Global steel demand will rise by a meagre 0.2 percent this year, according to the World Steel Association (WSA). Next year won't be much better with a forecast of just 0.5 percent growth. But it could have been worse. The WSA has upped its forecasts from April, when it was expecting demand to fall by 0.8 percent this year.
The improvement is all about China, where production and demand have been lifted by the government's latest stimulus package, another push of the infrastructure and construction buttons. Within the steel universe, however, one sector is faring much better. Stainless steel production rebounded strongly in the first half of this year, thanks again to China.
And that has implications for two of the metallic inputs into the stainless production process, nickel and ferro-chrome. The latter is one of those metals that trades largely in the shadows for want of exchange-traded pricing. But that may be about to change with the London Metal Exchange (LME) eyeing a potential new contract. Global stainless production rose by 4.1 percent to 22.1 million tonnes in the first half of this year, according to the International Stainless Steel Forum (ISSF).
That represents both a strong recovery from last year, when production fell by 0.3 percent, and an outperformance relative to total steel production, which fell by almost two percent over the same period. And, unsurprisingly, this is again all about China, which produces over half the world's stainless steel. Chinese production surged by 11.5 percent in the second quarter, boosting first-half growth to 7.9 percent. Domestic demand has been booming but so too have exports, a mini drama within the broader story of rising pushback against the flood of Chinese steel exports.
The trade tensions are there to see in the ISSF's regional breakdown. Other than China the only other region to experience stainless production growth was the rest of Asia. Output in the rest of the world declined, a trend that may start reversing as the trade sanctions accumulate. Stainless steel is a core driver of demand for nickel, a market which is currently fixated on the shifting supply dynamics arising from government policy in Indonesia and the Philippines.
Indonesia was the major supplier of nickel ore for China's production of nickel pig iron, a form of the metal used for stainless production. The country banned ore exports in 2014 in a drive to force its miners down the value chain. The policy has been only partly successful. There has been some build-out of smelter capacity, and in the case of China's Tsingshan, even stainless capacity. But other smelter projects have struggled to get off the ground and the government is now mulling whether to relax the ban for those that have started construction work.
The Philippines filled the ore supply gap after the Indonesian ban but the country's nickel production has been thrown into disarray by a draconian environmental review of its miners. A quarter of the country's miners have been closed with another 20 of them under the threat of suspension, many of them nickel operations. Which begs the question of how China's stainless steel producers are getting sufficient nickel to feed such strong output.
The answer, according to analysts at Macquarie Bank, is by blending higher-content concentrates and even refined metal into their ore mix. ("Nickel and the Philippines - the big surprise of 2016", July 13, 2016). There is, after all, no shortage of refined nickel around, particularly in China, which has lifted imports by 68 percent to 290,000 tonnes so far this year.
This relatively new usage of primary metal in the stainless production process may be one reason why Chinese nickel demand is up eight percent so far this year and global usage six percent, according to the International Nickel Study Group. Stainless steel producers also need ferro-chrome and China's surging output has already translated into strong price rises, again according to Macquarie Bank. ("Chrome swings back to a raw material constraint", October 5, 2016).
This market is still characterised by producer benchmark pricing. South Africa's Merafe Resources settled European deliveries for the fourth quarter at 110 cents per lb, the highest level in two years and a 12-cent increase in a quarter normally characterised by price weakness. That reflects a shortage of chrome ore further upstream, particularly falling production in South Africa, the world's largest supplier. China has no chrome resource of its own and is highly dependent on South African supply. Port stocks, according to Macquarie, are at multi-year lows thanks to booming demand from stainless makers.
The bank does expect some pick-up in supply but "overall, we are looking at a chrome market where inventories will continue falling over the coming years". With Indonesian stainless capacity rising, thanks in large part to that government policy on pushing for value-add in the nickel sector, "the coming years may well see an ongoing scramble for supply."
None of which would normally make many headlines outside of the small world that is the chrome market But ferro-chrome has made it onto the radar of the London Metal Exchange (LME). A group of industry participants recently met in London to discuss the idea of a new contract, according to Metal Bulletin. The idea of a London ferro-chrome contract has done the rounds before but this time seems to be gaining traction to the point that the exchange is happy to confirm the interest.
"The LME has been approached by industry users regarding the introduction of an LME ferro-chrome contract," it said. "We believe in developing products in conjunction with participants to meet the real needs of the market, and are committed to assessing and enhancing our offering as effectively as possible." So watch this space. The current stainless steel surge may be about to have a bigger impact than just boosting demand for nickel and ferro-chrome.
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