here i am contributing to ur education. There arent many details on what the ferrosilicon or silicon manganese cost curve looks like, and what available information is not always accurate. However, the electricity price can give u an idea of what the curve looks like. In this case. 7 cents minus 3.2 per kwh. About 3.8 cents and the difference is likely higher than that. At 9000 kwhs thats 342usd. Or almost 30% margin if prices are at 1.3k. Which should be what the marginal producers cost is. This is ex China, as the market there seems to be getting a high subsidy.
what do u mean by new high capital builds? R u saying because there isnt new investment into the sector that prices wont go up? Its the opposite of that. U got it upside down, the falling supply will move prices up. Low prices destroy supply. However for that to happen normally prices have to go below the operating cost of most of the smelters, hence the reason they r shutting down. This has to do with the business environment, as indebted producers normally produce more in order to pay down their debt. This is what it means when the chairman says the sector is chasing cash, not profits. They r offloading inventory at prices below their cost. Oversupplying the market further and dropping pricss below what it costs to produce them in the short term.
demand for this commodity is inelastic, large moves in the price doesnt change the demand for the product. Supply will be determined by the marginal producer. If the marginal producer goes bust, there wont be enough supply. Prices will go up to whatever it needs to incentivize the marginal producer to meet that demand, as the users will need the product regardless of whether it is priced at 1k or 2k. Which is why the us prices went up to 2k recently.
all this is also in a market where the supply and demand nodes are at different locations and certain regions like the us and europe have put in large tariffs on Chinas alloy products. So even if china can export at usd 1k fob tianjin. For the product to reach the us prices have to be at least 1.3k if u take into account logistical and the 25% tariff instituted in 2019. The tariffs and geographical locations is what gives omh the advantage, as nobody has tariffs on Malaysia for alloys and the industrial factory is located beside major sea trade routes.
to find out where the market is right now, just look at the other 2 producers who r in the 1st quartile of production costs. Which are Elkem and Ferbasa. Both of them r cutting production. Ferroglobe, once one of the largest producer of alloys. Is going bust.
if these guys r threading water, the guys at the 3rd and 4th quartile are drowning. Look at all the reports posted by rocket. Everyone is shutting production.
total ferrosilicon consumption outside of china is approximately 3million tonnes. Which is what omh is competing against.
the repayment of the debt is not an issue. The inventories alone are over 220million aud, and the cash the business is generating is about 100million aud at cycle bottoms. This is on a long term debt of 400million spread over 5 years. What is likely to happen is that they refinance it once it hits 200mil.
what ur doing is a very shallow analysis.
U dont understand the difference between profits vis a vis cashflow for debt repayment. Its 2 different things. Having large new capital into the sector is an INDICATION that there might be an upswing in demand, but it is not a positive thing for prices. It means there is more supply coming in.
supply and demand depends on both supply and demand, not just demand. While a slump in demand can and will push prices down. Exiting supply will rebalance the prices towards the marginal producers. This is all the posts that rocket have been posting for the last several months. Supply exiting the market.
OMH Price at posting:
36.0¢ Sentiment: Buy Disclosure: Held
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