utilities reduced supplies significantly while some nearly stopped generation while smelters were told to curb consumption.

Secondly, the prices of China's domestic thermal coal, required in steam generation, and met coke and nut coke, used in the production process, have spiralled up.

Chinese domestic met coke prices have surged from RMB 2,920/t ($453/t) in January to RMB 4,160/t ($646/t) in September, an 87% increase since April and a m-o-m rise of 19%. Imported 5500 NAR thermal coal prices brought to Qinhuangdao Port have escalated 135% in September from March levels and by 35% m-o-m against August.

Production costs are unviable on the back of the unreasonable surge in costs of inputs like coal and coke, forcing Chinese ferro alloys plants to increase prices too.

Coal and coke prices, both domestic and imported, in China are inflating on continued shortages amid ongoing safety and environmental regulations and limited non-Australian premium material, while demand is robust thanks to healthy steel margins. End-users are rushing to procure but facing the double whammy of high prices and domestic production crunch as the government cracks down on miners flouting safety norms.

Price surge

As a result, ferro silicon prices are surging to almost RMB 17,000/t ($2,639/t) against RMB 6,000/t ($930/t) levels nine months back. Silico manganese is touching RMB 12,000/t ($1,863/t) compared to RMB 7,000/t ($1,086/t) in early 2021. Similarly, ferro manganese prices have spurted to RMB 13,000/t ($2,018/t) levels compared RMB 7,000/t ($1,086/t) in January while ferro chrome prices have almost doubled to RMB 12,000/t ($1,863/t) against RMB 6,000/t ($930/t) early this year.

Outlook

Coal and coke prices are not likely to reduce soon. China's power crisis is also not expected to alleviate in the near term. Both factors will keep ferro alloy prices supported.

Moreover, European ferro alloy producers are implementing production cuts. Units in Spain and Ukraine have shut shop due to increased energy costs in Europe. Russia's export tax has also ensured that supply stays tight. These factors will further prop up China's already high ferro alloy prices.