Of Interest - Market
May 27, 2013
The Manganese Revolution To Bring BHP Down To Earth
By John Helmer in Moscow
It’s not a good time to be a steelmaker - not if you are in Russia, not if you are in China, and certainly not if you are in the US or the European Union.
Manganese ... strategic metal
But if mining manganese, the vital steel-hardening alloy, is what you do for a living, the coming three years look likely to transform worldwide control, as Russians reach self-sufficiency in manganese supply for the first time; and as a prominent Ukrainian prepares to share a large corner of the global market with China.
Big ambitions, big subtlety – and watch the Big Australian, BHP Billiton, take a tumble.
The reason that manganese can prosper while steel is in the doldrums is because almost all of its application is to steelmaking, and because “manganese has no satisfactory substitute in its major applications”, as periodic US Geological Service reports point out.
The new Russian manganese supply is coming from the little-known Siberian Mining and Metallurgical Company (SGMK), controlled by Alexander Rybkin, a former executive of the Evraz steel group. Rybkin’s influence is provincial, limited to his partners – the Evraz group, which has first call on SGMK’s new manganese supplies for its Kemerovo steelmills at Novokuznetsk, central Siberia, and the governor of Kemerovo region, Aman Tuleyev. Until now they have made SGMK’s manganese a captive of Evraz’s demands.
The Ukrainian alluded to a moment ago is Gennady Bogolyubov, who was for a time a board member at Evraz, and who is now concentrating on expanding his manganese mines in Western Australia and Ghana.
Two new moves may make his influence global. The first is a proposal from Bogolyubov’s Consolidated Minerals (Consmin) to replace the US dollar with the yuan for benchmark pricing of manganese, as well as for regular payments on account. By offering yuan-priced manganese to the Chinese market, Consmin would be aiming to diversify its Chinese clientele and increase its sales, even when growth in overall demand for manganese may be slowing down.
The second move would be for Bogolyubov and OM Holdings (OMH), a mining rival in Australia, to come to an agreement. This, claims a metals market source in Hong Kong and analysts in Sydney, would enable OMH to shift its business from the loss-making minehead to its more profitable refineries in China and Malaysia, assign Consmin the role of consolidator of manganese mines in Australia, and tie the two together in a durable ore-supply arrangement. Such a pact would be a portent for BHP to beware.
The calculations on which this revolution in the manganese market depends can be drawn from reports from CRU of London, and its manganese specialist, Dee Perera. She is forecasting worldwide consumption of manganese ore will rise at 4.2 per cent per annum until 2017. Production of manganese over the same period will grow slightly faster – at 4.6 per cent per annum.
Year by year, the CRU forecast is for the manganese ore price to keep rising, even if steel production slows down in China, and even if non-Chinese steelmaking continues to fall, taking prices down with it. According to CRU, the price of manganese ore will peak in 2014 and not resume growing again until 2016 or 2017 – unless production can be curtailed. Of annual global mine output of around 20 million tonnes, outside China the biggest miner is BHP, which accounts for eight million tonnes.
According to BHP’s reports, it has been extracting record volumes of manganese ore, especially from its northern Australian mines at Groote Eylandt. BHP’s tactics are to over-supply the market, forcing more manganese into unsold stockpiles and driving higher-cost miners out of business. Russia – variously the fourth or fifth largest steelmaker in the world, swapping places with India – has been obliged to import most of the manganese its steelmills need. The consumption requirement peaked at 738,000 tonnes in 2008, before the global steel bust of that year.
The current need is for 651,000 tonnes, most of which is imported from Kazakhstan, China and the Ukraine. The principal manganese supplier is Eurasian Natural Resources Corporation (ENRC) of Kazakhstan. Falling Russian demand and lower prices last year recently forced ENRC to declare an impairment loss of US$124 million in its annual report for the manganese division. If the new Russian concern SGMK can implement its announced mine and smelter plans, ENRC isn’t likely to recover its Russian market. Instead, its exports to Russia are forecast to dwindle to a half or less of the 2012 volume.
According to SGMK, its Kemerovo mining operations should now be capable of producing 600,000 tonnes of manganese ore per year, and 120,000 tonnes of concentrate. In parallel, a second Russian producer, Chek-Su, is building its own manganese mine and smelting capacity. If and when both reach design capacity, Russian steelmakers will no longer need to import manganese. SGMK acknowledges that for the time being it supplies all the manganese it can mine to Evraz; it claims it isn’t looking for other clients at the moment.
But as planned production surpasses Evraz’s demand, the remainder will substitute for imports flowing to the other steelmills. This modest revolution in Russian manganese will hurt ENRC, but have little impact outside Russia and Kazakhstan. In this larger, global market the revolution that’s under way is an unspoken attack on BHP. For the more manganese ore BHP digs out of Australia, and the larger the global share of manganese ore sales BHP takes, the more threatening its influence over the world price appears to the Chinese.
Chinese steelmaking dominance in the world translates into Chinese dominance of more than three-quarters of the worldwide manganese trade.
This is what the market looks like right now, according to CRU’s Perera. “While the volume of manganese ore stocks at major ports in China has remained largely unchanged for the past four months (i.e. 2.5 million tonnes), ore imports into China over the first two months of 2013 were up by 20 per cent year on year, suggesting a phase of restocking amongst ferroalloy producers. Consequently, after three months of no change in 2012 Q4, manganese ore prices gained month on month through 2013 Q1. Our latest price assessment of US$5.65 per dmtu [dry metric tonne unit] CIF China for last month is the highest level registered since March 2011.”
The Australian manganese miners – BHP, Consmin and OMH - have benefitted from the surge. The latest trade data analyzed by Perera show “that, of the top ten exporting countries to China in February, shipments from Australia rose by eight per cent month on month to 388,000 tonnes, while imports from other traditional suppliers, such as South Africa, Gabon, Ghana, Brazil, Malaysia and Myanmar all fell between 12 per cent to 61 per cent.”
Consmin reports that for calendar year 2012 its manganese production was down six per cent to 2.97 million tonnes. However, Consmin notes, “Ghana manganese ore production in tonnes decreased 13 per cent as a result of the stripping programme during Q4 2012. Australian manganese ore production increased two per cent compared to 2011.”
Last year OMH’s mine production was almost 738,000 tonnes, well under its annual one million tonne capacity. OMH’s December quarter production of 177,616 tonnes was down 20 per cent on the same period of 2011. BHP, by contrast, acknowledges it is trying to dig as much manganese as it can. “Record ore production for the nine month period ended March 2013 reflected a substantial improvement in plant availability at GEMCO (Australia), the world’s largest and lowest cost manganese operation.”
The GEMCO reserves can last for another 12 years. Until then BHP is investing in more roads and port capacity to allow export shipments to China to hit seven million tonnes per year. Allowing for about 20 per cent of Australian mine production to go to local refining, BHP’s plan anticipates mine output of up to 8.4 million tonnes – about six per cent more than last year. This strategy would be financially ruinous if not for the fact that manganese sales make up just three per cent of BHP’s aggregate revenues, putting manganese at the very bottom of the group’s business units now that it has sold off its diamond mine in Canada.
Australian brokers and analysts of the manganese sector believe that on current results Consmin is a more profitable mine operator than OMH; a merger between the two has been rumoured in the mining media before. Oleg Sheiko, chief strategist for Consmin’s mines and markets, says: “we don’t comment on discussions and market speculations. Consolidation in manganese industry outside BHP has clear advantages and synergies.”