European ferro-chrome market prepares for future after end of quarterly benchmark

Participants in the ferro-chrome market have begun to make preparations for changes to their pricing structure after the recent surprise announcement that the publication of the European ferro-chrome benchmark will be discontinued.

The announcement on Monday May 20 was greeted with surprise in some quarters, but contemplation and preparations have begun to emerge in several corners of the market.

The beginning of a new era

A spokesman for ferro-chrome producer Merafe said that the benchmark pricing system had become “less relevant for market participants” and that the decision to discontinue had been taken “after a thorough review.”

Market participants’ minds have now turned to their next moves.

While the announcement caught some market participants off-guard, others said that they had expected the benchmark to be discontinued sooner or later, and some were already preparing for it.

And while the benchmark’s relevance may have diminished, its influence was still widely felt, leading to a number of suggestions about what could fill the gap.

“Now the option is to negotiate new pricing terms for supplies,” a seller in India said.

Several market sources suggested the possibility that a price reporting agency, or more than one, could offer a replacement for the industry benchmark.

Others, meanwhile, pointed to China, suggesting the use of a solution that factored in Chinese monthly ferro-chrome tender prices.

“We will try to negotiate to move to a mix with the Chinese benchmark and another European ferro-chrome index,” a buy-side source said.

A distributor told Fastmarkets that buyers had already been asking for price quotes based on the Chinese price, plus a freight differential and duty, rather than seeking a price with reference to the benchmark.

A trader in Europe added that, with China establishing as the world’s largest consumer of chrome, it had seen a growing trend in which European markets were increasingly leaning toward Chinese prices, because of the growth in the discount applied to prices against the benchmark.

The reaction in Asia

The overall reaction to the benchmark’s discontinuation among market participants in China was more muted, with some saying that they foresaw no effect on business in China.

Others, however, suggested that they would be monitoring the situation with some interest while the European market grappled with what to do next.

“This news shocks us,” a trader in China told Fastmarkets. “We expect to see another pricing benchmark – maybe an index from a third-party.”

From a sales perspective, few expected that the monthly tender price would be a likely replacement, with a trader in Asia pointing out that tender prices often come in below charge chrome prices for imports into China, or prices within Europe.

“It will take some time for buyers and sellers to discover a new pricing mechanism,” a source in Asia added, “but I don’t think the [Chinese] monthly tender price… will be used for the European market or the Japanese market.”

Implications for alloy surcharges

There were also likely to be implications for the calculation of alloys surcharges, according to some sources in the market.

“[Stainless steel producers] set a surcharge for the alloys and metals they buy, which in their case was principally chrome and nickel,” a buy-side source said.

This surcharge would have been calculated against the benchmark and, without it, an alternative will be needed, they said.

“The main question is what price reference stainless steel mills will now use to calculate their alloys surcharge for chrome,” a distributor said.

In the dark

Across markets, there was a general sense of surprise in the responses to the announcement.

“Everyone is now in the dark. You need to try something else at short notice, [which is] not convenient,” the trader in Europe told Fastmarkets.

Furthermore, industry sources pointed out that at least some market participants were still using the European benchmark in their contracts.

“We have a bit of a problem because we have contracts linked to the benchmark. We are discussing how to sort it out,” one such market participant said.

“[There were] offers last week or two weeks ago, based on the benchmark,” another source said. “I was not expecting [the discontinuation] to come yet.”

Other market sources added that the loss of a key reference point could create further challenges.

“We don’t know how to price certain regions after the benchmark disappears,” a second market participant said.

“With the benchmark,” a trader added, “you knew where you stood, and used it for long-term contracts.”

Diminishing relevance

There was agreement, nonetheless, about the diminishing relevance of the benchmark, with a second trader in Europe saying that it was “not very realistic” in recent years.

And while it is still used in contracts, for example, the number of market participants which do use it has dwindled in recent times, according to the first trader in Europe.

“There are still quite a lot who are using the benchmark in their contracts, though fewer than there were 10 years ago,” the trader said.

The same trader added that it had heard continuing discussions about whether the benchmark system truly reflected market dynamics.

“It was always under discussion,” the trader said. “Is the benchmark pricing system really mirroring the market?”

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