JOHANNESBURG (miningweekly.com) – The JSE-listed black-controlled ferrochrome producer Merafe Resources has given up hope of government assistance in preventing raw chromite ore from leaving the country unbeneficiated.

Merafe CEO Zanele Matlala, who presented an excellent set of results that saw the company’s shares rise 3% on the local bourse, had earlier campaigned for an interim duty of $100 being imposed on every ton of raw chromite ore leaving South Africa and the creation of an exchange for chrome similar to Canada’s successful Canpotex single-channel marketing arrangement for potash.

South Africa’s chrome-to-ferrochrome business provides 200 000 jobs and contributes R42-billion a year to gross domestic product (GDP) and there is a fear that up to 80 000 of those South African jobs could be lost and the GDP contribution halved as a result of China’s inroads.

China, which now accounts for 37% of global ferrochrome production, lifted its 2013 ferrochrome output by 13% compared with South Africa’s 34% share of global ferrochrome production and 2013 output increase of only 2%.

Despite a fall in the price of ferrochrome and China’s inroads, Merafe posted a 112% increase in headline earnings a share for the 12 months to December 31, and also lifted ferrochrome production by 32%.

Its revenue rose 38% to R3.5-billion and cash of R487-million was generated, but the Merafe board stood back from declaring a 2013 dividend. 

The business achieves its results by extracting chrome ore from the mines of the Glencore-Merafe Chrome Venture, a joint arrangement Merafe has with the London-, Hong Kong- and now also Johannesburg-listed Glencore. The venture has a total installed capacity of 1.98-million tons of ferrochrome a year and is able to produce using low energy and low air polluting technologies.

Matlala told Mining Weekly Online that Merafe was no longer pushing for government intervention but instead holding thumbs that market forces would eventually unravel China’s ferrochrome business model, which had both cost and pollution downsides.

While R1 660 is added to South Africa’s GDP every time a ton of raw chromite ore is exported, R9 109 is added every time a ton of ferrochrome is exported – five times more.

But the campaign for government intervention has also snagged on the platinum industry’s own upper group two (UG2) reef chrome production as well as some raw chrome traders lobbying in the opposite direction.

“We’ve gone back and forth with the DMR [Department of Mineral Resources] but I think the momentum is now lost,” said Matlala, a former Industrial Development Corporation and Development Bank of Southern Africa executive.

“With cost pressures coming to China, I think it’s not a sustainable model for the Chinese to be producing ferrochrome from imported ore,” Matlala added to Mining Weekly Online.

Nearly 55% of the 12.1-million tons of raw chromite ore that China imported last year - 6.7-million tons - came from South Africa, with Merafe itself providing R492-million worth, 49% more than in 2012.

High levels of raw chromite ore exported from South Africa to China are expected to persist for as long as shipping rates and prices remain low, which is currently the case.

Merafe did well despite the 4% decline in the average European benchmark ferrochrome price to $1.16/lb.

Should the price of chrome ore start rising, and shipping rates go up as well, the production cost in China is expected to keep rising to unsustainable levels.

A lot of the chrome ore that is exported out of South Africa is UG2 ore, which will be in shorter supply as a result of the prolonged platinum strike.

With the Glencore-Merafe Chrome Venture Lion II ferrochrome project already hot commissioned and expected to be fully operational by mid-year, Merafe is likely to sell less raw chrome ore and use more in its own operations.

Lion II is nearly 90% complete and Merafe is to contribute another R170-million to the R5-billion project this year to bring it to completion.

Chrome is a key ingredient in stainless steel, half of which is now produced by China.

Europe’s stainless steel production declined in 2013 and India, which succeeded in curbing its raw chrome ore sales to China, had 6% higher stainless steel production.

Ferrochrome demand also rose 6% in 2013, again driven by Chinese growth, and ferrochrome production rose by 8% to match the growth in the production of stainless steel.

Demand fundamentals for ferrochrome remain strong and ongoing investments in energy efficient technology have provided the Glencore-Merafe Chrome Venture with a significant low-electricity advantage.

South Africa, which hosts some 75% of the world’s chrome-ore reserves, formerly held a 50% share of the global ferrochrome market, which China is eating into, ironically with overwhelming help from South African raw ore.

China hosts no chromite deposits of its own, but imports the ore it needs from a string of countries, with South Africa far ahead of the supplier pack.

India cut its supply to China to 168 000 t in 2013 compared with South Africa’s 6 736 000 t contribution, made mainly by UG2 suppliers.

The Canadian government’s long-term potash price depression led to the formation of Canpotex in 1972, which today describes itself as a marketing and logistics company that sells and delivers Saskatchewan potash to international markets as a wholly owned entity of potash producers.

The extraordinary growth in ore supply from UG2 tailings will result in a potential six-million-ton oversupply of metallurgical-grade ore this year, strikes permitting.

If the oversupply eventuates, ore prices and ferrochrome margins will fall, with negative implications across the South African chrome value chain.

Including UG2 sources, South Africa has 82% of the world’s chrome reserves.

Exporting chrome ore in unbeneficiated form creates 5.7 jobs per 1 000 t of ore and exporting ferrochrome creates 17.3 jobs per 1 000 t of ferrochrome – three times more.

South Africa also has technologically advanced smelting capacity, which is currently underused.

  Lion II uses the proprietary Premus technology to ensure low production cost. M erafe is also investing in Bokamoso and Tswelopele pelletising and sintering plants and the Lion II ferrochrome expansion.

Despite rising energy costs, Premus keeps the company in the lowest quartile of the global ferrochrome production cost curve.

Merafe shares in 20.5% of the Glencore-Merafe Chrome Venture’s earnings before interest, taxation, depreciation and amortisation (Ebitda).

Merafe’s share of 2013 Ebitda from the venture was R583.5-million, which was 67% higher than the R349.4-million of 2012.

A 23% increase in ferrochrome sales to 314 000 t, compared with 255 000 t in 2012, lifted its revenue, along with a 17% weaker rand that was partially offset by the 4% European benchmark price decrease.

Chrome ore revenue as a percentage of total revenue increased from 13% in 2012 to 14% in 2013.

In spite of higher electricity tariff increases this year, production cost increases were contained below ferrochrome-sector inflation.

The energy use a ton of ferrochrome produced reduced by 7% to 13.49 Gj compared with 14.50 Gj in 2012 and the carbon dioxide emissions a ton of ferrochrome produced reduced by 3% from 5.10 in 2012 to 4.95 in 2013. 

The venture’s wage negotiations at its smelters and mines were concluded with industrial action at the eastern and western mining operations not wage related.

The unprotected strike in the eastern mining operations resulted in the dismissal of 1 200 employees. The eastern mining operations were resumed in the second half of the year and the smelters that were supplied by these mines were not significantly impacted owing to sufficient stockpiles of chrome ore.

There were two fatalities in 2013 compared with no fatalities in 2012 and the total recordable injury frequency rate was 3.84, an improvement on the 4.05 of 2012.