2007 Annual Report on Chinese Chrome Market

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1 2007 Annual Report on Chinese Chrome Market In 2007 ferrochrome and chrome ore markets keep at high price levels and Chinese government publishes many policies to regulate chrome market. Many Chinese smelters cooperate with foreign chrome ore suppliers in order to develop stronger and stronger. In 2007 Chinese chrome ore market changes greatly. Most of suppliers increase their offers while buyers meet great production cost increases pressures, which show the importance of holding resources. Many importers become worried about the future market. Although there are many factors that influencing the market trend, the most important one is the relationship between supply and demand, so we should analyze the market trend by means of this factor. Ferrochrome is the most important raw material for stainless steel production, as every kind of stainless steel has something of chrome, so the steel will not be corrosive. The supply and demand of chrome and stainless steel market ties up closely. 1. The introduction of chrome There always has been chemical reaction between all kinds of metals and oxide by means of forming oxidation film. Unluckily, Ferric oxide would continue to oxide further and finally form holes, so we could make use of oil paint or other metals to protect stainless steels, but as all of us know, this protection is filmy, and once it is destroyed, the stainless steel would be erosive. Whether stainless steels would be erosive or not depends on chrome and the ways to protect stainless steels are different. Every stainless steel has its common factor, that is, the content of chrome is above 10.5%. High Carbon Ferro Chrome is an alloy of chromium & ferrous used in the manufacture of Stainless Steel. It is manufactured in a submerged electric arc furnace. The raw materials for its manufacture include: Chromite Ore (in the form of fines and lumps),reductants (like Coke and Coal), fluxes (like Quartz, Dolamite, etc.). The Ores are smelted in submerged electric furnaces at a temperature of 1700 degree centigrade to produce High Carbon Ferro Chrome. High carbon ferrochrome is also the raw material of medium and low carbon ferrochrome production. The production areas of high carbon ferrochrome are in Northwest and Southwest China, such as Shanghai, Shanxi, Sichuan, Guanxi and so on. High carbon ferrochrome and chrome ore are the main raw materials to produce medium and low carbon ferrochrome.

2 2. Main raw material------chrome ore China, as one of the largest demand and import countries for chrome ore, is lack of chrome ore resource. There are about million tons of ore reserves, including 53.6% of rich ores. The main areas exploring chrome ore lie in 13 provinces, including Tibet, Sinkiang, Inner Mongolia, Gansu and so on. Tibet holds 50% of chrome ore reserve in China. The features of Chinese ferrochrome production are as follows, Firstly, there are many smelters of small-scaled; secondly, 95% of smelters greatly depend on importing chrome ore. Due to the shortage of resources and high production costs, many smelters have great pressure; thirdly, the power price keeps high. Chinese ferrochrome production relies on above 85% of importing chrome ore. Usually China imports chrome ore from South Africa, India, Iran, Pakistan, Oman and so on. 2.1 The volume of importing chrome ore in the recent years From 2005 to 2007 Chinese chrome ore import volume Ten thousand to Year In 2006 and 2007 Chinese ferroalloys and stainless steel industries develop fast, which impels the import volume of Chinese chrome ore to increase from 3.02 million tons in 2005 to 4.32 million tons in 2006, and in 2007 the volume reaches 6.09 million tons. The importing volume of Chinese chrome ore is increasing year by year, which shows the large demand for global chrome ore and impels international chrome ore price to go up quickly.

3 2.2 In recent years the countries China imports chrome ore from In 2006 Distriction 3% of Chinese chrome ore import 2% 5% 2% 2% 5% 23% 6% 18% 34% South Africa India Turkey Iran Oman Pakistan Philippine Kazakstan Albania Australia In 2007 Distriction of Chinese chrome ore import 5% 4% 3% 4% 4% 2% 32% 5% 3% 18% 16% South Africa India Turkey Iran Oman Pakistan Philippine Kazakstan Albania Australia Brazil From the above, there are some features for importing chrome ore. Firstly, the volume importing chrome ore from South Africa is increasing year by year. In 2005 the importing volume was only 329 thousand tons, and in 2006 the volume increased by 539 million tons to 868 thousand tons, while in 2007 the volume breaks 1.96 million tons, increasing by 128% compared with those of Chinese chrome alloy production depends on

4 South African chrome ore. Secondly, there are some changes for Indian chrome ore import volume, which is decreasing gradually. In 2005, China imported 975 thousand tons of Indian chrome ore, occupying 32% of the total import volume, and in 2006 China imported 1.34 million tons, occupying 31% of the total import volume, however, in 2007 the volume decreased to 980 million tons of the material and occupied 16% of the total import volume. Thirdly, China starts to import chrome ore from many kinds of countries and it does not focus on India mainly, such as, Turkey, Iran and South Africa and so on. At present China starts to import chrome ore from Mozambique, Zimbabwe, Madagascar, Armenia, Sudan, and Albania and so on. Fourthly, not only does China import chrome ore from all kinds of countries but also the import volume is increasing. In 2006 Japanese import 10% 7% 13% 2% 68% South Africa Pakistan India Philippine Others In 2007 Japanese import 6% 4% 20% 3% 67% South Africa Pakistan India Philippine Others

5 In 2007 Japan imports 180,092 tons of chrome ore, including 36,892 tons from South Africa, 4,521 tons from Pakistan, 120,571 tons of India and 9,924 tons from Philippine. In 2006 Japan imported 136,362 tons of chrome ore, including 17,948 tons from South Africa, 2,900 tons from Pakistan, 93,122 tons from India and 13,871 tons from Philippine. In 2007 Japan increases its import volume by about 32% compared with that of The import volume from South Africa increases from 13% in 2006 to 20%, but the import volume from Philippine decreases from 10% to 6%. India is still the major chrome ore import country for Japan. The comparison of American chrome ore import volume in 2006 and 2007 Country In 2006(ton) In 2007(ton) South African 146, ,759 Canada 19 Korea 22 India 1 Total 146, ,759 From the above, in 2007 America import volume is about 23% lower than that of 2006, including the import volume from South Africa decreases by 27,359 tons. South Africa is still the major chrome ore import country for America. 2.3 South African and Indian chrome ore South Africa is the largest chrome ore production country. Although in South Africa there are abundant chrome ore resource, the chrome ore is of low ratio of Cr/Fe, so South African smelters could only get charge chrome 50-55%. Most of Chinese steel mills are used to produce with high carbon ferrochrome 60%, so it is not popular for them to use charge chrome and even if South Africa holds an abundant of chrome ore and the price is workable, there is still some disadvantages. In recent years, China imports large quantities of South African chrome ore in view of the resource advantages, workable price and enough supply. In 2006 China imported 868 thousand tons of South African chrome ore, increasing by 169% and in 2007 the total import volume rises by 32%, which is more than that of Indian import volume. Although South African government plans to restrict chrome ore export, the export policy has not been published officially. It is said South

6 African government wants to follow suit Indian policy. Once South Africa, as the largest chrome ore production country, increases its export duty on chrome ore, international chrome ore market would go up further. India chrome ore market Once in view of the low freight from India to China, India plays an important role on Chinese chrome ore supply. Indian chrome ore is mostly used in medium and low carbon ferrochrome production. Indian chrome ore controls Chinese ferrochrome and chrome ore markets. However, in recent years, in view of the large import volume from other countries, the import volume from India becomes decrease, especially with the economic development and steel industry growing up, ferrochrome capacity is also increasing, which needs more chrome ore, so Indian government published chrome ore export restriction. Since the beginning of 2006, Indian government has published policies to restrict chrome ore export. On 1 st March 2007 India published the export duty of INR2,000/t (USD44/t) for chrome ore, an then in the second quarter of 2007, the price of concentrate 48-50% increased to USD347/t FOB and fragile 46-48% moved up to USD350/t FOB. In the following three months, the price was unchanged. In financial year of 2006, India published export quota for fragile chrome ore of 400 thousand tons and the price of fragile should be above USD200/t FOB. In the last quarter of 2007 MMTC increased the price of chrome ore by USD60/t FOB, so the price of concentrate chrome ore 48-50% moved up to USD407/t FOB and the price of fragile chrome ore 48-50% rose to USD410/t FOB. On 1 st March of 2008 Indian government increased chrome ore export duty to INR3,000/t (USD77/t) and the price of fragile chrome ore 48-50% increased to USD510/t FOB and the price of concentrate chrome ore 48-50% rose to USD505/t FOB. Before July of 2007 Chinese chrome ore import volume from India started to decrease to 587 thousand tons, 36.6% lower than that of the same period of Meanwhile, China imported more materials from South Africa, which is 1 million tons, increasing by 145%. In the end of 2007 the price of Indian chrome ore increased to USD500/t CIF China. Although the price increase in Indian chrome ore impels Chinese market to go up and tight supply, most of smelters start to use South African and Omani chrome ore to replace Indian ones, except medium and low carbon ferrochrome smelters, so there is little affect towards Chinese ferroalloy industry. In view of the export duty increase in Indian chrome ore, the price for export also witnesses increase, which is an impact towards international chrome ore market. Although Indian suppliers have to increase chrome ore price in view of the high export duty, but in 2007 China still imports more Indian chrome ore, so most of other chrome ore suppliers follow suit to increase their offers.

7 It is normal that chrome ore suppliers want to increase their offers to decrease their costs, but the ferroalloy and steel industries suffer a lot, and they could not accept the increasing chrome ore price constantly. Besides, chrome ore exporters suffer from the export duty increase in chrome ore, so some want Indian government to cancel this policy, and some South African exporters are also against export duty increases, believing that supply and demand are the main factor of influencing market, not national restriction policy. There is no doubt that in 2008 China would continue to restrict ferroalloy export volume and domestic production volume, which will help international chrome ore market to decrease rationally. 2.4 The reserve, supply and demand volume of chrome ore in the whole world South Africa holds the largest chrome ore reserve in the whole world, about 75% of the total reserve volume. Zimbabwe s chrome ore volume occupies 13% of the total reserve, 1% of Indian chrome ore and 3% of other countries. In 2007 the production volume of South African chrome ore takes up 38% of the global chrome ore volume, 19% of Kazakstan, 15% of Finland, Turkey, Zimbabwe and Brazil, 17% of India and 11% of other countries. In 2006 the production volume of chrome ore in the whole world was about 21 million tons, 75% of which are used in domestic ferrochrome production; in 2007 the production volume of chrome ore is 23.4 million tons, 68% of which are used in domestic ferrochrome production. It is expected that in 2008 the production volume of chrome ore would reach 24.9 million tons, increasing by 6.4% compared with that of In 2006 the demand volume for chrome ore in the whole world was about 21 million tons, and in 2007 the demand volume increased to 23.1 million tons. It is expected that in 2008 the volume would reach 25.5 million tons, increasing by 10.3% compared with that of The areas of ferrochrome production 3.1 The main areas producing ferrochrome spread in Northwest and Southwest China, for example, Shanxi, Sichuan, Guangxi and so on. There are many major ferrochrome smelters, such as, Shanxi Wanbang and Hengshan, Sichuan Jinguang and Mingda, Jilin ferroalloy, Fushun ferroalloy, Dongfeng ferroalloy, Guangxi Guixin and so on, and Fushun ferroalloy mainly produces low carbon ferrochrome, but most of smelters

8 produce high carbon ferrochrome. Company The production capacity in 2007 Shanxi Jinzhong Wanbang Industry Trade Co. Pinglu Changhong Ferroalloy Co. Shanxi TianGong Electic Power Development Co.,Ltd Shanxi Minmetals Industrial&Trading Co. Shanxi Hengshan Industry Co. Sichuan Mingda Group Enterprise Co. Sichuan Jiannanchun Ruifeng Smelting& Ores Co.,Ltd 80,000tons HC FeCr 50,000tons HC FeCr 5,000tons LC FeCr 50,000tons HC FeCr 70,000tons HC FeCr 65,000tons HC FeCr 120,000tons HC FeCr 10,000tons MC LC FeCr 100,000tons HC FeCr Guixin Metallurgy Company Limited 60,000tons HC FeCr Jilin Ferroalloy Co. 66,000tons HC FeCr 72,000tons MC LC FeCr Fushun Ferroalloy Co. Dongfeng Iron Alloy Company Limited Hunan Ferroalloy Co. Zhejiang Hengjian Ferroalloy Plant Inner Mongolia Mingtuo Group 120,000tons LC FeCr 60,000tons HC FeCr 7,000tons MC LC FeCr 50,000tons HC FeCr 5,500tons MC LC FeCr 30,000tons MC LC FeCr 200,000tons HC FeCr 3.2 Chinese domestic ferrochrome volume increasing

9 In 2006, the total ferroalloy volume was about million tons, increasing by 30.9% compared with the year of 2005, including 2,457,700 tons in Inner Mongolia, 1,603,400 tons in Guangxi, 1,535,700 tons in Guizhou, 1,213,900 tons in Sichuan, 1,075,600 tons in Hunan and 819,200 tons in Ningxia. In 2006, 18 smelters produce 640,500 tons of high carbon ferrochrome, 143,700 tons of medium and low carbon ferrochrome. In 2006, it is estimated that the total output of high carbon ferrochrome in China was about 900,000 tons, increasing by about 220,000 tons compared with that of According to the customs statistic, in 2006 China imported 4,320,000 tons of chrome ore, increasing by 42.86% than that of In 2005 and 2006 the chrome ore import volume increased by above 42%. In 2005, Chinese ferrochrome production volume was about 896,000 tons, 1,100,000 tons in 2006, 1,300,000 tons in It is expected that in 2008 the production volume of ferrochrome would reach 1,500,000 tons Chinese ferrochrome production volume Ten thousand tons Month 3.3 Chinese domestic ferrochrome market price

10 In 2006 the production volume of Chinese domestic stainless steel increased quickly, which made ferrochrome market bullish, especially since the end of 2006, with the price increase in chrome ore and other raw materials and strong demand, high carbon ferrochrome price has kept increasing. In early February of 2007, the mainstream price of high carbon ferrochrome 50% increased to about RMB /t ex works, about RMB100/t higher than those of early December of 2006, about RMB2300/t up compared with the beginning of In the recent two months, the price of high carbon ferrochrome 50% reaches above RMB9,500/t ex works in view of the tight supply and price increases in chrome ore. Due to the strict restriction in Indian chrome ore and high demand in Indian domestic market, the export volume would decrease gradually. Meanwhile, Turkish chrome ore suppliers continue to increase their offers, so Chinese traders have to purchase materials at high prices. At the beginning of February of 2007, the price of Indian concentrate chrome ore 50% moves up to RMB58-60/dmtu (USD /dmtu) ex ports and the price of Turkish lumpy chrome ore 44% increased to RMB58-60/dmtu ex ports, but till March of 2008, the price of Indian concentrate chrome ore 50% has reached RMB95-96/dmtu (USD /dmtu) ex ports and the price of Turkish lumpy chrome ore 42% has moved up to RMB92-93/dmtu (USD dmtu) ex ports, so most of ferrochrome smelters are afraid of the future chrome ore price and the tight supply of chrome ore. 3.4 Foreign ferrochrome production From 2006 to 2008, global ferrochrome production capacity reaches 1,300,000 tons. In

11 2007, many ferrochrome smelters started to be on stream, including LION ferrochrome plant (X STRATA) run in January of 2007 and two electric furnaces of IFM in BUFFELSFON TEIN put into production in January of 2007, about two or three months earlier than they expected, so the ferrochrome volume in BUFFELSFONTEIN plant increased by 39,000 tons in Besides, in October of 2007, an electric furnace of RICHARDS BAY (Tata steel) established and in October of 2008 another furnace is going to finish. RICHARDS BAY produces high carbon ferrochrome by means of using Indian chrome ore. In 2007 there were about seven ferrochrome smelters in South Africa, those are, XSTRATA ALLOYS (1,960,000 tons/year), SAMANCOR CHROME (1,000,000 tons/year), HERNIC(420,000 tons/year), ASSMANG (300,000 tons/year), ASA METALS(130,000 tons/year), IFM BUFFELSFONTEIN (267,000 tons/year) and RICHARDS BAY. In 2007 South Africa increased 762,000 tons of ferrochrome. It is heard that in 2008 ASA METALS would increase their production capacity from 130,000 tons to 380,000 tons, which brings great pressure on the international ferrochrome market. In 2006 it is expected that the total global production volume of ferrochrome was about 6,440,000 tons and in 2007 the volume increased by 20% to 7,75,000 tons of ferrochrome. Asian Metal predicts that in 2008 the global production volume of ferrochrome would increase by 5.8% to 8,200,000 tons. In 2006 the global demand volume of ferrochrome was 6,690,000 tons, and in 2007 the demand volume increased by 14.4% to 7,660,000 tons. It is expected that in 2008 the demand volume would reach 8,600,000 tons, increasing by 12.2% compared with that of Chinese ferrochrome import volume increasing Chinese ferrochrome import(450,000 tons in 06) 21% 5% 24% 3% 47% South Africa Kazakstan Zimbabwe India Others

12 Chinese ferrochrome import(1.05 million tons in 07) 2% 17% 1% 28% 52% South Africa Kazakstan Zimbabwe India Others 3.6 Chinese domestic stainless steel industry smooth, ferrochrome consumption increase In 2006 Chinese special steel smelters produced 3,060,000 tons of crude steel, including 1,109,600 tons from Tai steel, 1,139,100 tons from Bao steel, 1,770,000 tons from Jiu steel. It is expected that there is about 2,300,000 tons in private steel smelters, so in 2006 the total crude steel in China reached 5,360,000 tons, increasing by 60% compared with In 2007 Chinese stainless volume keeps increasing, and the volume is expected to 7,530,000 tons, about 2,230,000 tons more than that of In 2006 Chinese high carbon ferrochrome consumption was about 1,300,000 tons, about 440,000 tons up compared with that of In 2007 the global stainless production volume is 30,000,000 tons, increasing by 7.1% compared with that of It is expected that in 2008 the production volume of stainless steel would reach 10 million tons, about 33% higher than that of 2007

13 From 2000 to 2008 The prodction volume of Chinese crude steel Ten thousand tons Year 3.7 The cooperation between Chinese buyers and foreign chrome ore suppliers With the fast development of Chinese stainless industry, China has become the largest country of importing and consuming chrome ore and ferrochrome, so Chinese importers should cooperate closely and show the advantage of importing chrome ore and ferrochrome. Meanwhile, China should quicken not only chrome ore trading and also reserve steps. 4. The analysis of Chinese ferrochrome policy and the prospect of the future market In 2006 Chinese ferroalloy export volume increased quickly, but as it belongs to high energy consumption and resource export, since 2004 China has published many policies to restrict ferroalloy export. However, it still could not control export volume last month. On 27 th October of 2006 Chinese government increased the export duty to 10% from 5%, including ferrochrome, ferromanganese, ferrosilicon and silicomanganese, and as for other ferroalloys, such as manganese ore and chrome ore, the export duty increased to 10% from 0%, and the policy was set down on 1 st November of From 1 st January of 2007, most of ferroalloys should abide by export permit system in order to restrict ferroalloys export, and in 2007 the export duty of ferrochrome moves up to 15% from 10%. Since 1 st January 2008, the export duty of ferrochrome has increased to 20%.

14 In 2008 Chinese ferrochrome market would still keep at high price levels. Firstly, high production costs keep ferrochrome price at high levels. Indian government published chrome ore export restriction policy, so the price of chrome ore in the global market would increase, which brings much pressure on Chinese ferrochrome smelters. Secondly, Chinese government pays much attention to environmental protection and cancels preferential power price, which also add high production costs for many smelters. Meanwhile, the prices of oil, coke and transportation fee are also increasing, so there is little room for Chinese ferrochrome smelters to decrease their offers greatly. Thirdly, the demand from Chinese domestic buyers would keep strong. In 2008 Chinese stainless industry would witness production output increases, so there is a large demand for ferrochrome. Fourth, International market keeps strong and ferrochrome market remains firm, which bring a good environment for global steel industry. In 2008 the demand for ferrochrome from the global steel industry would continue to keep strong, so international ferrochrome market would be at high price levels. Fifth, in view of the strict restriction for ferrochrome, some ferrochrome smelters could not burden the increasing production costs and have to become bankrupt. The supply in the spot market would turn to tight, so many smelters increase their offers.