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Inoxum buyout clouds ferrochrome benchmark

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Outokumpu’s planned acquisition of ThyssenKrupp’s stainless steel unit and the leading role of stainless producer Aperam in recent quarterly ferro-chrome pricing talks have raised questions over who will negotiate prices with ferro-chrome suppliers Xstrata and Glencore in the future, and whether the benchmark system itself will last the year.

The European benchmark price for charge and high-carbon ferro-chrome has traditionally been settled by Xstrata, with marketing partner Glencore, and ThyssenKrupp’s stainless unit Inoxum, which Outokumpu plans to take over this year.

The quarterly settlement for ferro-chrome, which is an essential raw material for all stainless steel production, is under growing pressure, though.

“It’s becoming more and more discredited; all it needs is one more push,” a steel mill source told Metal Bulletin. “If Inoxum and Outokumpu tie up you’re saying the main benchmark setter [Inoxum] can’t contribute to that process and that they’ve then contributed to their own selling price and everyone else’s.”

Outokumpu is a ferro-chrome producer as well as a stainless steel mill.

In the most recent negotiations, for prices for contracts for April-June, Luxembourg-based mill Aperam settled the price with Xstrata and Glencore, while ThyssenKrupp remained in negotiations.

The second-quarter price settled up 20 cents from the first quarter at $1.35 per lb, but discounts are normally applied for actual deals.

Spot high-carbon ferro-chrome prices are trading at $1.16-1.20 per lb.

There is no agreement between Xstrata and Aperam that they will settle the benchmark price in future quarters, though, Metal Bulletin understands.

The 15-20% discount on the benchmark that individual producers give their customers on the benchmark is one factor that undermines the quarterly price, ferro-chrome suppliers and buyers suggest.

Uncertainty over the structure of the talks in future quarters as a result of Outokumpu’s takeover of Inoxum will also add to the already substantial argument against having a benchmark settlement at all, with some saying the latest talks could have been one of the last rounds.

If the benchmark survives long enough to see Inoxum pass into Outokumpu’s hands, it is unlikely that the company could resume its role as a lead negotiator, sources said.

Outokumpu has a captive supply of ferro-chrome for its steelmaking needs and sells the rest to consumers, making the company a net seller of ferro-chrome at the moment.

The company is investing €440 million ($603 million) in an expansion project that will double its ferro-chrome capacity by 2015.

Its Kemi chrome mine produces around 1.3 million tpy of chrome ore. Its Tornio ferro-chrome plant is expected to produce 530,000 tpy of ferro-chrome when the expansion is complete.

Without the acquisition, this would have given Outokumpu more than 200,000 tonnes of ferro-chrome to sell, but after absorbing Inoxum, it will instead become a net importer.

As both a producer and a consumer, Outokumpu is unlikely to be considered to be in an appropriate position to lead the benchmark discussions, market sources said.

It could still theoretically participate in the discussions as a buyer.

But its presence on both sides of the market, compared with Inoxum’s previously clear-cut position as a consumer under ThyssenKrupp’s ownership, could further undermine the vulnerable benchmark system, one market source explained.

“By combining Inoxum and Outokumpu you change the dynamic of the benchmark discussions. Outokumpu has its own chrome ore mining and ferro-chrome capacity and would have [until the takeover] been a net seller. So the balance [of ferro-chrome supply and demand] within the group would be very different to that within ThyssenKrupp,” the source said.

“The combined group could do both, but the role it might play in benchmark setting would be very different to the role ThyssenKrupp played. Nobody could dispute the role ThyssenKrupp had in setting the benchmark. So there is the question: who will play the key role on the buy-side?”

One scenario is that Aperam could become a more regular benchmark setter.

But debates about the future composition of the benchmark talks always find their way back to the question over the viability of the system itself.

“I think it is more pertinent to ask: what is the future of the benchmark? The benchmark is not in place through the will of the South African ferro-chrome producers,” one ferro-chrome producer source said.

Other market participants see the benefits of the system. Stainless steel stockists see the benchmark as an established and transparent pricing mechanism, while mills are able to obtain chrome units at a discount to the benchmark and then pass the full benchmark price on to their customers.

But the benchmark is not necessarily irreplaceable to mills, particularly with its future so uncertain, sources said.

“I’d rather get rid of the benchmark altogether; we only want it as a pricing mechanism which could just as easily switch [to another reference],” the stainless mill source said.

Janie Davies 
jdavies@metalbulletin.com
Twitter: @janiedavies_mb

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