Restart of SA ferrochrome production brings 2020 price recovery to abrupt halt

Chrome concentrate

THE rollover in the European benchmark third quarter ferrochrome price announced by Johannesburg-listed Merafe Resources this week was a reflection of the increase in South African supply following COVID-19 lockdowns.

Merafe, which is in joint venture with Glencore, said the European benchmark price for the quarter was agreed at 114 cents per pound. This compares to a second quarter increase of 13% as South Africa went into a five-week hard lockdown in March.

Supply of the world’s chrome is dominated by South Africa. It controlled about 60% of ore supply last year. The demand side is dominated by China: it consumed 64% of the mineral. China is also the world’s largest ferrochrome producer with 43% of total production. Interestingly, however, about 80% of the ore used to make ferrochrome was imported from South Africa.

Therefore, the behaviours of the two countries sharply define pricing. Following its lockdown which started in February, China built up chrome ore stocks at its ports of some 4.2 million tons (Mt), according to a report by Macquarie. These stocks were only being drawn down now, the bank said in a report dated June 28.

And although South African production was beginning to be restored, the Merafe-Glencore JV had kept some units offline whilst in January announcing potential restructuring over some 430,000 tons a year in production from its Rustenburg facilities.

“Bringing together supply and demand, we assume that the market is in significant deficit this year as severe cuts take place but return to balance in the coming years leading to some upward pressure on prices,” said Macquarie in its report.

However, primary chrome production is also supplemented with supply as a by-production of platinum group metal (PGM) output.

According to RMB Morgan Stanley, chrome contributed up to 6% of revenue for South African PGM producers over the past two years. It might seem a relatively immaterial driver of production economics, but RMB Morgan Stanley said that in absolute numbers, chrome from PGM producers is an increasing portion of overall pie.

It estimates chrome production grew from two million tons in 2010 to 4.8Mt in 2018. Total South African chrome exports grew to 12.4Mt from 4.6Mt over the same period, said RMB Morgan Stanley. “Furthermore, we are aware of plans by PGM producers to increase this chrome production by a further one million tons over the next few years,” the bank said.

“Net this ramp up in supply from South Africa appears to have been a material contributing factor to the over supplied position in global chrome markets over the recent past and could expect to continue to weigh on chrome prices for some time to come, in our view,” RMB Morgan Stanley said.

One factor could yet play an important role in the market, however.

According to Macquarie, the South African government is revisiting previous proposals to slap an export duty on chrome ore in order to preserve ferrochrome jobs. “If this occurs, it would probably lift the long-term price of chrome pricing worldwide,” said Macquarie.

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