Although researchers indicate the possibility of “seriously high” demand, that extremely positive outlook clashes head-on with Eskom’s slow power station build programme.

Expansion projects for other power-hungry industries, such as aluminium, have already felt the heat of power restrictions and have postponed new project plans.

With ferrochrome stock levels at a historic low and global stainless steel production forecast to increase 18% to 29,9- million tons in 2010, there was every reason to accelerate project plans – but that is not to be and again South Africa may lose out on the full benefit of the ferrochrome upswing because of State-owned enterprise lags.

Ferrochrome prices are expected to rise, starting in the second quarter of 2010, but no additional ferrochrome expansions are expected in South Africa for the next three years, owing to the electricity constraint, the lack of availability of finance and the magnitude of the capital cost.

Some replacement ferrochrome capacity is scheduled to come on stream in Kazakhstan, but that will serve only to ensure that the supply side does not slide.

At a time when the South African ferrochrome producers should have their feet firmly on the ferrochrome project acceler- ator, they are doing just the opposite until Eskom’s big Medupi power station comes on stream, followed later by Kusile.

“China alone is able to consume our material, so if the rest of the world picks up and the economy picks up, then we’ll have a serious supply shortage, and we are seeing the indications of that already,” Merafe Resources CEO Steve Phiri tells Mining Weekly.

Merafe’s stock levels are down to ten weeks of consumption, compared with 24 weeks in 2008.

Supply is thus subdued, at a time when demand is poised to increase by 6% a year over the next five years.

Part of Large Xstrata Venture

The black economically empowered Merafe is part of the Xstrata-Merafe Chrome Venture, led by the London-listed Xstrata, the world’s largest ferrochrome producer.

Ferrochrome research company Heinz Pariser forecasts that the world will produce 7,5-million tons of ferrochrome in 2010, an increase of 29,8% over last year, and it says that 3,2-million tons will come from South Africa.

Ferrochrome is a key ingredient of stainless steel and the same researcher forecasts that the world production of stainless steel will rise by 18,3% in 2010 to 29,9-million tons.

Xstrata Alloys’ operations are located across the mineral-rich Bushveld Complex of the North West and Mpumalanga provinces, where it employs more than 12 000 people, including contractors.

Merafe Resources, Kagiso Trust Investments, the Ngazana Consortium and the Bakwena Ba Mogopa community all have chrome ownership participation in Xstrata Alloys.

With South Africa having more than 75% of the world’s chrome-ore reserves, the expected three-year project standstill will influence global ferrochrome supply and pricing.

World ferrochrome prices are more likely to track price increases made by South African producers than global consumers are of finding alternative sources.

David Kovarsky, the CEO of South Africa-focused, London-listed ferrochrome producer International Ferro Metals (IFM), reported last week that the ferrochrome market had improved “greatly”, reflecting not only increased demand from China, but also from the US and Europe.

Merafe CFO Stuart Elliot concurs that an uptick in demand is on the way from Europe, and sees the US market as also being under supply pressure.

IFM reported that it planned to increase its production capacity from the current 267 000 t/y to 665 000 t/y over the next four to five years.

“We cannot underestimate the task of more than doubling up our production, but IFM believes that it is achievable given the increase in world demand and the tight production capacity in South Africa owing to the current Eskom constraint,” Kovarsky said during a media conference call.

Phiri, who has been campaigning for some time for the export-ation of raw chromite ore from South Africa to be reduced, concedes that the power shortage may result in even more unbeneficiated ore being sent out of the country without any value addition – a foreign-exchange and job-opportunity loss for South Africa.

What’s worse, South Africa is selling its chrome ore at the low price of $215/t cost, insurance and freight (CIF), while India is receiving $360/t CIF for its far closer product as a result of the curbs that the Indian government has placed on raw-ore exports.

Statistics projected onto a large screen at Merafe’s latest results presentation showed that 42,9% of the raw ore that China imports comes from South Africa – the highest single percentage.

The statistics also revealed that the importation from South Africa had risen by 11,5% year-on-year in 2009.

South Africa is thus helping high-cost Chinese ferrochrome producers, which may not otherwise survive, to compete.

By contrast, exports of raw ore from India to China were down 24,7% year-on-year in 2009, because of an export duty imposed by the Indian government to discourage ore exports prior to local value addition.

Compelled to Export Raw Ore

Phiri foresees a likelihood of an even greater volume of raw ore being exported from South Africa, because miners will be able to argue that they are unable to beneficiate the ore because there is insufficient electricity.

“They will be compelled to do so by the circumstances in which they find themselves,” he says.

His request to the South African government is that the raw ore exports be regulated in order to avoid the current “free-for-all” situation.

“Let’s export raw ore if we have to, but let’s regulate it so that we don’t kill the goose that lays the golden egg,” he adds.

When chromite ore is beneficiated into ferrochrome, there is significant value uplift and employment creation.

But large volumes continue to go out of the country, which undermines the position of the local producers that have made investments amounting to billions of rands into expensive ferrochrome production facilities.

Phiri tells Mining Weekly that Merafe is not giving up on its campaign to minimise raw ore exports and is seeking a meeting with the Department of Mineral Resources (DMR) to discuss the issue further.

“We are continually engaging the DMR and I know that, internally, the DMR is doing something in this regard.

“Unfortunately, the DMR has to deal with other departments. I cannot share with you the detail because it’s still confidential, but there is progress, even though it’s a bit slow.

“We’re not going to give up because this is an issue of principle as well as a commercial issue for us,” Phiri added.

Movement by Smaller Producer

The improving global ferrochrome demand, and the antici- pated increased power supply from Medupi in 2012, have encouraged IFM to begin a pre-feasibility study – due for completion by January 2011 – to expand its operations.

IFM reported a 35% increase in sales volumes to 71 000 t in the second half of the financial year ended December 31, compared with figures for the first six months.

As with Merafe, IFM’s results in the second half of the year improved markedly over the first half, but were insufficient to prevent the ferrochrome producer from avoiding a pretax loss of R145-million in the half year to December.

It was a bigger loss than the R27-million reported in the December 2008 period, but an improvement on the R429-million loss in the first six months of the financial year.

In the long term, IFM is confident that demand will remain strong, as developing economies continue to urbanise and industrialise and look for diversity of supply.

Merafe also suffered a R152-million loss in the year to December, but indicated its firm confidence in the future by declaring a maiden dividend of 2c a share, totalling R49-million in cash.

Merafe halved its ferrochrome inventory in the period, reduced its net financing costs by 81% and has R463-million cash on hand.

Ferrochrome Price

Ferrochrome prices, now at US103c/lb, are expected to rise in 2010, and the Merafe marketing team was in Asia at the time of going to press to negotiate second- quarter prices.

The new prices will only be announced once the prices are finalised in all regions, which is likely to be by month-end.

Supply is expected to continue to be tight until 2013.

Many proposed ferrochrome projects are said to be linked to Medupi and Kusile coming on stream, as well as prospects of independent power producers possibly entering the fray.

There is likely to be a prolonged demand for ferrochrome owing to China targeting to produce ten-million tons of stainless steel a year, and maintaining that level going forward.

A new chrome recovery plant that the Xstrata-Merafe joint venture planned to build with platinum company Lonmin – to treat current upper-group two (UG2) tailings from concentrators at Lonmin’s Marikana operations – will add 1,5-milllion tons of low-cost UG2 chromite ore a year from 2011.