Up to 30% of chrome ore exports to China can be displaced if export tax proceeds, says consultancy

5th November 2020 By: Marleny Arnoldi - Creamer Media Online Writer

Up to 30% of chrome ore exports to China can be displaced if export tax proceeds, says consultancy

Further to a statement released earlier this week, chrome producer organisation ChromeSA has explained the evidential rationale behind its dismay at Cabinet’s proposed export tax on chrome ore.

Cabinet on October 22 released a statement in which it said it approves of measures to support the domestic ferrochrome industry, including through an export tax on chrome ore.

Chrome miner Tharisa CEO Phoevos Pouroulis says chrome producers were aware of discussions being held between government and industry around the pressures it was experiencing, including the high electricity price, but the producers believed there would be more detailed consultations before any decisions were tabled and taken.

“We were given no notice or warning that any formal process on the export tax had started; we only saw the proposed introduction of export tax on chrome ore in Cabinet’s release,” he explains, adding that the producers are disappointed at the lack of consultation.

ChromeSA says it remains committed to developing alternative solutions to the proposed tax, summarising its view that the proposed tax aims to boost one industry, or one part of the value chain, at the expense of another, with flawed justification.

The chrome miners rely on maximum value being realised from the natural resource, to retain employees, business and community welfare.

The organisation had asked consultancy Genesis Analytics to undertake a review of the chrome value chain and what the impact of such a tax would be on chrome and ferrochrome producers.

While ChromeSA appreciates the difficulties facing the ferrochrome industry and is not necessarily against the implementation of export taxes in principle, the proposed chrome export tax "poses too many downsides" for chrome producers.

Genesis had provided an independent economic assessment of the likely impact of a proposed export tax on chrome ore, finding that this high-risk intervention strategy would likely pose a significant cost to the producers of chrome ore, particularly to non-integrated producers.

While there are some potential benefits for the ferrochrome industry, they are highly uncertain and likely to be less than suggested by many of the proponents of the tax, says Genesis partner and competition economist Paul Anderson.

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

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

Anderson explains that the logic behind the proposed tax is that it attempts to leverage the global position of South African chrome ore exporters to raise the cost of Chinese ferrochrome and thereby increase the relative competitiveness of South African ferrochrome.

The outcome of the proposed tax, however, critically depends on the complex chain of responses by other players in the global chrome value chain. Many of the extreme assumptions which underpin the proposed logic of the export tax are either "highly uncertain or simply do not hold", he says.

For example, the assumption that the South African chrome ore producers have sufficient market power to increase the chrome ore price without losing market share in the export market, is flawed in that international chrome ore producers have excess capacity to displace material volumes of South African chrome ore and Chinese ferrochrome producers have significant countervailing power.

The assumption that increased chrome ore prices will reduce the relative competitiveness of Chinese ferrochrome producers and lead to a shift in Chinese stainless steel preferences in favour of South African chrome ore is also flawed in that various responses by China are likely to dilute the impact of the export tax, Anderson points out.

These include State supported ferrochrome and stainless steel in China to absorb additional costs to retain market share and a retaliatory trade policy aimed at South Africa.

Another assumption that does not hold water is that the export tax will lead to a significant increase in the achievable revenue for South African ferrochrome producers, which will improve the sustainability of these operations, says Anderson.

However, only South Africa’s exports to China and Indonesia can expect any form of benefit – therefore only between 48% to 60%.

This while other international ferrochrome producers – who are not reliant on South African chrome ore – will provide a competitive constraint on prices in China and Indonesia. Besides, rising electricity process will erode any potential benefit in a couple of years anyway, Anderson states.

He continues that the impact of export taxes, in practice, have almost always negatively impacted primary raw material producers, while downstream processing players have recorded mixed impacts.

This is notwithstanding that the proposed tax is fairly novel, because normally such tax measures are used to secure domestic supply for downstream industries, and they are traditionally not aimed at disadvantaging international downstream competitors, as is the case with the proposed chrome ore export tax.

Genesis says 22% to 32% of South Africa’s current supply to China may be vulnerable to displacement. The chrome ore will become less competitive both on a cost and price basis, while international chrome ore producers can simply increase production and displace South African chrome ore.

Anderson says it is an extreme assumption on government’s part that South Africa has sufficient market power to pass on the tax and avoid displacement of exports. Instead, it is likely that exporters will need to absorb a significant portion of tax to avoid losing volumes.

The tax will make South Africa a more costly producer of chrome ore, while it is already producing at lower grades than larger international producers, he notes.

Moreover, Genesis finds that Chinese ferrochrome producers have strong countervailing power, stemming from their ability to displace significant volumes of South African chrome ore and turn to other producers and also from South Africa’s complete dependence on China as a buyer of chrome ore.

China also has two to four months of chrome ore stockpiles, and they can withhold buying if need be.

Should China resist the pricing increase, and it has the power to do so, the exporters would have to absorb these costs, Anderson says.

“There is great uncertainty as to whether the proposed tax will harm Chinese ferrochrome competitiveness, as intended, to a point where the Chinese stainless steel sector shows a substantial increased preference for ferrochrome from South Africa instead of their own local producers,” he states.

He adds that any decreases in Chinese and Indonesian competitiveness will benefit other international ferrochrome competitors and, therefore, potential gains for South Africa are further diluted by vertically integrated competitors from Kazakhstan and India.

Chrome producer Assore director Alistair McAdam says non-integrated primary chrome producers will be hit hard if they have to absorb the export tax or lose volumes as a result of it, and they account for about 10 000 direct jobs and almost 34 000 indirect jobs.

“Crippling one industry to save another is baffling for us. We can only assume that the decision-makers are not aware of the wider impact their decision would have. We will support local beneficiation, but not at the expense of our sector.

“We are asking government to press the pause button and first engage with the chrome producers further to determine the best solution, without crippling any other industry.”