Manganese market recap Tony Gu
Partner at Datt Capital 1 article Follow
May 3, 2024
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1. Manganese Industry:
We estimate total world manganese ore production to be around 60 million tonnes, or 20 million tonnes in manganese equivalent given the ore grade differences. The manganese ore specification typically ranges from 30% to 44%. Any grade lower than such specification requires treatment to concentrate the ore further to meet the specification requirements of the midstream Silicon Manganese producers (Ukraine played a big part in this, but both its PGOK and MGOK operations are currently suspended due to the ongoing war with Russia). Currently, the top 3 producers, South Africa, **on, and Australia, account for nearly 80% of the global supply, and only 40% of the mined manganese ore are high grade.
Source: Datt Capital
Source: Datt Capital
Source: Jupiter Mines
Ninety percent of manganese production is used in crude steel production, acting as a deoxidiser and alloying element. China accounts for over 50% of world crude steel production and remains the largest consumer as well. In 2023, total Chinese crude steel production totalled 1.02 billion tonnes, and as a rule of thumb, it is required to use just over 1% of Silicon manganese in crude steel production, which equates to an annual manganese demand of at least 28 million tonnes in ore or 11 million tonnes of manganese equivalent from China alone.
Despite stable demand from downstream steel makers, the industry has faced challenges due to the weakening Chinese real estate market and the ongoing US-China trade war. As a result, midstream players such as the silicon manganese producers are currently operating at a loss, causing a sharp decline in capacity utilisation rate, currently sitting at around 56% by production or 42% by the number of operating furnaces. As at the end of April, the trailing 12 months Chinese crude steel production is approximately 84 million tonnes per month or 1.01 billion tonnes per year, which still indicates solid demand from the downstream steel makers. Given the above context, the manganese sector seems to be near trough, and it would be difficult for midstream utilisation to shrink any further, given that once the furnace is turned off, it is time-consuming and costly to turn it back online (up to 10 days and RMB$500,000.00 per furnace).
In March, Cyclone Megan caused a major incident to the world-class GEMCO mining operations located in northern Australia, owned by South 32 and Anglo-American. This operation suffered significant damage to port, shipping, and logistical infrastructure, as well as damage to the mine itself. Groote Eylandt is a globally significant production asset, providing around 12% of the global manganese ore market production. There is significant uncertainty around the duration of the supply disruption given the sheer scale of damage incurred and remote location. Importantly, GEMCO supplies approximately half of the high specification manganese (44% Mn) market. As a result, the manganese ore price has already surged over 30% since the incident, against a rapid 10% drop in port inventory. However, the price change has not yet been reflected in the realised price of manganese producers due to the unique pricing mechanism of manganese ore.
2. Pricing:
Typically, manganese ore is priced on an auction basis immediately before each shipment. Using South Africa as an example, the auction takes place near Port Elizabeth at the end of each month, and the price is set by traders at auction. Upon price agreement, these manganese ores are subsequently shipped to consuming nations, such as China. In China, the two major receiving ports are the Southern port (Qinzhou) and the Northern Port (Tianjin). Once the manganese shipments arrive at the Chinese port, they either get transported directly to the end clients or get stored at port for transportation at a later date. Further profit-taking opportunities thus take place, as the local traders can once again trade the manganese ore at port. Given the unique pricing mechanism, as reported by FerroAlloy, as of April 25th, the port prices for Mn44% and Mn37% are RMB55/mtu (US$7.7 VAT-Incl) and RMB45/mtu (US$6.3/mtu VAT-Incl) respectively. In contrast, the realised CIF price reported by Jupiter Mines for its Tshipi operation was US$3.55/mtu in March due to the lagging effect.
Before the Groote Eylandt incident, there were approximately 6 million tonnes of manganese ore, or 2.2 million tonnes of MnEq at Chinese Port, which accounts for circa 2.5 months' worth of inventory. Although at that time, the port inventory level still looked to be adequate, such comfort quickly dissipated due to the logistic timing mismatch, which is idiosyncratic to the industry.
3. Logistic Timing:
Based on nautical mile differences, it typically takes approximately 40-45 days to ship South African, **on ore, and approximately 15-18 days to ship Australian ore to China. In March, out of all manganese ore at Chinese ports, over 25% were high-grade inventories from Australia. Soon after GEMCO declared Force Majeure and canceled its shipments, a logistic timing mismatch began to emerge as the high-grade ore from South Africa and **on cannot reach the Chinese ports in time. Due to the structural supply gap caused by the Groote Eylandt incident, we have observed a commentary on the 24th of April from FerroAlloy Online, stating that "Qinzhou Port has had no incoming manganese ore for two consecutive weeks".
A similar event occurred in 2016 when manganese prices dipped below RMB20/mtu (US$3/mtu), resulting in multiple mine closures, including Bootu Creek (OM Holding), Woodie Woodie (Consolidated Minerals), and Otjozondu (Shaw River Manganese). Eramet (now the world's largest producer) paused production for 4 weeks under pressure, and GEMCO, although still in production at the time, also incurred a major asset write-down and indicated potential job cuts, care and maintenance, as well as delayed mine expansion. The rapid reduction in supply quickly caused Chinese port inventory to drop to below one month's worth of usage, and panic at port caused the manganese price to surge sharply to RMB90/mtu (US$13.5/mtu). As the manganese price quickly recovered, miners resumed production, and the port inventory was able to be restored above the safety stock level (typically 1.5-2 months), which caused the manganese price to retrace eventually.
Source: MySteel
However, what sets the current situation apart is that it does not seem likely that the supply from Australia and Ukraine can be restored in the near term, which creates a significant structural deficit in the manganese market. The accelerated depletion of high-grade Australian manganese ore is likely to exacerbate the port inventory level in absolute terms. Based on our analysis, if there's a 50% drawdown in high-grade inventory at the port (accounting for roughly 25% of the total inventory by ore tonnage), it could lead to a one-month decrease in port inventory, bringing it close to breaching the safety inventory level.
4. Price Elasticity:
Manganese ore price is crucial for the midstream producers, but the grade is equally important. Typically, it takes approximately 2100 kg of 44% Mn, 4400 kWh of electricity, 560 kg of coking coal, 550 kg of high grade silica, and 35 kg of electrode to produce one tonne of Silicon Manganese. At the current manganese price, manganese cost accounts for circa 50% of the total production cost. Given it’s an energy-intensive process, in order to maximise profitability, the Silicon Manganese producers will always draw down the high-grade stockpiles first.
Source:
It is possible to blend a small amount of lower-grade spec (Mn30%-32%) with the high-grade spec ore, but given the current silicon manganese price is still trading at near the cost curve, it would not be economical to use purely the low-grade manganese ores in Silicon Manganese production due to its energy-intensive nature.
Other technical issues could also rise when using a lower grade manganese ore in manganese alloy production, such as the impurities from its iron. Manganese ore used for smelting ferromanganese generally requires a manganese content of 30~40%, a manganese-iron ratio greater than 7, and a phosphorus-manganese ratio less than 0.003. Many low-grade deposits around the globe suffer from impurity issues and cannot act as a substitute for high-grade products without further treatment.
The recent silicon manganese price has shown a pass-through effect from the upstream, with the silicon manganese future price currently trading at close to RMB8000/t compared to the spot price of RMB6300/t. A higher silicon manganese price is likely to encourage midstream producers to restart their furnaces, but with the prerequisite of securing adequate manganese ore feed. The existing producers will also benefit from the price movement and, in our view, will compete against latent producers in securing feedstocks. Given the rule of thumb of 1% SiMn in per tonne of crude steel production, at the current Chinese steel price of approximately ~RMB3600/t, a further 100% increase in manganese ore price is expected to cause only a 50% increase in silicon manganese price or a movement of only 1% in steel price. Being a stable industry, it seems that demand from steelmakers can be rather inelastic. For example, during 2018, the manganese price traded persistently at over US$6/mtu, despite higher manganese production at the time (18.9Mt according to the US Geological Survey) compared to the present supply capacity of 17.5Mt (post GEMCO incident).
E25 Price at posting:
25.0¢ Sentiment: Hold Disclosure: Held
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