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FEATURE: Russian export tax could push US ferrosilicon prices higher: sources

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FEATURE: Russian export tax could push US ferrosilicon prices higher: sources

Highlights

US ferrosilicon market already tight

Consumers more worried about supply than price

US at hefty premium to rest of world

Ferrosilicon producers and suppliers in the US believe the Russian export tax to be levied on nonferrous metal exports from Aug. 1 could push record prices in an already tight market even higher.

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The taxes are set to amount to $150/mt for ferroalloys and steel and will be applied on exports from Aug. 1 to Dec. 31.

"I think it's entirely possible that we'll be offering ferrosilicon at $1.75/lb before long and getting booked at above $1.70 just because of the tax," said a producer source on June 29, who reported spot truckload sales at $1.60/lb.

The Platts US ferrosilicon price was last assessed on June 23, when it rose to $1.55-$1.58/lb ($3,417-$3,483/mt) Si contained, up from $1.50-$1.53 on June 16. It has risen from $1.42-$1.47 since the beginning of the month and 97-99 cents at the beginning of the year.

The June 23 assessment broke a previous record last seen in June 2008, when the Platts assessment reached a peak of $1.45-$1.55/lb. The market will next be assessed on June 30.

The import-dependent US market is trading at significant premiums to the rest of the world. In Europe, ferrosilicon was assessed on June 23 at Eur1,450 ($1,725)-Eur1,650 ($1,963)/mt delivered, duty-paid.

Chinese export prices were assessed at $1,850-$1,950/mt FOB on June 23.

All of Platts ferrosilicon prices will next be assessed on June 30.

Hefty US premium, but no arbitrage

Despite the massive US premium, it has still not been enough to attract additional imports into the US, according to market sources. Asian producers are largely committed on long-term contracts within Asia, and the shutdown of OM Holdings in Malaysia last month and a national lockdown in the country has tightened Asian supplies further, as well as the country's shipments to the US.

Ferrosilicon exports from Asia are heavily dependent on container freight, where the cost of a container to the US is approaching the $20,000/TEU level ($830/mt for a 24 mt load of ferrosilicon) compared with around $2,000/TEU in the fourth quarter of last year, when annual contracts were signed by steel mills.

Malaysian and Asian Russian producers also prefer to sell within Asia, because the shorter shipment times mean they get paid quicker, according to market sources.

Brazilian producers are understood to be fully sold out for the third quarter, and will only offer on an FOB basis as they do not want to take the risk on freight, according to market participants. They are also facing production issues because of drought in a country with an electricity grid that is heavily dependent on hydroelectric generation. This is also contributing to US market tightness.

A second producer source agreed the Russian export tax was likely to push US ferrosilicon prices higher, but did not say how much higher.

The producer reported selling three truckloads on June 29 for first week of August delivery at $1.58/lb ex-works basis.

A purchasing agent at a steel mill said the Russian export tax was unwelcome and could not have come at a worse time.

"The Russians are the dominant supplier in the US," the buyer said. "And it's not like Malaysia can just replace them, so the timing of this is not good, when prices have already risen sharply this year."

But the buyer said talk of it pushing prices up in the US by 20 cents from the supply side was tantamount to "price gouging. The proposed tax should only add another 6 cents."

The buyer added that demand was strong, as well as supply being constrained.

"Steel mills don't have enough cover for the second half of the year and when you want to buy, there aren't too many people left we can get firm offers from." That had given producers and suppliers the "upper hand."

The first producer described the export tax as a "short-term money grab. ... All the exporters will do, in any case, is pass the cost on to their overseas clients, so it raises the price of those commodities overseas and the domestic prices in Russia don't change."

Russia has said the export tax is aimed at sheltering its economy from the surge in prices of nonferrous metals prices this year.

A second steel mill purchasing agent said the tax and the effect on price was not the main concern.

"My concern is making sure we get supplies," the buyer said. "Even at these elevated prices, the cost of ferrosilicon in steel is negligible compared with scrap costs, but we need ferrosilicon every bit as much as we need scrap to produce finished product."

The first buyer added: "If my competitor pays the highest price for ferrosilicon and gets supply and I don't get supply and my furnace shuts down, guess who loses their job."

The first producer said that while the market was tight, he believed that some consumers were hoarding. "They're taking more than they need. If cool heads prevail, everyone will get what they need," he said.

Annual 2022 contract talks start early

Several market participants said they were already negotiating annual contracts for 2022. Contract talks do not usually begin until the fourth quarter and are sometimes not concluded until around Thanksgiving time.

"Most people have either never seen a year like this, or not since before 2008, so the secure units mentality is prevailing and we are talking with suppliers for next year already, and not just on ferrosilicon," the second raw materials buyer said.

Producer and trader sources also said they were either already in negotiations, or had been requested to begin talks.

The second producer source said he was negotiating on the basis of take or pay fixed quantity, rather than consumption-based or requirements only volumes and on a formula with little to no discount to Platts average low, month prior to delivery, with a price floor for a one-year contract and a price floor and ceiling for two-year contracts.