Someone shared this article, self-explanatory....Monday 21...

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Monday 21 February 2022

Record premium for high-grade manganese ore likely to remain wide,sources say

The pricepremium for high-grade manganese ore against

low-grade ore,on a cif China basis, has steadily expanded to its widest since Fastmarkets beganreporting on these markets, and although the underlying fundamentals indicate thatthe gap may narrow, it will remain wide, according to market participants.

The differencebetween Fastmarkets’ price indices for manganese ore 44% Mn, cif Tianjin, andmanganese ore 37%, cif Tianjin, has risen to an average of $0.96 per dmtu so farthis year, reaching $1.17 per dmtu when it was calculated on February 11.

This comparedwith an average difference between the two cif indices of $0.589 per dmtu in 2021,$0.212 per dmtu in 2020, $0.453 per dmtu in 2019 and $0.409 per dmtu in 2018.

Similarly,a widening gap between low- and high-grade manganese ore prices has also been recordedin China’s port markets.

The differencebetween Fastmarkets’ manganese ore port index, base 37% Mn, range 35-39%, fotTianjin, China, and the corresponding manganese ore port index, base 44% Mn, range

42-48%, fotTianjin, China, has averaged 9.52 yuan ($1.502) per dmtu so far this year.

In comparison,the average differences were 5.95 yuan per dmtu,

2.58 yuanper dmtu and 3.55 yuan per dmtu in 2021, 2020 and 2019 respectively.

Why hasthis happened?

added. “It’snot just that you need to pay more to get the HGO, it’s that smelters are even strugglingto reach the high-grade ore technical threshold they would like, widening the spreadeven further.”

Limited flowsof ore from Brazil have further increased demand for high-grade ore. At the sametime, demand has been strong from outside China, especially in India, which hasdrawn material away from China, sources said.

At the sametime, the production of manganese-rich slag from high iron content ore in SouthAfrica has fallen. This has driven consumers to compensate by purchasing a greaterproportion of higher grade ore.

“Due to thehigh electricity costs, many of the manganese-rich slag producers from highiron ore have stopped production for several months. This rich slag is mostly usedwith higher grade ore in combination with other ore to achieve their ideal blendingmix,” a second manganese ore producer said.

“Because therehas been limited rich slag availability for the past few months, there has beena need for smelters to find more

high-grade oreto achieve the right ratio balance,” he added.

Consequences

Economic logicdictates that consumers will alter their behavior to maximize their profit, andsome market participants suggested that this process would see smelters adjust tothe record-high premiums.

“Consumers willadjust their blends of high and low ore, but while they do that there will be alag during which the premium will remain high. Alloy producers will implementmitigating practices,” a producer of lower grade ore said. “This is the timelag in which smelters adjust their practices and purchasing habits.”

And the starkdifference between prices of low- and high-grade manganese ore has alreadybegun to affect alloy producers’ consumption patterns, some ore consumers told Fastmarkets.

“Higher gradeis just too expensive,” a silico-manganese producer source in Ningxia said, addingthat it had increased the use of

semi-carbonatein its production to mitigate against surging costs brought about by elevated high-grademanganese ore prices.

In fact, thismovement has been followed by many silico- manganese producers, Fastmarkets heard.

“It ispossible for producers to increase their semi-carbonate usage ratio to 40-45% fromaround 30% previously, and to [reduce the ratio] of high-grade manganese ore to20% from 40%,” a manganese ore trader said.

The rising consumptionof low-grade manganese ore could then support its sales prices, tightening theprice gap with the higher grade of ore.

That said,some market participants doubted that producers would significantly reduce theiruse of high-grade ore in the current profitable alloys market.

“Even thoughproducers could lower their manganese ore costs by switching back tosemi-carbonate, they also have to consider output, recyclability andelectricity costs in doing so,” a second manganese ore trader said. “After all,the profitable market means there is a desire to ramp-up output.”

Fastmarkets’weekly assessment of the price for silico- manganese, 65% Mn min, max 17% Si,in-whs China, was 7,800- 8,000 yuan ($1,231-1,262) per tonne on February 11.

A profit of300-400 yuan per tonne was achievable for producers in the north based on currentraw material prices and spot sales prices, according to market participants.

And bullishnessin the high-grade ore market was expected to last into the near term given thereis little likelihood of an immediate

improvementin supply, Fastmarkets heard.

“Many of therecent shipments [of high-grade manganese ore] to China have been reduced or delayed,”a manganese ore buyer said. “Even though some miners are on track to raise theircapacity, we don’t expect to see actual arrivals of cargoes improving until thesecond half of this year.”

An optionfor 37% sellers

There is anargument that producers of lower grade ore should cut their offer prices ratherthan attempting to follow higher prices in the higher grade market in order to changethe behavior of buyers.

“Semi-carbonatedproducers have been short-sighted,” one market participant said.

Instead, producersof lower grade ore could incentivize consumers to switch to their material by providinga wider discount to higher grade material.

“The questionis, what is the threshold at which it is economic for consumers to use more semi-carbonatein their blends? At what point does it make sense to shift to lower grade ore, andwhen will this happen?” a second market participant said. “Semi-carb producersare not deliberately marketing at a level that will facilitate a switch.”

But sellersof lower grade ore would need to consciously reduce their prices to change buyingpatterns, according to the first market participant.

“The way producersprice the product does not make it attractive for end-consumers to switch to usemore semi-carbonated ore,” the source said.

“Every timethe high-grade price goes up, semi carbonated producers try to push the price higherrather than keeping it stable or lowering it in order to make it more attractivefor consumers to switch,” he added.

“There is apossibility for at least a 20% switch, which could help to reduce the oversupplyof semi carbonated,” he said, “but this would mean short-term suffering for long-termgain.”

Premiumexpectations

Most marketparticipants who spoke to Fastmarkets expected the premium for higher grade oreto narrow in 2022 from its current high, but for it to remain wide.

“I expect wewill see a wide price gap continue for the foreseeable future – the premiumwill remain as a structural element in this relatively balanced market,” thesecond market participant said. “So, while the premium will probably narrow, itwill remain wide because high grade material is becoming scarce, while there ismore semi-carbonate available.”

“The biggap currently is probably wider than most have anticipated,” the second ore producersaid, “but I expect it to narrow to nearly $0.60-0.75 per dmtu in the short term.”

Two other producersources also expected that the gap between the two grades would narrow to around$0.50-0.70 per dmtu in the long run.

“I would bevery surprised if this occurred as a result of a substantial rise in 37% prices,”one of these producer sources said. “Instead, I would expect [the price for] 44%to come down in relation to semi-carbonate.”

Byt the currentwide premium may be re-established, according to the first producer source.

“Longer term,with lower high-grade resources available and grades deteriorating, I definitelyexpect the high-grade gap to widen further again to the level we [see] currently,”the second producer source said.

The supplyof higher grade ore was likely to remain limited and

Reflectingsupply and demand

The high premiumenjoyed by high-grade manganese ore over its low-grade counterpart is areflection of supply and demand differences that have emerged between the two markets,according to market participants.

Lower-than-normalstocks for Australian and **onese lumpy - the main types of high-grademanganese ore - at China’s ports have developed at the same time as demand frommanganese alloy producers has risen.

Electricitycosts were raised in China in 2021 and power supply limitations in alloy-producingregions were imposed in an attempt to reduce carbon dioxide emissions.

In response,smelters sought ore with higher manganese content to cut their electricity consumptionper tonne of alloy.

And this droveup demand for higher grade ore at a time when the electricity problems damped activityin the alloy market.

In the meantime,the supply of higher grade ore has tightened while there is a relatively abundantsupply of low-grade

(semi-carbonated)manganese ore, sources said.

“First, we believethat there is a shortage of high-grade ore with a relative oversupply of semi-carbonatedore. Second, the value-in- use of high-grade ore [HGO] follows power and cokeprices - the higher these [are], the higher and faster the spread will grow,” aproducer of high-grade ore said.

“And thefirst argument is exacerbating the second one,” he

electricityprices high, which would support the current high premium, according to the producerof high-grade ore.

“Against allodds, we are very positive that such a wide gap should continue,” this producersaid. “We do not foresee the shortage of higher grade ore being solved in the firsthalf of 2022, so this spread could last.”

A combinationof factors should ultimately drive the price of ore grades closer together,assuming some conditions are met, according to the first market participant.

“Steelproduction picks up, when manganese-rich slag is being produced again andelectricity prices ease,” this source said. “Historically, you can see that whenthere is a big gap there is always a sharp recovery, and we are in the lag beforethe recovery