Steve Phiri, CEO, Merafe Resources
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Xstrata JV suspends ferrochrome growth plan
Allan Seccombe
Posted: Mon, 03 Mar 2008

[miningmx.com] -- XSTRATA Resources and its partner in South African ferrochrome Merafe Resources see production of the key stainless steel ingredient falling because of the power crisis in that country, which has also put on ice a 360,000 tonne expansion plan.

Merafe, the empowerment partner for Xstrata’s ferrochrome projects in South Africa, hit out at the government there allowing new ferrochrome projects to go ahead – like ASA and International FerroMetals -- while the rest of the mining industry had to cut power use by 10%.

The venture uses about 1,000 megawatts of power at its 20 furnaces in South Africa, the world’s single largest ferrochrome supplier, and the reduction in power allocation will have an impact on production.

“We estimate that the restricted power supply will constrain ferrochrome production to approximately 85% of capacity in the second quarter,” said Xstrata CEO Mick Davis.

The venture partners have drawn down on stockpiles to meet contracted supplies and they are trying to spread the reduced ferrochrome output equally amongst its clients, said Steve Phiri, CEO of Merafe.

“The supply side has been reduced,” he said. The venture has declared force majeure.

The venture has installed capacity of 1.96 million tonnes at its 20 furnaces. These operate at 85% to 90% of their capacity under normal circumstances, Phiri said.

An agreement struck with power utility Eskom means mining and heavy industry sectors will use just 90% of their normal electricity consumption. This could bring operational capacity down to 75% to 80%, Phiri said.

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“It’s not an ideal situation. The market is strong and we should be taking advantage of these ferrochrome prices going up. It’s not good for the country’s reputation as a reliable supplier,” Phiri said.

Maintenance of furnaces has been brought forward and during that cycle one or two furnaces are likely to be out of production, with more efficient furnaces kept running.

The venture produced some 1.42 million tonnes of ferrochrome in 2007, of which 284,000 tonnes was attributable to Merafe.

The venture is ramping up its 360,000 tonne Lion Ferrochrome project to full capacity at the end of the second quarter of 2008, as well as its Bokamoso pelletising and scintering plant to 1.2 mtpa by the end of the first quarter of 2008, which should offset production declines.

The implementation of the second phase of Lion to add 360,000 tonnes has been postponed because of the power situation, Phiri said. “We have delayed the building of Project Lion II to evaluate and assess the situation because there is no certainty and the case we’ve made to shareholders is not a complete case.”

“It’s discouraging… to read reports that certain projects have been approved by Eskom and are going ahead,” Phiri said, asking if the 10% reduction for other industries was to provide these new projects with power.

The contract price of ferrochrome, which is set once every quarter, is expected to rise further, climbing off its first quarter 2008 record of $1.21/lb. The spot price is $2/lb and the contract price will narrow that gap, said Merafe financial director Stuart Elliot.