An essential component of Warren Buffett’s investment strategy is his focus on what he calls “moats.” In business, a moat refers to a competitive advantage that allows a company to earn outsized profits. Like its namesake—a water-filled ditch—Buffett’s moat refers to a defensive barrier, but instead of protecting a castle, it helps prevent a company’s profits from being eroded by competitors.
Identifying businesses that have moats is central to Buffett’s strategy, and his advice to company managers is to focus their efforts on making moats deeper and wider. However, not all moats look the same, and evaluating a moat’s durability can be challenging.
How to find Moat?
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What is Moat?
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Sadhan Moat Calculator (excel Template) & How to use it?
We are talking about Ferro Chrome – an alloy whose demand is linked to Steel!
Watch this video to understand the complete value chain:
Ferro Chrome are a type of alloys called as FERROALLOYS. Ferroalloys are important inputs for steel industry as these are used as deoxidizers and alloy additives in the steel manufacturing process .These alloys impart special properties to steel for ex: increase resistance to corrosion, improve hardness & tensile strength at high temperature, impart wear and abrasion resistance and increase creep strength etc. There are three sub segments in ferroalloys Silico Manganese Ferro Manganese Ferro Chrome
The growth of Ferroalloys Industry is thus, linked with the development of Iron and steel Industry. One interesting thing to note for an Investor is that : This sector is high energy intensive sector. It means power requirement to make 1 ton is very high. Ferroalloys Industry spends 40 to 70% production cost on power consumption. The power consumption per ton of ferroalloys production in the country varied from 3,000 to 12,000 kWh as shown below:
FERROCHROME Ferrochrome when added to stainless steel to enhance its appearance and impart corrosion resistance. For every ton of stainless steel (depending on the grade), there is 17-23% of chrome content is required. Hence, if the stainless steel industry grows, the ferrochrome industry also grows. Ferrochrome is produced by electric Carbothermic Reduction of chromite.
Ferrochrome Demand Ferrochrome market size is projected to reach USD 19150 Million in 2022 and is forecast to readjusted size of USD 31070 Million by 2028 with CAGR of 8.4% during the review period. As it is a proxy on steel demand so let us understand first the demand drivers of steel sector.
International Steel demand
Steel demand shall remain high as in order to beat Covid most of the countries have to deploy funds into infrastructure building and infrastructure development without steel is virtually impossible. So there will be a huge demand of steel in market. Chinese Lunar new year is about to end so China will start producing and demand from china will increase.
Following the fresh lease of mines, the players have to pay a high premium for extraction of ore for majority of the production in India. This is likely to push up cost of extraction and keep ferro chrome prices firm.
Indian Govt. Steel Policy India has 100 million tonne capacity at present and has planned to grow 300 tonne per annum. We will see a growth in coming years basis the Key Targets detailed below: Domestic crude steel capacity is to be 300 million tonne by 2030-31 (122 million tonne in 2015- 16) entailing an investment of Rs 10Lakh Crore. Steel Demand estimated at grow 3-fold to 212 to 247 million tonne by 2030-31. Per Capita Consumption of steel to go up to 160kg by 2030-31 (from 61kg now). India to emerge as net exporter of steel by 2025-26. To domestically meet entire demand of high-grade automotive steel, electrical steel, special steels and allow for strategic applications by 2030-31.
Ferro Chrome prices
When there is increase in steel prices there will be increase in ferrochrome simultaneously. But in October 2021 there is decrease in its prices (25% correction) due to Chinese Lunar New Year, as in this month they produce as well consume it in its own country. It affected the market because 50% majority of steel market is controlled by China. Global Stainless Steel companies are shopping for Ferrochrome in very limited reserves in the market. Consumers are accepting higher offers and willing to pay premiums. Price Outlook Domestic ferrochrome demand this week was sluggish due to buyers reluctance to book at higher levels. Domestic offers, therefore, remained stable. In addition, ferro chrome prices also remained stable due to muted Chinese demand owing to the Lunar New Year holidays. In addition, the cost of ferro chrome production has increased due to a hike in coke prices in India – up by 11% m-o-m to INR 51,000/t from eastern region. This prompted smelters to raise that offers, but buyers refuse any further hike due to unacceptable high prices. Additionally, UG2 chrome ore prices increased to $185/t CNF China as Chinese inventories dropped to 3 million tonnes (mnt) from 4 mnt and producers expect robust demand after the New Year holiday. So, an increase in chrome ore prices also supports ferro chrome prices. Indian ferrochrome smelters are optimistic in terms of ferro chrome prices and demand as they are anticipating good demand from Chinese buyer post-the New Year holidays. Three Reasons Supporting High Prices
South Africa: South Africa having 60% of Market Share and it is the Price Setter. Power Supply in South Africa has been a perennial issue from many years. Since 2008, South Africa has been facing power deficit. Currently they are running a deficit of 4000 MW (Power shortage of 4000 MW ) hence they are planning to raise power rate, and as we know this industry is totally dependent on power sector, so if there will be a hike in Power cost in South Africa then globally prices of ferro chrome will be high. As South Africa produces ore and Chinese company import ore and ferroalloy spelter situated in China supply Stainless steels from there, South African local spelter was against it as they are not in favor of South Africa economy. So they have tried to bring a legislation which they have proposed in budget. 20.5 % is the price increase applied for by ESKOM from 1st April 2022 for electricity. The Govt is considering a Tax on export of Chrome Ore which is still not announced as SA budget is on 23rd February 2022.
Kazakhstan: In Kazakhstan there is civil unrest is going on so it may affect production. Kazakhstan also controls more than 10% of international ore supply.
Turkey: Turkey is major exporter of European countries. Prices of ferrochrome in Europe is already high because turkey is unable to supply to them due to its own problems
Conclusion From Supply side these are the three factors as they are geopolitical in nature and from Demand side Lunar New year is going to end soon then China will start producing, demand from china will high so prices are going to be elevated for near term.If all these factors come into picture then prices shall go up in short term.
We think an Indian domestic company named IMFA Ltd is placed to benefit from this . Watch the video to know more: