Toolbox of measures needed to arrest slippage of domestic chrome competitiveness

27th October 2020 By: Donna Slater - Creamer Media Contributing Editor and Photographer

The Minerals Council South Africa says a comprehensive “toolbox” of measures is needed to improve the competitiveness of the entire chrome value chain, which has been impacted by a number of challenges.

These challenges include nearly 40% of South Africa’s ferrochrome production having either been closed or mothballed in the past two years, as well as the significant 523% rise in the price of electricity over the past decade and shortages of electricity supply that have affected the production of mining companies and materially eroded the competitiveness of the ferrochrome industry.

The council represents companies that are involved in primary chrome ore mining, produce chrome ore as a by-product of platinum mining, and integrated ferrochrome producers.

As a platform to determine industry challenges, the Minerals Council has an active Chrome Leadership Forum where several challenges facing the value chain, as well as potential solutions, have been discussed.

In terms of production statistics, about 80% of the world’s yearly chrome ore production is used in the production of stainless steel. South Africa produces about 1% of the world’s stainless steel production of 52-million tonnes.

In terms of raw materials, South Africa accounts for 200-million tonnes, or 35% of the world’s known chrome reserves (economically recoverable), and 70% of world’s chrome resources.

Over the past decade, the South African chrome ore mining business has grown strongly with primary chrome ore exports having increased from 4.7-million tonnes in 2010, to 14.1-million tonnes in 2019. If chrome produced as a by-product of platinum group metals mining is included, South Africa accounted for 78% of global primary chrome ore supply in 2019.

The Minerals Council claims that South Africa’s ferrochrome production has risen from 3.2-million tonnes in 2009 to 3.6-million tonnes in 2019. However, despite this modest growth in aggregate terms, South Africa’s share of the world ferrochrome production fell from 47% of the total in 2010 to 25% in 2019, states the council.

Impacting South Africa’s chrome competitiveness is uncertainty of the trajectory of electricity prices and the reliability of supply, which has had a “huge impact” on future planning for both the chrome ore producers and for the integrated ferrochrome producers, reports the Minerals Council.

“The fact that large-scale electricity users subsidise other users to the tune of R10-billion a year probably adds another 10% on to electricity costs.”

In addition, more than half of chrome and ferrochrome by volume is moved by road transport, and not rail, which is more expensive. As such, transport, port bottlenecks and high costs have further undermined South African chrome competitiveness.

As such, the Minerals Council Chrome Leadership Forum agrees that a toolbox of measures should be implemented to assist the entire chrome value chain to enable further growth of the chrome ore producers and to stabilise the ferrochrome businesses.

Specific solutions discussed with government, Eskom and Transnet include investigating a developmental pricing mechanism that provides short-term support for ferroalloy producers in distress while also looking at a longer term electricity pricing mechanism to enable longer term planning.

The solutions also include a critical need to review the current electricity intensive user cross-subsidy and to possibly phase this out, potentially adjusting Eskom's hefty winter peak demand tariff, enabling investment in self-generation for own use and improving the reliability of the Eskom fleet.

“Good progress has been made on this issue with the Department of Mineral Resources and Energy,” the council states.

Other solutions also include the critical need to transport more chrome ore and ferrochrome by rail rather than road, the need to improve port efficiencies and capacity to increase exports and lower costs, as well as engaging on providing incentives for the ferrochrome producers, such as a S37E Income Tax benefit.

Meanwhile, economic research institution Trade & Industrial Policy Strategies (TIPS) states that government’s decision to introduce a chrome export tax (announced by Cabinet on October 21) could provide the economy with a much needed boost by stimulating the domestic ferrochrome industry as well as providing the opportunity to support the development of downstream industries.

TIPS director Saul Levin explains that the introduction of a chrome export tax will bring immediate benefits to the ferrochrome industry and will mean that South Africa is able to take advantage of its natural resources by giving South African ferrochrome producers a price advantage over Chinese firms.

He adds further that key to ensuring that the downstream industry is able to grow is that the benefit provided by the export tax to ferrochrome producers must see them commit to value chain development.

“They should pass on the pricing benefit to downstream domestic producers through a developmental price, which should be a discount to the export parity price.”