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Ferro-alloys set to rally, and China owns the most

Ferro-alloys set to rally, and China owns the most

Write: Quincy [2011-05-20]

Ferro-alloys set to rally, and China owns the most


China s dominance in rare-earth minerals has overshadowed its lead in another group of key industrial commodities, which could be set for big gains from an upturn in factory-equipment spending.

Metals additives known as ferro-alloys, used to boost the hardness or strength-to-weigh ratio of steel and in other advanced applications, could be about to rally, according to Nomura International.

They re not considered rare, and don t have the offer quite the compelling supply-and-demand dynamic seen in some commodity charts, but they could be about to catch up to gains seen elsewhere on the periodic table, the brokerage said in a report earlier this week.

Nomura said ferro-alloys should benefit as recent business surveys indicate a strong capital-expenditure cycle is set to emerge that will drive demand for high-tech industrial equipment.

A lateral way of engaging this theme is through the metals that are used to build such equipment, wrote the Nomura analysts, headed by Hong Kong-based strategist Sean Darby.


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Darby, an engineer by training, said the market has overlooked the fact that China dominates global production of ferro-alloys in much the way it does the production of rare-earth metals.

Last year, output by Chinese mines accounted for 85% of the world s tungsten, 88% of antimony, and was also the biggest vanadium producer of any single nation, all key ferro-alloys.

The reason these metals are important is that they are used to strengthen steel, particularly for machine-tool applications, automotive and aircraft production, and high-performance industries such as a petrochemicals, Darby said.

Meet the alloys
Tungsten is used in the production of super-hardened steel for cutting blades, among other machine tools. In fact, its uses in industry are so broad, it s sometimes used as a barometer of global industrial activity.

Antimony has properties similar to zinc and is frequently added to lead. It has uses within the automotive industry.

Vanadium, when added to steel, produces a material with a high strength-to-weight ratio that s well-suited for uses in aerospace and construction. It s also frequently added to chromium and manganese to create special steels with military applications.

Of tungsten producers, Darby lists Xiamen Tungsten /quotes/comstock/28c!e:600549 (CN:600549 51.52, +1.15, +2.28%) , and Australian miner Newcrest Mining /quotes/comstock/22x!e:ncm (AU:NCM 39.82, -0.11, -0.28%) /quotes/comstock/11i!ncmgf (NCMGF 40.75, +1.55, +3.95%) , whose O Callaghan deposit with an estimated 4% of global reserves is expected to become the world s largest producer once it s developed.

Hong Kong-listed China Molybdenum /quotes/comstock/22h!e:3993 (HK:3993 6.78, +0.14, +2.11%) /quotes/comstock/11i!cmclf (CMCLF 0.81, -0.04, -4.71%) is another on Darby s list, even though only 7% of the miner s revenue comes from tungsten production.

Among vanadium producers of note, Darby named Australia s Atlantic Ltd /quotes/comstock/22x!atida (AU:ATI 1.95, +0.05, +2.64%) , Pangang Group Steel Vanadium & Titanium Co. /quotes/comstock/28b!e:000629 (CN:000629 13.72, 0.00, 0.00%) and Hong Kong-listed China Vanadium Tintano Magnetite Mining Co. /quotes/comstock/22h!e:893 (HK:893 3.35, -0.07, -2.05%) /quotes/comstock/11i!cvtmf (CVTMF 0.00, 0.00, 0.00%)

Antimony producers listed included Australia s Anchor Resources Ltd. /quotes/comstock/22x!e:ahr (AU:AHR 0.27, -0.0050, -1.82%) and Chenzhou Mining Group Co. /quotes/comstock/28b!e:002155 (CN:002155 39.91, -0.46, -1.14%)

Disagreement on rare earths
Darby said he generally prefers industrial-metal producers over those involved in precious metals, though he s also looking to pare back his recommendations on rare-earth miners amid concerns new supply of the metals are due to come online in 2013.

But others are more bullish on the rare earths, with J.P. Morgan saying domestic prices in China are catching up with the higher prices it gets for its exports.

Global rare-earth prices surged when China announced it would curb exports in the second half of last year.

But domestic Chinese prices are now at where global prices were before the new quotas. Since the start of the year domestic mainland China prices for cerium are up 167%, while lanthanum are up 87% and neodymium are up more than 100%, reaching levels seen globally before China announced its new quotas.

We think these recent increases actually point to a healthier market in China and should be supportive of higher longer-term rare earth export prices, said J.P. Morgan analysts in note Monday.

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