Demand uncertainty may upend EU bulk alloy price rally

An uncertain demand outlook threatens to upend the ongoing price rally in Europe's bulk alloy market, with some traders unsure whether to take the risk of booking more forward shipments while regional steelmakers grapple with soaring energy costs and multiple headwinds further downstream.

Prices for silico-manganese, ferro-manganese and ferro-silicon have climbed rapidly this year amid tight supply and high freight costs, all registering triple-digit growth since January. Ferro-silicon's rally has been particularly sharp, hitting a record high of €1,700-1,760/t ddp on 15 June before more than doubling again to €3,800-3,900/t ddp on 7 October.

But going forward, the outlook for demand and therefore prices appears less bullish. Industry association Eurofer last week noted multiple headwinds affecting steel demand, as consumer spending power and inflationary pressure affected buying, according to director of market analysis Alessandro Sciamarelli.

Supply bottlenecks are also disrupting mills, as are high shipping costs. And Europe's energy crisis is putting some smaller mills in a precarious position financially, where idling furnaces can become more cost-effective than adding energy surcharges or raising offers.

A growing number of European ferro-alloy traders are voicing concerns about the demand outlook. Spot demand in particular may come under pressure, as large stainless steel mills have been locking in larger volumes of alloy than normal under long-term contracts in an attempt to reduce their exposure to any further supply chain shocks.

"At the moment I'm wondering whether it is good or bad to have [material on] stock," one trader said. "It is such a huge risk to book forward now," they added, saying their customers are unsure if they will be producing material towards the end of the year and the first quarter of 2022 "as no one can survive with these electricity prices".

On the flip side, tight supply is likely to remain a support factor for bulk alloy prices in the near-term, particularly as surging energy costs force some regional alloy producers to slash output.

"What is happening now is that energy prices are consuming our profitability. We are not buying on forward and we decided temporarily to switch off some furnaces. We will see what will happen with the market when we have more news but if the energy prices stays where it is, we will not produce," one producer told Argus.

Spain's Ferroglobe has already idled two furnaces in the country amid soaring regional gas prices. The firm had already been considering the closure of two plants in France this year, further contributing to tight fundamentals in the silicon alloy market.

Europe has also seen a drop in bulk alloy imports this year, as Covid-19 outbreaks and rising shipping costs deterred or disrupted bookings, particularly from Malaysia and India. For material coming from India, market participants now peg freight costs as high as €100/t per container, noting that break bulk shipments have become a more widely used approach amid the container shortage.

Brazilian material has also been in short supply, with the country's producers struggling to ramp operations back up amid lockdowns, and in some cases preferring to export to the US where they have been able to achieve higher selling prices than Europe.

By Yusuf Khan