Manganese play may bring BHP to earth
By John Helmer
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 United States or the European Union. 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 Co (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 is Gennady Bogolyubov, who was for a time a board member at Evraz and 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 is up to Bogolyubov and OM Holdings (OMH), a mining rival in Australia, to negotiate and agree for their mutual gain. 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 is 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 annum until 2017. Production of manganese over the same period will grow slightly faster - at 4.6% pa. 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 8 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 drive higher-cost miners out of business.
Russia - variously the world's fourth- or fifth-largest steelmaker, 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, in that order. The principal manganese supplier is Eurasian Natural Resources Corp (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 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 claims, 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. SGMK refuses to comment.
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. 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. Their 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 (ie 2.5 Mt), ore imports into China over the first two months of 2013 were up by 20% y/y, suggesting a phase of restocking amongst ferroalloy producers. Consequently, after three months of no change in 2012 Q4, manganese ore prices gained m/m through 2013 Q1. Our latest price assessment of $5.65/dmtu [dry metric tonne unit], CIF China for last month is the highest level registered since March 2011.
The Australian manganese mines - BHP, Consmin and OMH - have benefited from the surge more than other country sources. The latest trade data analyzed by Perera show
that, of the top 10 exporting countries to China in February, shipments from Australia rose by 8% m/m to 388,000 t, while imports from other traditional suppliers, such as S. Africa, Gabon, Ghana, Brazil, Malaysia and Myanmar all fell between 12% to 61%.
Consmin reports that for calendar year 2012 its manganese production was down 6% to 2.97 million tonnes. However, Consmin notes, "Ghana manganese ore production in tonnes decreased 13% as a result of the stripping program during Q4 2012. Australian manganese ore production increased 2% compared to 2011."
Neither Consmin nor OMH has released first-quarter 2013 results yet. OMH's latest report shows that for last year mine production was almost 738,000 tonnes, well under its annual 1 million tonne capacity. OMH's December quarter production of 177,616 tonnes was down 20% 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."
In its Form 20F report to the US Securities & Exchange Commission, BHP says its priority is mining, not refining manganese. It stops short of acknowledging that in order to raise the profitability of this end of the business, it must keep as much mineable manganese in the ground, if it is controlled by market competitors. "Our strategy is to focus on upstream resource businesses. Manganese alloy smelters are a key conduit of manganese units into steelmaking and enable us to access markets with an optimal mix of ore and alloy, optimise production to best suit market conditions and give us technical insight into the performance of our ores in smelters."
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 7 million tonnes per year. Allowing for about 20% of Australian mine production to go to local refining, BHP's plan anticipates mine output of up to 8.4 million tonnes - about 6% more than last year.
This strategy would be financially ruinous if not for the fact that manganese sales make up just 3% 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.
The viability of the manganese strategy is even harder to defend in the stock markets when BHP's report of earnings for its manganese division reveals that last year EBIT (earnings before interest and taxes) was $235 million, a dramatic 66% below the 2011 level. Company documents put the blame for the shrinking balance-sheet on the global price contraction, justifying the extra output by its low marginal cost. Again, according to the 20F report, "a 22% decline in the average realized price of ore and a 10% decline in the average realized price of alloy reduced Underlying EBIT by US$400 million, net of price-linked costs. In contrast, record manganese ore sales increased Underlying EBIT by US$64 million."
A Hong Kong source explains that a scheme of yuan-pricing between a supplier like Consmin and Chinese buyers of manganese is aimed at reducing the currency risk and volatility of the trade for mid-size and smaller buyers whose demand will be more sustainable if they can use Chinese currency instead of the dollar. "If you want to expand manganese sales in China, and diversify your client base there, then you have to use the yuan," the Hong Kong source says.
If there is to be this alliance between Consmin and the Chinese on pricing manganese, is there also to be an alliance to reshape the supply of ore, and consolidate mineable capacity in Australia of almost 4 million tonnes per annum? That's up to Consmin and OMH to decide between themselves.
OMH has reported to shareholders this year that its mining operations are under pressure. They have been challenged by the Australian aboriginal community, which has charged the miner with desecration of a sacred site, as well as other alleged offenses against the indigenous people. The charges are being considered by a regional court.
Also revealed in the OMH reports are growing tax and royalty claims by the territorial tax authority, which OMH is disputing. The bottom-line for both 2011 and 2012 is loss-making: OMH's 2012 loss of A$60.9 million (US$60.2 million) is five times greater than the previous year.
The latest financial report from OMH, released in March, reveals that upstream mining in Australia accounted for just 27.5% of group revenue last year; that was down from 34.2% in 2011, and from 48.1% in 2010. Profitability is evidently concentrated outside Australia at the Qinzhou, China, refining unit and the Singapore marketing unit. According to OMH's breakdown of its operating segments, its refining or processing business earned A$7.5 million in profit; marketing, A$26.8 million. Mining, by contrast, produced a loss of A$27.5 million.
OMH's presentations are notably more optimistic about the profitability of downstream refining in China and Malaysia than about its Australian mine. The second refinery in Sarawak, Malaysia, OMH said in March, should start production in a year's time, reaching full capacity in the second quarter of 2015. According to OMH, it has already sold 60% of the refinery's alloy production with Hanwa and FSE Shoji of Japan, and Fesil of Germany.
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 previously rumored in the mining media.
Oleg Sheiko, chief strategist for Consmin's mines and markets, says: "We don't comment on discussions and market speculations. Consolidation in the manganese industry outside BHP has clear advantages and synergies".
John Helmer has been a Moscow-based correspondent since 1989, specializing in the coverage of Russian business.