South African Manganese Miners #pricesmustfall

Macquarie just published its report on South African manganese ore. The summary and the link to the entire report follows:
Rollercoaster year with high probability of price correction
2016 has been a year of extreme volatility for manganese (Mn) ore prices. Price-related supply withdrawals combined with China’s 1Q liquidity push drove prices up from multi-year lows of $1.74/dmtu to >$4.00/dmtu in April. A combination of stronger supply and weaker demand then drove prices back down to $2.75/dmtu by mid-July, as Chinese port stocks began to increase.
Since then, however, despite evidence of supply recovering and Chinese stocks improving, prices have continued to rally to $7.90/dmtu (+350% YTD). Speculative trader behaviour is likely to have contributed as is reluctance/inability for some idled operations to return, but structurally there is no reason for prices to hold at these levels, in our view. We expect a correction down towards marginal cost (~$3.00/dmtu). We do, however, expect price volatility to be a persistent feature of the market.
Structurally challenged demand outlook
More than 95% of Mn ore is used to produce either Mn ferroalloys or electrolytic manganese metal (EMM) which in turn feed crude and stainless steel markets, respectively. The two key factors for demand therefore are the volume of steel production and the intensity of manganese usage. We forecast flat to negative growth in both global and Chinese crude steel production to 2020 combined with lower intensity of use for Mn given China’s path to more consumption-led growth. While we forecast ~3% CAGR in stainless steel production (9% of Mn demand) most of this growth is expected to come from 300 & 400 series and largely at the expense of the Mn rich 200 series, further driving a reduction in intensity of use.
With ample (price elastic) supply
Mn ore production remains highly concentrated and supply depends largely on what existing assets from existing supply regions can deliver within the scope of available transportation infrastructure. Growth in South African ore supply has been driven by the alleviation of logistics constraints, expansions from existing producers, introduction of new entrants and less alloy conversion due to electricity prices and constraints. Meanwhile, high costs and falling grades have reduced China’s share of ore production. While China remains the marginal producer, a large portion of its output will respond to prices rather than drive them.
While we estimate that South Africa will export 13.5mt in 2016, there is capacity to export 16mt at present. With ~90% of global resources, exports (if unconstrained) could reach ~25mtpa by 2020. However, the marginal South African tonne will continue to drive seaborne prices and with recent MECA2 allocation and tariff harmonisation, the cost differential between producers has narrowed. The R/$ is also set to play an important role in driving USD Mn ore prices going forward.

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