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Commodities Comment
Contract ferrochrome prices set to fall
The latest round of quarterly contract pricing negotiations for ferrochrome is
now underway. In our previous update on the market outlook three weeks ago,
we had highlighted downside risks to prices, despite rising cost pressures.
These risks appear now to have crystallised and we think contract prices for
1Q11 will fall owing to underwhelming demand, strong production and recent
aggressive sales by some producers. We think that a decline of about 5¢/lb,
or more, could be seen, which would be equal to about 4% of the current
European headline contract price of 130¢/lb DDP for South African charge
chrome. Looking further ahead, ferrochrome prices should find some support
from cost inflation, assuming supply adjusts accordingly.
Latest news
Base prices rose on Monday, supported by positive news flow from China.
Paul Cavey, Macquarie’s China economist, reported that while there has been
no official release from the Central Economic Work Conference, delegates are
starting to speak to the media. The 2011 targets they have reported are CPI
+4%; GDP +8%; M2 +16%; and loans of “at least Rmb7tr”. The only surprise
here is the last. Our policy watches have talked about the debate on loans
moving down towards Rmb6tr and then back up towards Rmb7tr, which would
suggest more room for growth, and inflation too.
LME open interest and prices for copper have continued to rise sharply in
recent days – both to new record highs – indicating that new longs are being
built in copper into the end of 2010 (chart below left). The copper price is
running strongly as the market anticipates an even tighter balance in 2011.
A similar move occurred in late 2009 as traders anticipated the copper market
moving into deficit in 2010 – which, of course, is what has happened.
Latest Chinese data shows strong growth in some key copper industry enduse data. According to NBS data, production of power cables (in km) was up
33.1% YoY in November and 26.9% YoY in the first 11 months of this 2010.
Aluminium semis production was up 23.1% and 25.3%, respectively, on the
same comparisons. Meanwhile, Chinese crude steel production rose by 3%
MoM to 610mtpa in November, the highest annualised rate since June, and
we expect a strong push in Chinese steel output during 1Q11.
Data was also reported on production of base metals by the NBS but this
data is unreliable and we await the data published by the Non-ferrous Metals
Industry Association (CNIA), which tend to be more accurate, although we do
note the NBS data show a sharp rise in refined copper output in November,
possibly reflecting a more attractive conversion regime for concentrates (with
spot TC/RCs now at $110/t and 11c/lb), as well as weak primary aluminium
output following power-related production cuts.
The price for manganese ore (medium-grade lump 43–44% Mn) shipments to
China in January 2011 will be unchanged from this month’s level of $6.50/dmtu
CIF, which follows a roll over in prices from November to December, although
we understand that some producers are selling at moderately lower levels.
Previously, prices had fallen for six straight months from the May peak of
$8.70/dmtu CIF China. This latest development is in line with our expectations
and we continue to think that manganese ore prices are likely to rise in 2011.
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