No easy fix for ferrochrome conundrum

[] — SOUTH Africa exported 4.7 million tonnes/year (Mtpa)
of chrome ore last year to China.

This is the basic ingredient required in the manufacture of stainless steel used in
sinks, cutlery and those kitchen knives that slice through a steel pipe with a single
flick of the wrist. In fact, the stainless steel chain goes something like this: first you
mine chrome ore, then you refine it into ferrochrome, then you add it with other
ingredients and make stainless steel. Nickel, for instance, gives the steel that
stainless quality.

In the main, chrome ore is a by-product of platinum group metal mining. But a
proportion is also sold by the ferrochrome producers, the very ones that have been
prevailing on Government to install an export duty on chrome ore exports.

As hypocritical as this may seem, ferrochrome producers in South Africa sometimes
have no option but to export raw, unbeneficiated ore. According to Songezo Zibi,
spokesperson for Xstrata, China is feasting on South Africa’s lunch: while its own ore
is subject to export duty, it is also able to manipulate international chrome prices.
That’s because South Africa has to import raw materials from China to make
ferrochrome, which means that when the price for ferrochrome is high, Chinese
importers raise the cost of the raw materials that South Africa needs.

Zibi feels that unless South Africa slaps export duties on chrome ore, the ferrochrome
market that the country’s industry has dominated for years will disappear. “I wouldn’t
say the call for export duties is retaliation exactly [against the Chinese],’ says Zibi.
“But we’ve got to protect ourselves’.

South Africa dominated chrome ore reserves globally, and used to control about half
of ferrochrome production in 2001. Now, South African ferrochrome comprises only
41% of global consumption, with China having stepped in since 2001 to become a
main competitor.

The claim among ferrochrome producers is “support us or we perish’. It says about
200,000 direct and indirect jobs are at risk, as well as R42bn in GDP contribution. But
chrome ore producers and exporters complain that an export duty will destroy them
too. They also have a case to marshall.

Take Tharisa Minerals. It recently raised R1bn for a chrome ore mine in South Africa
from HSBC, but its business case is surely vulnerable to an export duty. Its owner,
Phoevos Pouroulis, won’t comment on the impact of a duty, but there’s no denying it
will hurt. Chrome ore mines employ more people than ferrochrome furnaces, and they
certainly consume less electricity than ferrochrome mines, which hungrily chew
megawatts of valuable power at increasingly high rates.

Yet it’s hard to argue against having some control over exports.

The argument among the pro-duty camp is that the secondary tier of beneficiation
(ferrochrome) is crucial if South Africa is to have the more valuable tiertiary
beneficiation, which is the sink and cutlery manufacturers, and the like.

The National Union of Mineworkers is generally in favour of a duty, since job
protection is paramount. Government in general is supportive, since it talks to its
beneficiation strategy. So what to do?

One suggestion by Merafe Resources CEO, Stuart Elliot, has been to slap a $100 per
tonne export duty on raw chrome exporters. Although that can’t be a long-term
solution, an export duty is an important interim measure; it gives the ferrochrome
producers breathing space before the question of their survival becomes a moot one,
says Zibi.

It’s felt that the South African ferrochrome industry could vanish in the time taken to
enact legislation that would develop a long-term mechanism that would accommodate
players in both the raw chrome export market as well as the value-added ferrochrome
industry. The mechanism is likely to suggest, sources say, the earning of export
credits in return for supplying the local ferrochrome market first with chrome before
turning to offshore markets.

– This article first appeared in Finweek. If you want to subscribe to the digital
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