2Q Cr benchmark highlights cracks in price mechanism

Europe's second quarter charge chrome benchmark price was raised this week after a lengthy negotiation. But many market participants are questioning its suitability as a key pricing reference given the 22 day delay to its settlement and the price rising despite a backdrop of deteriorating demand.

The second quarter benchmark has been set at $1.14/lb, up from $1.01/lb in the first quarter. It is negotiated between the South African Glencore-Merafe joint venture and Aperam, a European stainless steel producer.

Sources close to the negotiations said the Covid-19 crisis and subsequent lockdown in South Africa were "key factors" in the delay to the benchmark's announcement and price increase.

The delay has resulted in many market participants rolling over the first quarter benchmark price into their second quarter contracts. Some of those contracts will now be backdated, but others will not, meaning most of April's deliveries will be linked to the first quarter price of $1.01/lb, according to market participants. The impact of the delay was mitigated somewhat by low demand globally, owing to production shutdowns at steel mills.

The price is also generating controversy, with some market participants regarding such a large price increase as unjustified. One trader said the benchmark price "amounts to a special agreement between Glencore-Merafe and Aperam, not fit for purpose". That said, as yet it is too soon to say whether the wider market will actually move toward a departure from the current benchmark-based pricing system.

Glencore-Merafe has warned customers about the potential for a force majeure in South Africa in recent weeks, but there has been no official notice of this and some traders suggested it might have been part of a negotiating tactic for the benchmark price. However other South African charge chrome producers have declared force majeure, such as Samancor, on 31 March.

One buyer at a large European stainless steel producer said using the benchmark had become "unreliable" and that switching from charge chrome usage to high carbon ferro-chrome appeared "immediately more attractive". This would mean entering the spot market more regularly or linking contracts to a high carbon alloy index price. Argus assessed high carbon ferro-chrome prices at 79-85¢/lb delivered duty paid (ddp) on 24 April, much lower than the average over the last five years of $1.01/lb.

Depressed high carbon ferro-chrome prices are encouraging the market to move away from charge chrome in a more structural way. A ramp up in high carbon alloy output in India and Kazakhstan has pushed prices down over the past year, putting pressure on South African producers. China and Indonesia-based Tsingshan's ability to smelt their own ferro-chrome from chrome ore has put a further squeeze on them.

Charge chrome is typically produced in South Africa by large producers including Samancor, Glencore-Merafe, Afarak, and in smaller amounts in Zimbabwe and Oman. The ongoing crisis at state-owned utility Eskom has lifted electricity costs in South Africa, making it harder for producers to compete with high carbon alloy producers elsewhere. Before the coronavirus outbreak, Samancor warned that it might cut over 3,000 jobs because of low prices.

European steel mills could also turn away from charge chrome after the most recent benchmark. As one buyer at a steel mill said, "it's not mandatory to use charge chrome".

By Thomas Kavanagh