Ferrochrome users landed with SA energy costs

Allan Seccombe | Thu, 12 Nov 2009 12:52
[miningmx.com] -- Prices of ferrochrome, the key ingredient in stainless steel, will have to rise to accomodate increasing power tariffs in South Africa, and in coming years there may be a capacity shortage because of electricity constraints in the country, said David Kovarsky, CEO of LSE-listed International Ferro Metals Ltd (IFL)

A proposal by South African power monopoly Eskom to increase tariffs by 45% annually over the next three years after pushing rates up 31% this year is sounding alarm bells amongst mining companies and other heavy power users.

The proposal is meeting stiff resistance from business and labour. It has yet to be approved by the National Energy Regulator of South Africa (Nersa). Eskom needs around R380bn to increase generating capacity to meet the country’s burgeoning power demands.

Two new large power stations are under construction and these are seen coming on line only start coming on line in 2012, providing temporary relief.

South Africa is the leading provider of ferrochrome, accounting for around half of global supply.

“It will make us higher cost producers, but they key thing is that South Africa is still the largest producer of ferrochrome,” said Kovarsky.

“South Africa is generally a price maker and any costs that are impacted in South Africa will impact on selling prices and selling prices in future will have to cater for higher electricity costs,” he said.

It’s unlikely that stainless steel users can turn to other countries for ferrochrome if South African prices rise strongly. “South Africa supplies more than 3.5 million tonnes of ferrochrome per annum and to make up that slack would be extremely difficult.

“If anything, in a couple of years’ time, I think there will be a shortage of capacity because of the constraints the South Africans have on their electricity,” he said.

Operators in the South African ferrochrome industry have spent R10bn on mines and furnaces over the past five years. They have to spend a further R15bn up to 2014 to add 1.2 million tonnes of capacity to secure their 50% market share.

There are concerns amongst the top five ferrochrome producers -- including IFL --, which account for 90% of South African output and around 44% of global supply, that China is increasingly buying chromite ore to make ferrochrome domestically.

South Africa is the largest supplier of chromite ore and the ferrochrome producers are lobbying the government to impose a $100/tonne tariff on chromite ore exports and limit exports of the material by integrated companies. Junior chromite ore producers are forming a lobby group of their own to oppose such a move.

IFL is building a R190m electricity co-generation plant at its operations in South Africa where it has two furnaces which have only recently been brought back into full production. Full production in this case means including the power restriction imposed by Eskom early last year when mines were forced to close for a week because there wasn’t enough electricity in the country.

IFL will supply about 11% of its electricity needs from the second half of 2010 at a fraction of what Eskom charges. Before the 30% tariff hike in April, the estimate was the plant would supply power at around half of what Eskom charges.

If Eskom gets Nersa approval to up its rates by 45% annually over the next three years, the co-generation plant, which utilises gases from the furnaces, will produce power far more cheaply than IFL could buy it for and also generate carbon credits, offsetting Eskom’s hikes.

IFL noted there was a slowdown in stainless steel volumes in the September quarter. Ferrochrome is used to make stainless steel. There had been an overstocking of stainless steel inventory in China because of imports from Japan, Korea and Europe, Kovarsky said.

“I think that will ease off by the end of the year and that will calm the demand/supply equation down,” he said. “End consumption of stainless steel is extremely strong, particularly in China, so the dynamics of the stainless steel industry aren’t affected. It’s just overstocking.”