Some platinum group metals (PGMs) producers have become large producers of chrome ore to improve their profit- ability, says Kagiso Asset Management investment analyst Mandi Dungwa.
South Africa is the world’s largest chrome producer, delivering more than half of the global ore supply in 2017, with Kazakhstan and India accounting for an additional 35%, and the remaining production delivered by Zimbabwe, Turkey, Finland and Brazil.
“In South Africa, chrome is mined from the Bushveld Igneous Complex; it is extracted at dedicated chrome mines, and as a by-product at certain PGMs mines,” she says.
Dungwa adds that the Merensky reef contains the highest platinum content, the Upper Group 2 (UG2) reef comprises the highest chrome and palladium content, and the Platreef, on the northern limb of the complex, has large deposits of palladium and base metals.
“South African PGMs producers have faced a challenging environment over the last decade, with electricity shortages, labour disruptions and weak metal prices all impacting on profitability. As a result, more than 50% of South African producers are currently not profitable,” says Dungwa.
To mitigate the situation, PGMs producers have increased chrome production because their chrome-based revenue flows directly into earnings. Chrome, as a by-product of PGMs producers’ primary mining activities, carries minimal additional extraction costs.
The PwC ‘SA Mine’ report, released earlier this month, notes that, while the current average platinum price is trading 35% below the levels of January 2015, losses have been partially offset by increases in other PGM prices, such as palladium and rhodium, as well as increased by-product revenue from nickel, chrome and other PGMs.
Further, the report notes that, while chrome’s share of mining revenue remained stable, at 5%, in 2017 and 2018, PGMs’ share dipped from 21% in 2017 to 19% in 2018.
“For some PGMs producers, this has become a valuable contribution to earnings, and chrome ore production from PGMs suppliers [grew] from 20% of total South African chrome ore production in 2010 to 30% in 2017,” says Dungwa.
PwC concurs, with its report noting that PGMs producers have, in the past few years, contributed to the supply of chrome as a by-product from the UG2 reef. “More UG2 is being mined as the more lucrative Merensky reef is depleted in some mines.”
Dungwa adds that chrome has become a “material contributor” to revenues for miners on the UG2 reef, such as low-cost PGMs miner Northam Platinum.
As of 2015, Northam has produced more chrome at its Booysendal and Zondereinde platinum mines. In its financial results for the year ending June 30, Northam noted that it had increased its chrome concentrate production by 11.8% year-on-year (about 65 000 t, compared with 581 000 t). Moreover, one of the company’s stated aims is to expand its chrome operations and achieve a yearly chrome concentrate production exceeding one-million tonnes by 2020.
However, Dungwa notes that other PGMs producers – those with long-standing legacy contracts with local ferrochrome producers – have made marginal to negligible gains, as they agreed to sell the rights to their chrome ore production at very low prices. She points out that these contracts were negotiated before China’s growth shifted the dynamics of chrome demand, and are life-of-mine contracts without the option of being renegotiated. “Lonmin and Impala Platinum, both major chrome producers, are locked into such contracts.”
She explains that, at the current and persistent low PGM prices, chrome comprises between 30% and 100% of current free cash flow for companies depending on their chrome production and the existence of favourable pricing contracts.
Chrome Is Having a Moment
In a presentation on the report earlier this month, PwC energy and mining assurance partner Andries Rossouw noted that manganese, iron-ore and chrome were the only commodities that showed production growth over the past 15 years. The report states that mine and transport infrastructure development allowed for production growth, which, in turn, enabled mines to benefit from the higher iron-ore, manganese and chrome prices during the recent commodity price boom.
Additionally, Statistics South Africa’s (Stats SA’s) ‘Mining: Winners and Losers of 2017’ report notes that chrome production increased by 13.5%, the third-best performer, behind manganese and diamonds.
Dungwa notes that demand for chrome ore and ferrochrome is driven primarily by the demand for stainless steel, which, in turn, is largely determined by demand from China.
In its financial results for the six months ending June 30, JSE-listed Merafe Resources notes that global stainless steel production increased by 10% in the first half of 2018 (totalling 25.6-million tonnes), compared with the first half of 2017. Further, chrome ore imports into China increased in the first five months of 2018 to reflect the increased demand from stainless steel producers.
“The growth of the Chinese middle-class consumer market and the country’s rapid urbanisation have supported considerable stainless steel demand in recent decades,” comments Dungwa.
However, demand growth declined from a rate of 16% a year in 2010 to between 5% a year and 6% a year in 2017. Nonetheless, she expects growth rates to stabilise, given global domestic product growth rates of between 2% a year to 3% a year, which is “still supportive of reasonably high chrome prices”.
Dungwa notes that Chinese chrome ore stockpiles generally reflect current demand trends in China: “Port stocks rise when there is weak demand and are drawn down in stronger environments.”
She notes that, in early 2016, chrome ore stockpiles reached low levels, chrome prices bottomed out and some chrome producers cut production. “We saw a resurgence of chrome prices after that, with prices reaching all-time highs by the end of 2016. This incentivised growth in production and restocking of Chinese stockpiles.
“China’s emergence as the largest global ferrochrome producer, without access to domestic chrome ore, is significantly favourable for South African chrome ore producers relative to local ferrochrome producers, and is highly beneficial for certain low-cost PGMs miners, such as Northam and Anglo America Platinum (Amplats),” Dungwa states.
She notes that Northam and Amplats have a growing exposure to chrome production and both miners sell their chrome at market prices, with full exposure to chrome revenues at “virtually no additional cost”.
Meanwhile, Merafe achieved revenues of R2.7-billion in the first half of 2018, a 5.5% increase, compared with the first half of 2017. The increased revenue occurred despite the company selling less than in the previous comparable period, largely owing to higher chrome prices.
Further, the company expects stainless steel production to exceed 3.5% a year over the next three years, although the volatile pricing and exchange rate environment continue.
Dungwa states that about 50% of South Africa’s chrome ore is locally beneficiated to ferrochrome for export.
Given the energy-intensive processes involved in chrome production, South Africa’s intermittent electricity shortages and tariff hikes have eroded local ferrochrome producers’ margins, as electricity accounts for about 30% of production costs. “As a result, chrome ore is increasingly exported to China as a concentrate to be smelted for ferrochrome.”
South Africa is China’s leading ore supplier, exporting more than 50% of its yearly production to China, says Dungwa. “South African ferrochrome producers’ relative competitiveness to their Chinese counterparts is a result of chrome prices, South African electricity costs and ore transport costs to China. At higher chrome prices, South African producers become more competitive than Chinese ferro- chrome producers.”
She notes that local ferrochrome producers have lobbied for export restrictions on chrome ore in the past to advance local beneficiation and increase South Africa’s share of ferrochrome production, but adds that the proposed interventions have never been realised.
Dungwa explains that export restrictions could benefit South African ferrochrome if the cost of electricity were addressed as part of the interventions aimed at successfully increasing local beneficiation.
“China has gone from producing 15% of the world’s ferrochrome in 2007 to more than 40% of the world’s ferrochrome in 2017. Over that same period, South Africa’s production decreased from producing more than 40% to below 30% . . . despite having 80% of the world’s chrome reserves.”
Therefore, South Africa’s stumbling from one energy crisis to another has ensured that the country has squandered multiple growth opportunities, including chrome beneficiation.
However, with the steadily improving performance of chrome – in terms of production and revenue contribution – outlined by Stats SA and PwC, chrome’s multiple applications in the textile, automotive and stainless steel sectors, as well as the size of the country’s resource, will make the commodity an important mineral for the South African mining sector.