Yes, I think ferrochrome will definitely stabilise by third quarter – Cadiz’ Peter Major

3rd April 2009 By: Christy van der Merwe

South Africa’s ferrochrome industry – heralded for producing about three- quarters of the world’s supply of the anticorrosive alloy – hit a slump in 2008, which spurred an unprecedented shutdown of operations in the country.

At present, only about 20% of South Africa’s smelting capacity is being used, and a large number of smelters are idle, or on care and maintenance. Industry spokespersons say that of a possible 49 ferrochrome smelters in South Africa, only between 8 and 12 are operating – and this number changes from day to day.

When compared with other refining industries in South Africa, the ferrochrome smelting companies reacted quickly and responsively to the global economic downturn.

“In terms of the speed and the scale of the shutdowns, I would say it is unprecedented,” Merafe Resources CFO Stuart Elliot tells Mining Weekly, although he notes that the discipline of turning off smelters when there is excess capacity is not a new one.

“The ferrochrome industry closures have been far greater, without a doubt,” adds Elliot, particularly when comparing the state of the ferrochrome industry to the aluminium smelting, or platinum refining industries.

“Companies probably turned off ferrochrome production faster than anyone else. So, even though they ramped up production quickly, I was impressed at how quickly they shut the smelters down,” reiterates Cadiz corporate solutions mining analyst Peter Major.

South Africa’s largest ferrochrome producer, the Xstrata Alloys and Merafe joint venture (JV), is only operating three of its 20 ferrochrome furnaces in South Africa. Second-ranking Samancor Chrome, which has 3 smelters and 16 furnaces, has slashed mining by 50% and smelting by 55%.

Hernic Ferro-chrome has completely halted smelting operations, as has International Ferro Metals (IFM), and African Rainbow Minerals (Arm) has cut smelting operations by 60%.

Expansion plans have also been halted. Cash preservation is now the prime aim.

“I think the challenge now, and more so for chrome, is to maintain cash flow, and to at least not run into losses. Now whether or not that is possible, we will only discover as we go through the next two or three months,” states Arm Ferrous CE Jan Steenkamp.

“Management is enforcing the ongoing review of fixed costs, the implementation of increased controls over expenditure and assessments of salary and wage reductions. The company resolved to defer all major capital expenditure. Only capital expenditure relating to the maintenance and upgrade of the plant and the cogeneration project is ongoing,” says London-listed IFM.

Stainless Steel Demand

Since ferrochrome, or charge chrome, is the vital corrosion-resistant ingredient in stainless steel, the drop in demand for the alloy comes after the lowered production of stainless steel, which has also been struck by falling demand in light of the global economic crisis.

The International Stainless Steel Forum reported that stainless steel production worldwide dropped by 6,9% in 2008, and this was after production already dropped by 2% in 2007.

Although stainless steel production in China only dropped by about 3,6% in 2008, pro- duction in the Americas dropped by more than 11%. Worldwide production for the fourth quarter of 2008 was at its lowest quarter-on-quarter levels since 2004.

However, more than just the dwindling demand for ferrochrome, there was a signifi-cant oversupply of the metal in the market.

“By announcing all the closures, it clearly means that more ferrochrome is being sold than is being produced, which means that the stockpiles are coming down. We don’t know exactly what the stockpiles were like, but clearly there was more than the market needed,” notes Elliot.

“The crisis is because there is too much – there is a big, big surplus stuck in the pipes somewhere,” emphasises Major.

“There are some signs, particularly in China, that ferrochrome inventories are diminishing with most stainless steel producers generally having relatively low ferrochrome stocks and spot prices appear to have stabilised. There is, however, a large stockpile of chrome ore in China that will be converted to ferrochrome, but, at this time, it appears that these stocks will be sold only when prices increase,” notes IFM.

Major adds that because South Africa has the biggest reserves and the highest grades of chrome ore in the world, there was significant interest from foreign investors in setting up mines and smelters..

“Chrome was probably a lot more overbuilt than most of the other minerals. To increase copper, lead or zinc takes a lot of work – it’s not easy to find good deposits of those metals. But chrome is easy to get – it’s shallow, and it’s high grade, so you could get a truck and a loader, and a screening plant, and you are mining chrome. And ferrochrome isn’t too complex,” says Major.

Obviously the complexity of mining is also reliant on the orebody deposit, and, if it outcrops on the surface, it will be more cost effective than mining underground, which requires the sinking of shafts. However, contractors can easily be hired to do the actual mining, and so, if a company has a mining licence, it can mine the deposit.

On the other hand, the sustainability of simply mining opencast is questioned, and while, perhaps, more cost effective, is viewed as a short-term approach to mining.

“I think it was just a very easy metal to increase production of and, now that the world has gone into the worst economic slump since the depression, we have an overcapacity of everything, including oil. But we probably had the most overcapacity in ferrochrome,” says Major.

A number of emerging miners have found chrome-mining an appealing additional revenue stream to operations in the Bushveld Complex.

Aim-listed Chromex Mining is mining chrome at the 32-million-ton Stellite mine, on the western limb of the Bushveld Complex, and notes that an amendment to the company’s licence to extract gold and platinum from the resource will add to the project’s “already robust economics”, says CEO Russell Lamming.

Jubilee Platinum recently notified the market that, while exploring for platinum, the com- pany would also continue evaluating producing chrome ore. “It will be at least six months before we contemplate building process plants and associated infrastructure. Hopefully, the chrome climate will be improving by then,” Jubillee CEO Colin Bird tells Mining Weekly.

Another ASX- and Aim-listed junior miner finding chrome ore a sweetener to its operations is platinum and chrome-from-tailings producer Sylvania Resources.

In fact, the company says it is fast-tracking the development of its new Doornbosch and Tweefontein chrome and platinum recovery plants. Sylvania uses feed from Samancor’s tailings dams to maintain production, and has managed to continue production despite Samancor’s cutbacks in mining.

Jobs Continually Reviewed

Despite the significant drop in production, ferrochrome-producing companies, at the time of going to print, had not retrenched any permanent employees.

There are, however, thousands of contract workers who have had their employment terminated, until production picks up again. Many companies are also encouraging early retirement, where appropriate.

In mid-March, Samancor said that it was preparing to retrench workers, and section 189 notices have been sent to labour unions. Of the company’s 4 800 employees, not more than 900 would be considered for retrenchment, and, at this stage, the consultation process is under way with unions, seeking to reduce that number.

The Xstrata-Merafe JV indicated that it would stick to its policy of not retrenching any of its 6 000 permanent workers through the implementation of a ‘cash-burn avoidance’ strategy. The company was taking the time to further train and upskill its workforce.

Official comment from Xstrata is that “if this situation of uncertainty about the future persists, the company may be forced to consider retrenchments”.

Hernic Ferrochrome has not retrenched any workers, but “the issue will be reconsidered depending on the market”.

London-listed IFM also says it has not retrenched any permanent staff, but has terminated contract staff engagements. The company adds that plant maintenance and upgrades are being done during this shutdown period.

Steenkamp explains that Arm is in discussions with its contract mining company and will be reverting to an owner-operator mining model – something the company has been considering since early 2008. By operating the mine itself, the company will require less labour.

“In November last year, we put a moratorium on hiring any new staff, and have been looking at opportunities for people to go on early retirement. We have given notice to two of the bigger contractors, and all temporary contracts have been terminated. We have quite a lot of people on short-term contracts so that we can try to protect our permanent employees,” adds Steenkamp.

Wishful Thinking

Consensus among the industry experts interviewed by Mining Weekly indicates that the light at the end of the ferrochrome tunnel will shine after the third or, perhaps, the fourth quarter of the 2009 calendar year.

“I don’t think [ferrochrome producers] see the light at the end of the tunnel yet – if they could, they would already be crank- ing up production. But I think they are hoping to see light in the third quarter – but I think it is wishful thinking,” says Major.

He further quips: “Logic says it should bottom out by the third quarter, and that the harder and faster you go down, the sooner you bottom out, and, boy, things did fall really hard and fast, so I think that’s a fair guess – that things could improve after the third quarter. Yes, I think things would definitely be stabilised by the third quarter.

“It is believed that by the end of the third quarter, stocks should be back to a level that is acceptable. The recovery thereafter is based on the recovery of the whole world. And then we are going to get back to the same situation where there is a shortage, because there has been no expansion in the industry,” comments Elliot.

“The sharp contraction of ferrochrome production indicates that ferrochrome inventories could normalise towards the end of calendar 2009,” notes IFM.

“Recovery is based on a lot of market dynamics and fundamentals, and it’s all hinged on the global economy, in terms of credit, capital, uncertainty and, possibly, over- reaction as well. But the general view, and our plans, and the way we look at them are that we do not see any major turnaround before at least the fourth quarter of this financial year. And that might even be optimistic,” says Steenkamp.