Ferrochrome company Merafe is considering proposals for the construction of renewable energy facilities and is in discussions with power utility Eskom to secure a negotiated pricing agreement (NPA) to mitigate against unsustainable high electricity costs, the JSE-listed company reported on Monday.
Rising electricity tariffs, coupled with general inflation, and higher ore prices and reductant prices, pushed up the total unit cost of ferrochrome production by 30% in 2022.
The cost of electricity went up by 9.61% in 2022 and the latest approved electricity tariff increase of 18.65%, which will come into effect next month, would “certainly add more cost pressures”.
CEO Zanele Matlala said that if an agreement could be reached with Eskom on an NPA, it would go “some way in providing certainty on pricing”.
Regarding renewable energy projects, she said that the idea was for a third party to finance a facility, with Merafe paying a fee for full use of the electricity produced. The company is in discussions with several independent power producers, Matlala said, noting that an agreement would likely be reached by the second or third quarter.
Despite the “unprecedented” increase in costs in 2022, Merafe still recorded profit after tax of R1.41-billion, driven by higher commodity prices and a weaker exchange rate. This was a decrease from R1.67-billion in 2021.
Merafe’s income is primarily generated from the Glencore-Merafe Pooling and Sharing venture, which is one of the global market leaders in ferrochrome production, with a total installed capacity of 2.3-million tonnes a year of ferrochrome. Merafe shares in 20.5% of the earnings before interest, taxation, depreciation and amortisation (Ebitda) from the venture.
Despite a 1% increase in attributable ferrochrome production from 379 000 t/y in 2021, to 384 000 t/y, Merafe reported a 2% decrease in revenue to R7.94-billion from R8.06-billion.
The company also reported a 12% decrease in Ebitda to R2.14-billion.
The company’s headline earnings a share fell from 67c in 2021, to 56.4c in 2022.
Merafe announced a final cash dividend of 13c a share, a sharp decrease from last year’s 22c.
Total dividends for the year reduced by R100-million to R625-million.
While presenting the company’s financial results, Matlala noted that disruption and volatility characterised the markets over the last two years.
“First there was Covid-19 which was followed by the Russia/Ukraine conflict. This led to inflationary concerns and contributed to supply chain challenges which were already prevalent in the aftermath of Covid-19 lockdown relaxations. Energy insecurity and global recession concerns now present risks that businesses and nations across the world have to deal with,” she said.
Matlala noted, however, that the risks associated with Covid-19 had reduced significantly from prior years, with no significant impact on operations being experienced. Mitigation measures were now part of its operating standards.
Looking at 2023, Matlala said that it would likely be another challenging year.
“There is an expectation that global recession will affect commodity prices negatively. On the positive side, the reopening of China after their zero Covid-19 policy suggests that there might be compensating increased economic activity from that region.”
She noted that the forecast growth in stainless steel demand, underpinned by growth in Asia and Europe, was positive for the ferrochrome industry.
Matlala assured that the company expected efficiencies achieved in its operations to be sustained. However, she said that Merafe’s production profile would be influenced by several factors, including Eskom’s inability to meet the country’s electricity demand and the company’s stock holding levels.
The company reported a 14% improvement in total recordable incident frequency rate to 2.40, down from 2.802 in 2021. The Venture was fatality free for the year 2022 and remained so for the first two months of 2023.
“This is the best performance in five years,” Matlala said.