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16 Mar 12 South African ferrochrome in meltdown, urgent intervention needed

South Africa has a long-standing chrome value chain that sustains 200 000 jobs and R42-billion a year in gross domestic product (GDP), but the industry speaks with one voice when it says that it is in meltdown mode.

If things go on like this, it could shed 60 000 to 80 000 of those jobs and lose its once dominant market position to China, despite China having no chrome of its own.

The contribution of the ferrochrome industry to South Africa’s GDP could plunge to R23-billion, and chrome ore prices could collapse.

On the environmental protection front, global carbon dioxide (CO2) emissions from production would rise by at least 15% a ton as a result of the displacement of capacity from the world’s most efficient South African smelters to the world’s least efficient energy-sapping and CO2-spewing Chinese smelters.

To maximise the resource endowment, the ferrochrome industry is advocating that South Africa fosters a competitive environment for beneficiation and creates sustainable long-term returns through top resource management and continued investment.

While the export of raw ore creates only 5.7 jobs per 1 000 t of ore, the export of ferrochrome creates 17.3 jobs per 1 000 t of ferrochrome – over three times more.

There is a nigh six times value uplift with ore exports contributing R1 660/t to GDP and ferrochrome contributing R9 109/t to GDP.

These figures justify South Africa’s beneficiation strategy, which should be accom-panied, the industry believes, by the laying down of a justifiable electricity price path that keeps Eskom in business and also sharpens competitiveness.

South Africa would not be alone in implementing measures to maximise return from the resources it hosts in abundance, given what Canada has done in potash, Brazil in iron-ore, China in metallurgical coke and India in chrome and iron-ore.

The irony of it all is that South Africans are giving China the chrome stick with which to hit it by supplying half of the raw ore it requires.

India used to do the same but has now stopped. Its government intervened in 2006 at a time when South Africa should have. Now India is enjoyng the value add as its ferrochrome sales rise and its ore exports plunge. Oman and Turkey are thinking of doing the same.

But as the local job-providing ferrochrome business burns, will the South African government continue to fiddle as it has done for the past half a dozen years?

In South Africa, the industry wants govern-ment to impose an export duty to discourage the country from exporting raw chrome ore and, in the longer term, establish an industry marketing arm, similar to CanPotex, of Canada, which has been highly successful at marketing potash.

But at least one South African chrome trader is as vociferous that the proposed imposition of a temporary export tax will also cause economic hurt.

It is the typical standoff between producer and trader that only a fair and equitable local ore price will end.

Big capital spenders in the chrome-to- ferrochrome business have been complaining for the last six years that their substantial investment processing capacity is being underused as their fellow South Africans export raw ore to the Chinese, who are now virtually level pegging with them in the production stakes.

The meltdown signs are there for anyone to see. Producers have been closing furnaces left, right and centre and selling back their power allocation to State power utility Eskom.

The ferrochrome fortunes of JSE-listed black-controlled Merafe Resources, a proxy for Xstrata, fell 13% and profit plunged 58% in the year to December 31.

Merafe CFO Zanele Matlala reported that profit of R279-million in 2010 had shrunk to R117-million in 2011.

The Xstrata-Merafe venture has closed five of its 20 furnaces until May 31. Its peers have done likewise, Samancor Chrome closing a similar number and ASA, Tata and International Ferro Metals each closing furnaces, with Hernic poised to follow.

Merafe CEO Stuart Elliot’s call is that something urgent needs to be done. He is confident that the South African government will help by imposing a $100/t export tax on unbeneficiated chrome leaving South Africa’s shores.

Long-term he expects a system of credits to balance supply and demand.

Were it not for the unconstrained export, there would have been no need to close furnaces at this early stage in the year when production is generally still at full tilt ahead of the high winter power tariffs.

“With power being so expensive in winter, you generally try to maximise all your production in summer, build up inventory and do your closures in winter,” Elliot tells Mining Weekly.

Instead, the hard-hit South African ferrochrome industry is already in major sell-back mode to Eskom, even though winter tariffs only click in from June 1.

This is because South Africa’s ferrochrome production is being displaced by Chinese ferrochrome production, with South Africa’s 300 000 t supply loss exactly matching China’s 300 000 t ferrochrome gain.

Half of the raw ore South Africans exported to China in 2011 was from platinum miners producing chrome as a by-product of mining upper group two (UG2) reef, 30% from integrated ferrochrome producers and 20% from independent chrome-ore miners.

“It’s this unbeneficiated ore that is leaving the country and growing the Chinese ferrochrome industry at South Africa’s expense,” Elliot points out.

But the entire industry is in direct communication with the Department of Mineral Resources and the National Treasury, which has the power to impose export taxes – which are unlikely to fall foul of World Trade Organisation rules – to provide the short-term breathing space until a better long-term solution is agreed.

This will probably take the form of credits to local companies that sell their raw ore to ferrochrome converters.

Zimbabwe has already imposed an outright ban on the export of raw ore and other chrome-mining countries are also taking steps to protect themselves from the loss of a local value-add opportunity.

Optimising Endowment

An industry brochure was handed to analysts, investors and media representatives on how balance can be restored to South Africa’s teetering chrome endowment that contri- butes R36-billion a year in foreign exchange.

With UG2, South Africa has 82% of the world’s chrome resources and is currently the world’s largest chrome-ore miner and the world’s largest ferrochrome producer.

Historically, all the metallurgical-grade chrome, the brochure says, has been bene- ficiated locally, for which 4.8-million tons of annual ferrochrome capacity has been installed, requiring an investment of R13-billion since 2006.

The foreign exchange that ferrochrome earns is comparable with gold and 90% of the key technology and equipment inputs are local, with State electricity utility Eskom receiving R5-billion to R6-billion a year for power, which represents 7% to 8% of its total revenue.

In the last five years, South Africa’s chrome value chain has paid R2.5-billion a year in taxes and has invested at a rate of R3.5-billion a year.

Some 80% of the value creation is created by ferrochrome.

South Africa has the Primus technology that uses less scarce electricity, compared with China that uses the most, and fewer consumables.

Most of the furnaces are closed furnaces that emit less climate-changing CO2 compared with China, which has many open furnaces that emit more CO2.

This country has the largest furnaces and China the smallest furnace sizes.

South Africa contributed to making full use of all its chrome resources in pioneering the use of UG2 concentrate recovered from platinum tailings.

It produces anthracite and char locally, which makes it less reliant on imported metallurgical coke needed to process the ferrochrome.

There is investment in the cogeneration of electricity and a growing predisposition towards independent power production.

But a shrinking is under way and Elliot foresees more furnace closures when power prices double from midyear.

The problem that could put the South African industry out of business is that it is losing market share to China, despite the investment in capacity.

While 94% of the capacity to produce ferrochrome was taken up in 2004, only 74% of the available capacity was used in 2010, and far less now.

From holding a 50% market share, South Africa is currently battling to keep its share above the 36% level, whereas China’s share has grown from 5% to 30%.

To add insult to injury, China’s rise has been on the back of South African supplies.

Ore supply growth in South Africa is expected to catapult the market into a six- million-ton oversupply of metallurgical-grade ore a year by 2014, which will lead to lower prices and margins, with negative implications for the South African economy.

South Africa’s ore supply is poised to grow at a compound annual growth rate of 10% from 2010 to 2015, outstripping global demand growth of 6%.

A growth rate of 21% a year is expected from the platinum industry’s UG2 tailings from 2010 to 2015.

The ongoing switch to UG2 mining may well worsen the oversupply forecast.

Meanwhile, the cost of producing ferrochrome has been rising at a rate of 11% a year since 2007, electricity representing 22% of total production costs and labour rising by 8% to 10% a year in the last five years.

Chinese export tariffs have seen to it that the cost of imported metallurgical coke has gone up by 8% a year since 2007.

The industry sees the solution as an initial $100/t export tariff and ultimately the establishment of a local chrome ore-marketing organisation to drive local value-add as the solution.

Advocated is mandatory parti-cipation by all chrome and UG2 producers, the creation of space for new entrants and a fair and competitive domestic market.

The Canadian government approved the CanPotex marketing arm for potash, which has provided 40 years of profitable growth and which South Africa could emulate in chrome.

Beneficiation Partners

A silver lining is that the industry already falls hand-in-glove with South Africa’s long-held beneficiation dream that government is on the point of turning into reality.

But dead against the proposed $100/t tax is JSE-listed chrome-trading company Metmar, whose CEO, David Ellwood, calculates that the proposed tax represents a 100% tax on the chrome ore production cost and a 300% tax on UG2 operations, many of them community based.

“By imposing a tax, we will be effectively imposing a ban on chrome ore from South Africa,” he comments to Mining Weekly.

The net effect, he says, will be the collapse of the internal chrome ore price, as happened following the ban of raw chrome ore exports from neighbouring Zimbabwe.

“My opinion is that this is a very delicate matter that needs to be debated with all chrome stakeholders. South Africa holds 65% of the world’s chrome reserves, but only has 50% of the Chinese market. Is it being suggested that we give up this share of the market and let the Chinese buy from other sources?” Ellwood asks.

Half of the 9.4-million tons that China imported last year came from South Africa and half of the South African contribution came from platinum mines that produce chromite ore as a by-product of their UG2 platinum mining. Another 20% came from independent chrome-ore miners and integrated ferrochrome producers themselves were guilty of supplying the remaining 30%.

Heart of Problem

The quick flow of ore from UG2 miners is at the heart of the problem.

The industry could decide to decline in silence but then it was silence that contributed to South Africa’s energy crisis.

While South Africa did warn Eskom of the impending danger, perhaps it failed to shout loud enough.

The industry is thus correct to put out an SOS as vociferously as possible because the country needs to know what it stands to lose if no action is taken to stop the rot.

“But, as the industry, we can’t lay down the rules. All we can do is highlight the crisis that’s facing our industry. It’s now up to government to decide what action should be taken,” Xstrata Chrome MD Deon Dreyer tells Mining Weekly.

However, Ellwood casts doubt on the country’s ability to provide the necessary power to meet its ambitious beneficiation aspir-ations.

“Assuming that the capital was available internally to beneficiate all chrome ore to ferrochrome, or all manganese ore to ferromanganese or silico- manganese, where would Eskom find the required power and at what tariff?

“We are competing with new power suppliers across the world – one of them is Sarawak’s new 20 000 MW hydropower at around $0.04c/kWh,” Ellwood remarks.

Dreyer’s view, however, is that an attractive ferrochrome industry and a good environment for independent power production will entice producers to invest in their own competitive power capacity, which is the norm elsewhere in the ferrochrome world.

“In India, those successful in ferrochrome have their own power plants. Create the right investment climate that provides the right returns and the power plants will follow,” Dreyer adds.

Merafe’s Investment

Looking at an example of the current business end of the ferrochrome business, one notes that black-controlled Merafe’s revenue is primarily generated from the Xstrata-Merafe Chrome Venture, which has a total installed capacity of 1.98-million tons of ferrochrome a year and is in the process of completing the R1-billion Lion II expansion, which involves the development of a 360 000 t/y ferrochrome smelter as well as the Magareng mine.

Also on the way is the venture’s R188-million Tswelopele, a 600 000 t/y pelletising and sintering project at the Rustenburg smelter, where energy efficiency improvements will be a consequence.

Out of the R800-million debt facility that Merafe signed with Absa Bank, R300-million was used to refinance existing debt, which has left R500-million, most of which is earmarked for Lion II.

Merafe spends capital of between R150-million and R200-million a year and decided not to declare a dividend for the 2011 financial year after taking into account the funding it required for Lion II and Tswelopele.

The bulk Lion II earthworks are nearly complete and some of the kiln components already manufactured, with commissioning due in late 2013.

The development of the Magareng mine is to be accelerated to enable it to produce at full underground capacity in the first quarter of 2013.

The bulk Tswelopele earthworks are complete and the civil work more than 80% complete.

A chrome prospecting right has been granted over the farms St George and Richmond, a total of 4 019.9 ha which is contiguous to Xstrata’s Thorncliffe mining complex and where prospecting will begin this year.

The R42-million Lonmin UG2 plant project, which has been completed, has a production capacity of 1.5-million tons a year of fine UG2 chrome ore that requires agglomeration.

Also completed is the R17-million Waterval mine development, which has a production capacity of 360 000 t/y of chrome ore.

The R66-million Horizon mine project is due for completion in the second half of this year and will have the capacity to produce 480 000 t/y of chrome ore.

During 2011, Merafe’s total ferrochrome production was 263 000 t, which represented 65% of installed capacity use.

Strong global ferrochrome-using stainless steel production growth, driven mostly by a 15% increase in stainless steel production in China, resulted in record production of stainless steel in 2011 of 33.9-million tons, compared with 32.4-million tons in 2010.

Global demand for ferrochrome reached a record 9.3-million tons in 2011, exceeding the previous high of 9.1 million tons in 2010.

Strong end-user demand and restocking by stainless steel distribution centres in the first half of 2011 supported the growth in global demand for both stainless steel and ferrochrome – and South Africa has the opportunity to continue to be the lead supplier and at the same time create wealth and jobs for its many economically stressed citizens.

The income of Merafe, which shares in 20.5% of the venture’s earnings before interest, taxes, depreciation and amort- isation, decreased from the prior year as ferrochrome sales fell from 291 000 t in 2010 to 254 000 t in 2011 and production cost inflation rose 14%

The ferrochrome price declined from the US125c/lb average benchmark level in 2011 to US115c/lb in the first quarter of this year.

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