Update on the conclusion of rare trade on physical industrial commodity- Ferro Silicon.

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March 2, 2020

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Strategic Alpha

70-75% Grade Ferro Silicon

Ferro SIlicon

Dear Followers,

As I said Metal Businesses come under my circle of competence which also gives me an edge to understand Commodity Cycles. In June-July Sept there was an Excellent Opportunity in Ferro Silicon to Make 25-30% in 6-8 months.

This is what I sent to my closed group,

From the Archives( Email sent to my private group -18July 2019):-

About Ferro Silicon-
      Ferrosilicon is used as a source of silicon to reduce metals from their oxides and to deoxidize steel and other ferrous alloys. This prevents the loss of carbon from the molten steel (so-called blocking the heat). It can be used to make other ferroalloys. Ferrosilicon is also used for the manufacture of silicon, corrosion-resistant and high-temperature-resistant ferrous silicon alloys, and silicon steel for electromotors and transformer cores. In the manufacture of cast iron, ferrosilicon is used for the inoculation of the iron to accelerate graphitization. In arc welding, ferrosilicon can be found in some electrode coatings. For Every 100Kg of iron is produced 1.5-2Kg of Ferro Silicon is Required.

Rationale Behind Trade:-

Recently I went to Bhutan around May 2019  to make some deals in ferrosilicon. Just so that u know, We (Family Business) are traders in Industrial Metals/ Scrap and are we are Suppliers to manufacturers of cast iron castings, Ferro SIlicon is one of the very ingredients during casting production. I am Personally tracking Ferro Silicon Prices for the past 8-10 years and subsequent developments that drive prices. Currently, the only reason to visit Bhutan was that ferrosilicon prices seemed to have bottomed out, and apart from trading margin I can even make inventory gains if I stock it too.
Slowdown! It seems to be the talk of the town today and Demand is hit, Ferro Silicon Prices has Corrected Sharply Around 67000 Per ton Ex-Bhutan.

The cost of production for various manufacturers are as follows:-

Bellary-Hindupur Belt- 87000 TPA
Rhodium Cost
From above one can clearly understand that power cost contributes to around 50-53% of the total cost of the product for Ferrosilicon. The cheapest source of power comes from hydroelectricity. Meghalaya provides power to ferroalloy manufacturers at subsidized rates so their production cost for ferrosilicon works out to be 75000Rs/ ton( Meghalaya Belt), however, Bhutan has abundant hydroelectric power and it provides power at one of the cheapest rates in the entire world so production cost for ferrosilicon in Bhutan Belt works out to be 67000/Ton(Bhutan Belt).
Currently, Ferro Silicon Prices in Bhutan are trading at 67000Rs/Ton, which is exactly near the production cost of Bhutanese producers, i.e lowest cost manufacturers in the world.
This is one of the rare times when prices fall to such levels, maybe once in 5-7 years.
Max low which we have seen is around 62000 RS/Ton odd during 2016, however, on the upside prices shot up to 130000 Rs/Ton, and with currently priced around 67000 RS/Ton odd this provides a good risk to reward trade. If prices due to market forces fall below the production cost of Bhutanese manufacturers, for some time Bhutanese may continue to produce, however with losses mounting, most producers will shut down their operations till the pricing environment improves. When the lowest cost manufacturers shut down, it thus creates a shortage of ferrosilicon and will thus help prices to rebound.
So taking that into mind one should take a sizable position in stocking ferrosilicon and make the most of it. Usually, it takes 6-8 months for the prices to rebound once it makes a bottom. One can look at 1:3 to 1:5 times risk-reward trade here in this essential commodity.

Ferro Silicon Price Chart(steelmint.com):-

fesi pRICE

 

Below is the snapshot of the Whatsapp message sent to my close people taking consultation:-

Ferro SIlicon Opportunity

 

Status of the Trade as of Today(March2nd 2020):-

After I initiated my coverage on ferrosilicon as a medium-term money-making opportunity around 67000TPA Ex-Bhutan, Prices went down to 63000Rs/Ton and Currently trading at 91000Rs/Ton. It’s been around 7 months since I started buying ferrosilicon, some of my people I consulted entered into forwarding contracts with manufacturers and entered the trade. Now it’s time to book profits. we are almost up around 35%. we have already started booking profits to pocket a handsome 35% in 8 Months.

Here is how the trade went:-

Ferro SIlicon Opportunity

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The author of the blog Mr.Suyog Dhavan is a Full-time Investor / Value Trader and Value investing/Trading Mentor. His style of Investing is inspired by Mohnish Pabrai, Peter Lynch, and Porinju Veliath. He is the founder of Strategic Alpha Wealth, A Premier stock market mentorship firm with a mission to touch the lives of 1Lakh people through its mentorship program.

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