Nickel and ferrochrome prices diverge
Power of supply-side economics shows in nickel and ferrochrome markets with Xstrata having curbed ferrochrome output by 425000 tons
| JACK FARCHY |
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Published:2012/04/17 09:41:49 AM
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IS THIS the moment when commodity markets throw off the shackles of the macroeconomic outlook? For investors fretting about a Chinese slowdown, excited about a US recovery or fearing a euro-zone meltdown, that may be hard to imagine.
But it appears to be happening in several markets. One of the clearest examples is to be found in two markets to which few investors pay much attention: nickel and ferrochrome. Both are used by the stainless steel sector and their prices might therefore be expected to move in tandem. Traditionally they have done.
But in the past few months they have taken opposite paths.
The price of nickel on the London Metal Exchange has fallen 17% since early February to trade at $17134 a ton, close to a 2½ -year low. Ferrochrome producers, on the other hand, have just agreed on a 17% increase in second-quarter European benchmark prices to $1,35 a pound, within reach of a 3½ -year high.
What’s going on? The most important driver of the divergence has been the impressive production discipline of the South African ferrochrome industry. The country’s producers, led by Xstrata, have curbed ferrochrome output by 425000 tons in recent months, according to estimates by Macquarie. In a market that produces just 8,7-million tons in a year, that is an enormous loss.
Nickel supplies, on the other hand, are plentiful.
Chinese production rose 9% year on year in the first two months of the year, and the rest of the world’s miners are also bringing on new projects. For sure, the ferrochrome industry has had a little help. Eskom has offered incentives to ferrochrome producers who close their furnaces in an attempt to avert an electricity shortage. They may get more: the industry is lobbying for an export tax on chrome ore, which may push prices up further, at least in the short to medium term.
The divergence between the two commodities is interesting beyond the small world of stainless steel. It demonstrates the supply side is coming back into force as a determinant of commodity prices.
http://www.businessday.co.za/articles/Content.aspx?id=169804
Financial Times
