While a chrome ore tax does protect South African smelting interests, any benefit could be negated by a retaliation from China or a loss of market share for miners, says commodity analyst CRU chrome analyst Samuel Grant.

The South African government in October last year announced it was considering a proposed chrome ore tax to protect the domestic ferrochrome industry.

Grant explains that, while the tax has been mooted in previous years, the challenging long-term prospects of the domestic ferrochrome industry have become more apparent this year owing to rising electricity costs.

State-owned power utility Eskom’s electricity tariffs to large industrial customers have increased by more than 500% over the last ten years, impacting heavily on their global competitiveness.

Grant points out that South Africa has seen the closure or mothballing of more than 40% of its ferroalloy capacity.

The plight of the domestic smelting industry has persuaded the government to revisit the tax on chrome ore exports, which it hopes will make domestic capacity more competitive against Chinese production.

China’s growing demand for by-product upper group two (UG2) chrome ore and the rapidly increasing electricity tariffs in South Africa have supported the development of ferrochrome smelting capacity in China.

“The impact of this proposed tax will increase smelting costs in China, tipping them in favour of South African smelters. However, the tax could erode global market share for South Africa’s conventional chromite miners, as it will make them less competitive on a global basis,” Grant notes.

An export tax could push South African conventional ore producers towards the higher end of the cost curve and above average costs in Turkey or Zimbabwe.

In the longer term, this could shift mine investments away from South Africa and “we could see Chinese operators becoming more global with their investments”, he notes.

In the near term, Grant explains, Turkey and Zimbabwe will not be able to ramp up to meet demand levels in China and significant further investment is needed to do so.

However, Chinese companies could invest in these nations to increase capacity and provide chrome ore competitively to Chinese smelters. This would chip away at South Africa’s market share, despite the country having the largest chromite reserves globally.

On the other hand, the tax does offer South Africa a new source of revenue, which can, in turn, potentially be used to help ease Eskom’s growing debt pile.

Grant further states that the impact of a tax on chrome ore will inevitably raise smelting costs globally, but particularly in China, as it is reliant on South African imports.

In 2020, 82%, or 11.7-million tonnes, of China’s total chrome ore imports were from South Africa.

CRU does not believe that China will let its smelter output falter, without some form of retaliatory action. The ban on Australian metallurgical and thermal coal in late 2020 shows that China is capable of using the commodity trade to protect its interests.

“China has invested heavily to become more self-reliant within the stainless steel value chain and will likely act to defend this position,” Grant says.

Ultimately, he laments that the proposed tax on chrome ore may not save the ferroalloy smelting industry if significantly higher energy costs materialise in the medium term.

Lobby group Save SA Smelters on June 21 called for government to act with urgency in implementing the tax, highlighting that 80 000 jobs are on the line if government does not implement it.

ChromeSA, which represents primary chrome producers, meanwhile, has argued that the tax will have a destructive impact on primary and UG2 chrome ore producers, given that they export the bulk of their production.

ChromeSA does not believe that South African chrome producers have sufficient market power to increase the chrome price without losing market share.

Chrome ore production has grown by 50% over the last five years and close to 60% of all chrome ore is exported, with most of these exports going to China.

South Africa exports about 13.6-million tonnes of chrome ore a year, from a total production of 22.7-million tonnes, with the chrome mining industry employing about 22 904 people, of whom just under half are employed by nonintegrated chrome producers, alongside integrated producers and UG2 producers of chrome.