What’s the Future of Ferrochrome Price Discovery?

For almost two decades the quarterly published price had been an important part to price long-term contracts (LTCs) and calculate alloy surcharges. Even beyond Europe, the EUBM was widely used in the US and Japan to gauge ferrochrome markets.

Over the past years, the negotiating partners had been Glencore on the sell side and Aperam on the buy side, with Samancor and thyssenkrupp also participating as negotiators at different times.

Despite being widely used, the benchmark had decoupled from market reality. Behind closed doors, significant two digit percentage discounts were agreed, rendering the published EUBM rates to be imprecise. Thus, its disappearance also provides the opportunity to define a better pricing mechanism for the European charge chrome market.

Prerequisite to form a new pricing mechanism for charge chrome will be a more liquid spot market to derive market information from. Today, most volumes are locked into LTCs negotiated bilaterally on an annual basis. Therefore, buyers would need to shift volumes into the spot market to form a reliable benchmark for LTCs.

Considering this backdrop and assuming that no other benchmark arises, market participants currently have three options:

• Use Chinese Benchmark
• Use European Index via Price Reporting Agencies (PRAs)
• Use Digital Platform Pricing
• Move All to Spot

The most obvious option would be to simply use the next best charge chrome benchmark out there: The Chinese Benchmark.

On a monthly basis, the Chinese steel giants TISCO, Tsingshan (TSS) and Baosteel negotiate rates with suppliers and publish their purchasing volume and price as next month’s benchmark. They largely negotiate homogeneously and only very seldomly prices of the three move in opposite directions.

Given the size and market power of these players, a large chunk of the industry uses these negotiations as the reference benchmark. European producers could, of course, follow suit, but considering the significantly different market standards and dynamics, the applicability of the Chinese benchmark would only be directional and thus not present a major improvement compared to the prior EUBM.

A second option would be to use the newly created European charge chrome index from PRAs.

The data used for the index is collected by the PRAs via surveys with market participants through phone calls and emails, collecting information on transactions, bids, and offers. At times, however, this form of data collection may include inaccurate information depending on who is surveyed and what methods are used. Thus, it remains to be seen whether PRAs can accurately reflect the European reality and fill the gap with a reliable charge chrome index, which EUBM failed to deliver.

A third option would be to move a larger proportion of charge chrome volume to the digital spot market to enable digital platform pricing.

Digital platform pricing represents a modern approach to price discovery. In this instance, an independent software provider will enable sellers and buyers to conclude legally binding transactions digitally.

Once sufficient volume is transacted, these trades are then anonymised and normalised considering quantity, geography, chemical specification, payment terms, packaging and transportation cost using an algorithm.

This methodology minimises the risk of bias, information asymmetry, price manipulation and human error. The resulting transaction-based spot indices ensure an equitable market environment. Consequently, this model has gained significant traction with market leaders, including Outokumpu and Aperam, choosing providers, like Metalshub, to conduct regular digital transactions.

As a result of moving to digital platforms, Metis, a service provided by Metalshub, already offers Europe-specific high-carbon ferrochrome prices on a weekly and bi-weekly basis. Even though these could be adjusted to benchmark charge chrome, it would be an imperfect solution. What is truly needed is that participants move a proportion of charge chrome volumes to the spot market via a digital platform to enable a sound, transaction-based charge chrome price index.

A fourth alternative is to move away from LTCs and index-based pricing altogether. Instead, market participants could consider using regular bilateral spot negotiations for a more direct discovery of ferrochrome prices. Especially for less liquid ferrochrome submarkets, like charge chrome, this would mean a huge shift.

In this scenario, the downsides are evident. Without the use of LTCs, the security of supply is at risk for the buyer and capacity planning becomes very challenging for the supplier. Likewise, without any benchmark price to refer to, fair and transparent negotiations can become very tricky. Regular bilateral negotiations also demand significant resources and time from participants. Additionally, even with regular negotiations, price risks may persist for both parties if future deliveries are included in the contracts. Calculating and passing on alloy surcharges across the stainless steel value chain may also prove very difficult if the details of these transactions remain private.

There are also upsides to this alternative. Firstly, these bilateral negotiations may allow buyers to identify favourable instances to procure material if done efficiently. Secondly, if a sufficient number of parties conduct regular transactions, digital platforms would be able to publish a new index, which can subsequently serve as a reference for LTCs.

All in all, moving away completely from index-based pricing and LTCs may be an option reserved to the behemoths of this industry. Only they may have the resources, market intelligence and market power to secure supply, negotiate fair prices and maintain sound operational planning while doing so. However, it will be a disservice for the industry, as for mid-sized and smaller players, moving away from index-based pricing and LTCs could prove a very risky alternative with very little upside and significant downsides.

Effective price mechanisms will be crucial for the entire European ferrochrome supply chain to operate with greater transparency. Ultimately, the industry will need to overcome the initial shock and agree on the next European ferrochrome benchmark price to ensure an equitable market environment. It remains to be seen which of the four options prevails or if a mix proves most valuable for market participants.

When asked about this, Markus Moll, Managing Director of SMR Group, a leading stainless steel research company, says that “the old benchmark was easy to handle but far from being perfect. It never reflected the “real” market price and the gap to reality was usually widening from day two after the signature. A new pricing system is needed. What is better than transaction-based prices? This might not bring the “comfort” of a three months forward benchmark, but it brings the world into closer alignment with China.”