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South African ferrochrome profitability down to zero – Danko Konchar

07 Sep 2012
JOHANNESBURG ( – Profitability in South Africa’s ferrochrome industry was down to zero, Ruukki Group minerals CEO Danko Konchar said on Thursday.

Konchar, who emphasised that he was addressing the Metals Bulletin Events’ Fifth South African Ferro-Alloys conference in Johannesburg in his personal capacity, said that investment into the ferrochrome industry had dried up and the share prices of listed ferrochrome companies were in the doldrums (also watch attached video).

Earlier, Samancor Chrome CEO Jurgen Schalamon had told the conference that China had usurped South Africa’s position as the leading ferrochrome producer, ironically with the raw chrome ore that South Africa was supplying to the Asian country.

Marco International CEO David Kovarsky, who chaired the session, said the situation was worse now for the ferrochrome industry than it was during the 2008 global economic meltdown.

South Africa’s Department of Mineral Resources (DMR) deputy director-general Mosa Mabuza told the conference that two weeks ago the DMR had held its first debating session for representatives across the full spectrum of South Africa’s chrome value chain.

South Africa has a long-standing chrome value chain that sustains 200 000 jobs and contributes R42-billion a year to gross domestic product (GDP), but could shed 60 000 to 80 000 of those jobs.

The contribution of the ferrochrome industry to South Africa’s GDP could plunge to R23-billion, and chrome ore prices could collapse because of oversupply precipitated by South Africa’s upper-group-two (UG2) platinum mining sector, which exports the chrome ore by-product.

Schalamon said that the price of South African electricity had increased by 170% in the last five years and labour costs had gone up by much more than the 6.5% to 10% reported,as that did not take into account the cost to companies of allowances for housing, transport and several other benefits relating to the working of shifts and underground work.

Konchar said that ferrochrome companies had failed to lift the value of their shares or to pay dividends and, as a result, the investor community was turning its back on the industry, which was having capital-raising repercussions.

The South African ferrochrome industry’s capacity was far greater than demand, which Konchar said offered an opportunity for industry restructuring.

“The market forces are against us,” he said, adding that China was able to produce ferrochrome at a cheaper cost and faster.

Visiting Indian Ministry of Steel secretary DRS Chaudhary told the conference, in response to a question, that the entry of the private sector into electricity generation in India had been economically positive for that country and had resulted in a spurt of investment in power infrastructure.

Konchar predicted that in the long term, the market would reach the realisation that South Africa was the most appropriate location for ferrochrome production because of its vast reserves, and the fact that South Africa supplied half of China’s raw chrome ore was proof that it was this country that had the critical mass to influence prices.

But electricity, which currently represented 35% of the cost of production of ferrochrome in South Africa, was poised to continue to rise dramatically.

“The price outlook is grave,” Konchar said, which was why the time was right for industry restructure.

“A fundamental industry-wide restructuring must be undertaken,” he added.

He advocated collective investment by the industry in power generation.

“We have our differences, but we should put our differences aside and work together for common advantage,” he urged.

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 accompanied, 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.

India was the former main supplier of chrome to China before the Indian government intervened in 2006.

Now India is enjoying the value-add as its ferrochrome sales rise and its ore exports plunge. Oman and Turkey are thinking of doing the same.

The South African government has still not responded to the industry’s request that it impose a $110/t export duty to discourage the country from exporting raw chrome ore and, in the longer term, that it establish an industry marketing arm, similar to CanPotex, of Canada, which has been highly successful at marketing potash.

Half of the raw ore South Africans exported to China in 2011 was from platinum miners’ UG2 reef, 30% from integrated ferrochrome producers and 20% from independent chrome-ore miners.

It is this unbeneficiated ore that is leaving South Africa and growing the Chinese ferrochrome industry at South Africa’s expense.

With UG2, South Africa has 82% of the world’s chrome resources, is the world’s largest chrome-ore miner and the country with the world’s largest ferrochrome production capacity, much of it now idle.

Historically, all the metallurgical-grade chrome was beneficiated locally, for which 4.8-million tons of yearly 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 massive shrinking is under way and more furnace closures are foreseen.

South Africa’s ore supply is poised to grow at a compound yearly 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 to 2015.

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

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.