2008 Annual Report on Ferrosilicon Market

1. Introduction of Ferrosilicon

Ferrosilicon, or ferrosilicium, is a ferroalloy an alloy of iron and silicon with between 15 and 90% silicon. It contains a high proportion of iron silicides. Its melting point is about 1200 °C to 1250 °C with a boiling point of 2355 °C. It also contains about 1 to 2% of calcium and aluminum.

Ferrosilicon is used in steelmaking and foundries as a source of silicon in production of carbon steels, stainless steels, and other ferrous alloys for its deoxidizing properties, to prevent loss of carbon from the molten steel (so called blocking the heat); ferromanganese, spiegeleisen, silicides of calcium, and many other materials are used for the same purpose. It can be used to make other ferroalloys. Ferrosilicon is also used for manufacture of silicon, corrosion-resistant and high-temperature resistant ferrous silicon alloys, and silicon steel for electromotors and transformer cores. In manufacture of cast iron, ferrosilicon is used for inoculation of the iron to accelerate graphitization. In arc welding, ferrosilicon can be found in some electrode coatings.

Ferrosilicon is a basis for manufacture of prealloys like magnesium ferrosilicon (FeSiMg), used for modification of melted malleable iron; FeSiMg contains between 3-42% of magnesium and small amounts of rare earth metals. Ferrosilicon is also important as an additive to cast irons for controlling the initial content of silicon.

Ferrosilicon is also used in the Pidgeon process to make magnesium from dolomite. In contact with water, ferrosilicon may slowly produce hydrogen.

Ferrosilicon is produced by reduction of silica or sand with coke in presence of scrap iron, millscale, or other source of iron. Ferrosilicon with silicon content up to about 15% are made in blast furnaces lined with acid fire bricks. Ferrosilicon with higher silicon content are made in electric arc furnaces. An overabundance of silica is used to prevent formation of silicon carbide. Microsilica is a useful byproduct.

The usual formulations on the market are ferrosilicon with 15, 45, 75, and 90% of silicon. The remainder is iron, with about 2% of other elements like aluminum and calcium.

2． Distribution of Ferrosilicon

There are five major ferrosilicon producers in the world: China, Russia, Ukraine, Brazil and Norway. The major consumers are China, Japan, U.S.A. and Russia. Ferrosilicon is mainly used in steel production, so the output of crude steel influences ferrosilicon demand directly. According to Worldsteel, the global output of crude steel in 2008 is 1,329.7 million, decreased by 1.2% on the basis of 1,345.4 million in 2007. Producing one metric ton of ferrosilicon needs four kilograms of ferrosilicon, so there are about 5.3 million

Asian Metal Ltd. All rights reserved. Tel: +86-10-51002408/17/19/71/72/73/74 Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 tons of ferrosilicon consumed in the production of crude steel in 2008. Meanwhile, it needs 1.1 tons of ferrosilicon to produce 1 ton of magnesium in China. China has produced about 0.63 million tons of magnesium in 2008, so it needs about 0.69 million tons of ferrosilicon. So the total output of ferrosilicon in the world is at least 6 million.

2.1 Ferrosilicon Production in China

2.1.1. Ferrosilicon Output in China

As the largest ferrosilicon producer in the world, China has 5.5 million tons of ferrosilicon production capacity. However, due to the global financial crisis, Chinese ferrosilicon output has decreased greatly in 2008, and Chinese ferrosilicon is mainly being sold to steel mills and magnesium smelters and exported foreign countries. In 2008, China produced about 0.502 billion tons of crude steel, increased by 2.6% on the basis of 2007. Producing 1 ton of crude steel needs 4 kilograms of ferrosilicon, so there are about 2.01 million tons of ferrosilicon used in crude steel production. In 2008, China produced about 0.63 million tons of magnesium, and it needs about 0.69 million tons of ferrosilicon in magnesium production. Meanwhile, China exported about 1.25 million tons of ferrosilicon in 2008. Therefore, the total output of ferrosilicon in China is around 4 million tons.

Production capacity of some major ferrosilicon smelters in China. Unit: million tons Production Producers Output in 2008 capaicty Erdos Metallurgy Group 50 43 Dragon Northwest Ferroalloy Co .,Ltd 25 Qinghai Huadian Ferroalloy Company 15 10 Qinghai Wutong Group 20 Baiyin Yinzhu Electric Power Group 5 Ningxia Yinglite Hebin Metallurgy CO.,LTD 7 6.2 Erdos Xinju Company Limited 4 2.5 Junzheng Industry Co.,Ltd 10 Inner Mongolia Sanwei Resources Group 10 Co., Ltd Ningxia Rongsheng Ferroalloy Group Co. 12 9 Ningxia Jiyuan Metallurgy Co., Ltd 4.5 Ningxia Tianchen Metallurgy Co., Ltd. 5 Inner Mongolian Yaokui Special Ferroalloy 2 Co., Ltd. Ningxia Jinjing Metallurgicals and Minerals 5 Industrial Co. Shandan Tongxiang Ferroalloys Co., Ltd 4 Ningxia Dongfang Corporation Ltd 14 Bameng Hengtai Smelting Co., Ltd 10 8 Alashan Liyuan Coal Co., Ltd 7

2.1.2. Production Distribution of Chinese Ferrosilicon

Chinese ferrosilicon smelters are mainly centralized in Northwest of China (Ningxia, Inner Mongolia, Gansu and Qinghai)and Southwest of China (Yunnan and Guizhou), and ferrosilicon outputs in Inner Mongolia, Ningxia, Gansu and Qinghai account for 80-90% of the total output in China. Meanwhile, ferrosilicon outputs in Ningxia, Gansu and Qinghai account for 90% of the total ferroalloys in the area. In 2008, The total output of Chinese ferroalloys is 18 million tons, with 0.86 million tons in Gansu, 0.86 million tons in Ningxia, 0.7 million tons in Qinghai and 3.03 million tons in Inner Mongolia.

2.2 Ferrosilicon Production and Export in Other Countries Besides China, there are some other major ferrosilicon producers: Russia, Brazil, Ukraine and Norway. In 2008, the output of ferrosilicon in Russia is 0.84 million tons, decreased by 5.3% on the basis of 0.89 million tons in 2007. The Largest ferrosilicon producer in Russia is Kuznetsk Ferro-alloys, with an output of 55% of the total output in Russia. The second largest producer is CHEMK with 27% of total output and the third largest producer is Brat Ferro-alloys with 10% of total output.

Ferrosilicon output in Ukraine is 0.153 million tons, decreased by 30% on the basis of 0.218 million tons in 2007.

In 2008, the total output of ferrosilicon in Europe is 0.55 million tons, and there are about 0.245 million tons of output in Norway and 0.1 million tons in Iceland.

Distribution of Global Ferrosilicon Outputs in 2008

9% China 3%2% 3%3% Russia Brazil Ukraine 14% India 66% Norway Others

3. The export of Chinese ferrosilicon in 2008

In 2008, China exported about 1.246 million tons of ferrosilicon, decreased by 17.9% on the basis of 1.518 million tons in 2007. 38% of Chinese ferrosilicon were exported to

China, which is the largest export destination, and 15% were exported to South Korea, which is the second largest destination. U.S.A, Taiwan and Holand ranged from the third to the fifth.

Distribution of Chinese Ferrosilicon Export in 2008

Other region Japan 26% Japan South Korea 38% U.S.A. China Taiwan Netherlands 5% China Taiwan Netherlands South Korea Other region 15% 5% U.S.A. 11%

China exported a lot of ferrosilicon in the first half of 2008. From January to July, China generally exported around 100,000t of ferrosilicon each month, but the export quantity began decreasing since August, and from August to October, the quantity is 80,000-90,000tpm. However, with the worsening of global economy, China only exported about 50,000tpm of ferrosilicon in November and December.

South China Japan Korea U.S.A. Netherlands Taiwan Belgium Italy Turkey Mexico Total Jan 41,351 9,887 11,904 5,769 5,560 107,817 Feb 31,637 18,650 5,867 7,792 5,690 98,392 Mar 40,017 16,949 11,209 4,828 4,028 110,912 Apr 44,281 25,945 17,597 5,612 6,405 131,164 May 55,796 24,782 18,908 9,160 8,982 149,756 Jun 43,428 28,489 8,848 7,032 5,070 117,365 Jul 57,305 13,425 32,409 3,907 8,573 151,305 Aug 41,498 10,893 6,530 8,850 8,083 97,968 Sep 27,165 14,028 8,806 4,752 4,208 87,264 Oct 36,818 13,146 8,138 5,845 4,099 86,104 Nov 28,614 5,715 3,664 3,766 2,968 54,897 Dec 26,452 11,421 3,188 2,492 2,276 53,027 Total 475,050 193,331 132,163 61,171 61,985 1,245,972

4. Analysis of Chinese ferrosilicon market in 2008

4.1 Export market From 2007 to early 2008, with the increasing of crude steel outputs, the demand of ferrosilicon kept going up. Meanwhile, some foreign buyers worried that the Olympics would influence the transportation of ferrosilicon and they began purchasing more materials. Since early 2008, Chinese ferrosilicon market has begun increasing, and the price increased from USD1,000/t in January to USD2,100-2,200/t in June. However, with the worsening of global economy, a lot of steel mills have reduced their outputs or halted their production, so the demand of ferrosilicon dropped greatly. Ferrosilicon price began decreasing since June and some smelters stopped their production due to the slow demand and the high production cost. Ferrosilicon price has gone back to USD1,000/t at the end of 2008.

4.1 Domestic market Just like the export market, the domestic market of Chinese ferrosilicon has gone through great decrease and increase in 2008. In the early year, ferrosilicon 75% price was RMB5,600-5,700/t ex works, and then the price began increasing and reached RMB10,000/t in June. However, steel output dropped due to the global economic crisis in the second half of 2008, and the demand of ferrosilicon decreased greatly. Ferrosilicon price had kept dropping since June, and at the end of 2008, the price had gone back to the previous level in early 2008.

5．Ferrosilicon import in Japan

As one of the largest ferrosilicon consumers, Japan’s import quantity of ferrosilicon has a very close relationship with Chinese ferrosilicon output. From January to November in 2008, Japan imported about 0.541 million tons of ferrosilicon, mainly from China, Russia and Brazil. About 0.439 million tons of the material are from China, 38 thousands tons from Russia and 44 thousands tons from Brazil.

Ferrosilicon Import in Japan

8% 4% 7% China Russia Brazil Others 81%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov China 44,000 31,000 34,000 45,000 48,000 48,000 49,000 44,000 30,000 34,000 30,000 Russia 1,000 2,370 3,563 6,113 5,856 7,082 1,793 9,658 539 Brazil 6,064 3,323 4,264 3,909 4,647 2,986 3,631 4,925 5,238 5,744 4,653

6. Forecast of ferrosilicon demand in 2009

China produced about 4 million tons of ferrosilicon in 2008, decreased by 0.3-0.5 million tons compared with the output in 2007. According to the current production situation, Chinese ferrosilicon output will definitely continue to decrease.

6.1 Influence from steel industry on Chinese ferrosilicon demand

As the largest consumption source of ferrosilicon, steel industry’s development imposes great influence on ferrosilicon industry. The global economic crisis continues to expand in 2009, and although a series of economy-stimulating plans has come in some countries and the global steel industry are warming up now, it needs at least one year for steel market to recover.

As the largest steel producer and consumer in the world, China produced about 0.502 billion tons of crude steel. According to China Iron & Steel Association (CISA),although the global economic situation is still unpleasant, it is estimated that China will produce about 0.49-0.50 billion tons of ferrosilicon in 2009, but someone believes that the quantity should be 0.46 billion tons according to market situation. Producing one ton of crude steel needs four kilograms ferrosilicon, so the demand of ferrosilicon from Chinese steel industry should be around 1.8-2.0 million tons.

6.2 Influence from magnsium industry on Chinese ferrosilicon demand

Besides steel industry, The demand from magnesium industry also imposes great influence on Chinese ferrosilicon market because Producing one ton of magnesium needs 1.1 ton of ferrosilicon. China produced about 0.63 million tons of magnesium in 2008, and it consumed about 0.69 million tons of ferrosilicon. According to China Nonferrous Metals Industry, the demand of magnesium will keep slow in the world, and magnesium supply in China will decrease further in 2009, and it is estimated that the output should be 0.50-0.55 million tons, so the demand of ferrosilicon should be 0.55-0.60 million tons.

6.3 Influence from international steel market

Steel industry has suffered a great loss in the global financial crisis. Since last September and October, the orders of steel products from construction, automobile and household appliances industries have decreased greatly. Arcelormittal, Severstal and Corus have cut down their outputs a lot in the past several months. In January 2009, the total crude steel output is about 85.77 million, decreased by 24% on the basis of the output in 2008.

Almost all major crude steel producers have reduced their outputs by double-digit percent in January. In Japan, the output of crude steel has decreased by 37.8% to 6.37 million tons in January, and it is a new lowest level since 1969 and a continuous decrease in the

Asian Metal Ltd. All rights reserved. Tel: +86-10-51002408/17/19/71/72/73/74 Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 past four months. In South Korea, the output of crude steel is 3.47 million tons in January, decreased by 25.6% compared with that of 2008.

There are about 9.55 million tons crude steel outputs in Europe in January, decreased by 45.9% on the basis of 2008. Thereinto, the output is 2.65 million tons in Germany, decreased by 35.6%, 1.59 million tons in Italy, decreased by 40.4%, 0.858 million tons in France, decreased by 46.7%, and 0.652 million tons in Britain, decreased by 45%.

In CIS, the total output of crude steel is 5.76 million tons in January, decreased by 46.8%. Thereinto, the total output in Russia is 3.3 million tons, decreased by 49.1%, and the output is 2 million tons Ukraine, decreased by 45.9%.

For other major steel producers, the output is 4.09 million in U.S.A. in January, decreased by 52.9%, 1.62 million tons in Brazil, decreased by 45.6%, and 1.95 million tons in Turkey, decreased by 13.1%.

China produced about 4.15 million tons of crude steel in January, increased by 2.4% on the basis of 2008.

In 2008, China exported about 1.25 million tons of ferrosilicon, 31% of the total output in the year. However, due to the global financial crisis, steel output will decrease by 10% to 1.2 billion in the world in 2009. This has been the biggest decrease in the past 60 years. Meanwhile, some analysis organizations forecast that the total output of crude steel will be 1.29 billion tons in 2009, with about 183.6 million tons in Europe union, 103.2 million tons in CIS, 118 million tons in North America, 114 million tons in Japan and 505 million tons in China. However, some other analysts are very pessimistic about the future market, and they believe that the crude output will decrease by 8.1%, and Chinese crude outputs will decrease to 460 million tons in 2009.

According to above forecast, the demand of ferrosilicon from steel mills should be around 5.14 million tons in the world in 2009.

7. Analysis of ferrosilicon market in 2009

In 2008, Chinese ferrosilicon market has gone through great increase and decrease in 2008. The price increased greatly in the first half of 2008 and reached the top in June, but it went back to the previous level of early 2008 at the end of the year. Ferrosilicon demand kept strong in late 2007 and early 2008, and some foreign consumers worried about the transportation problems caused by Beijing Olympics, so they purchased a lot of ferrosilicon in the first half of 2008, and the market has gone up a lot at that time. However, due to the global financial crisis, The demand of ferrosilicon has gone down a lot caused by the decrease of global steel outputs. So the price moved down a lot in 2008.

In 2009, ferrosilicon market generally remains stable, but the demand from foreign consumers keeps slow. Due to the great decrease of their outputs, some foreign consumers have decreased the quantity of their purchase. In Chinese domestic market, steel mills have decreased their outputs greatly, with a total output of 120-160 thousands tons each month currently. Meanwhile, magnesium smelters have decreased their outputs greatly, and the demand of ferrosilicon from magnesium smelters is only around 20 thousands tons in each month.

For production cost of ferrosilicon, the production cost from power supply usually affects ferrosilicon market greatly, because producing 1 metric ton of ferrosilicon needs 8,000-9,000KW. Since the preferential power price has begun being performed, the power price generally kept stable, and it is about RMB0.32/KWH in Ningxia, Inner Mongolia and Gansu, and RMB0.28KWH in Qinghai. However, The preferential power price has been cancelled in Inner Mongolia since 17 February 2009, and now it is about RMB0.40KWH in Inner Mongolia, and the preferential power price in other provinces will be cancelled soon, because local governments have already received the document of cancellation of the preferential power price from the central government. So the production cost of ferrosilicon will increase by RMB400-500/t, and many smelters have to halt their production.

As the raw material of ferrosilicon, Blue coke also imposes great influence on ferrosilicon. Now the blue coke price is RMB840-850/t, and the price kept moving up slowly. Market participants believe that the coke price will generally keep stable at RMB800-900/t in the near future. The price of Steel scrap, another raw material of ferrosilicon, is RMB2,300-2,400/t currently and has been dropped a lot in the past months due to the sluggish demand of steel products, but there are few steel scraps used in ferrosilicon production, so the price change of steel scrap imposes little influence on the production cost of ferrosilicon.

To sum up, the production cost of ferrosilicon will keep stable in 2009, but due to the slow demand from both domestic and international market, ferrosilicon market will move in a low range in 2009, and the price will keep at RMB5,500-6,500/t ex works and USD1,000-1,020/t FOB China.