Chinas all-important stainless-steel makers are to reduce purchases of imported South African ferrochrome, turning to cheaper Chinese alloy producers who use imported, unprocessed chrome ore.
Domestic Chinese ferrochrome costs about half of that of imports from SA, where production is being squeezed by soaring electricity prices and by uncertainty over Eskoms ability to deliver uninterrupted power.
China is busy adding domestic ferrochrome capacity, with 1,76 million tonnes of new annual capacity coming on stream between 2012 and 2015.
To put that in perspective, China imported 409 316 tonnes of ferrochrome in last years fourth quarter, of which 271 706 tonnes was South African. By the middle of this decade, new Chinese capacity is likely to lead to a global oversupply even if the South Africans close more furnaces.
Executives of existing or would-be South African ferrochrome producers Merafe CEO Stuart Elliot and Ruukki director Danko Konchar among them have reacted to the Chinese competition by calling on Pretoria to tax chrome ore exports.
At a March conference in Hong Kong, Konchar urged Pretoria to impose an export tax of $100 per tonne. At that time ore prices were only fractionally over $200 per tonne landed at Chinese ports.
Higher, taxed ore export prices could, the idea was, tip the competitive balance in SA ferrochrome producers favour. SA ore exporters, who sit on four-fifths of the global chrome resource, might demur over interference in their trade.
Should Chinese ferrochrome makers object to SA ore prices they could turn to Zimbabwe, Turkey, India or Kazakhstan. Thats despite the fact that Zimbabwe is continuing to restrict ore exports, that Kazakhstan continues to push for its domestic ore to be smelted at home and that India is adding export quotas to its existing 30% ad valorem export tax.
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China itself was holding substantial stocks of ore at the end of 2011 and is expected to draw on them rather than pay higher import prices. Theres enough chrome in the ground worldwide to satisfy demand for several centuries.
In a new report, Johannesburg-based Core Consultants says SA ferrochrome producers cut output by 15% in this years first quarter. Producers continue to struggle with Eskoms power buy-backs, which have curbed electricity availability.
The upshot, says Core, was that SAs ferrochrome producers only operated at 55% capacity in this years first quarter, though there are upper-end suggestions of a rise to 65% in the second quarter. Smelters continue to be closed or converted to ferromanganese production.
Back in 2001, SA produced 50% of the worlds ferrochrome. By 2010 the share was down to 42% and falling.
Global output of ferrochrome totalled 2,072 million tonnes in this years first quarter with a small supply; demand deficit. An expected return to surplus this quarter should contribute to some price stodginess. Near-term demand for stainless steel and, by extension of ferrochrome, is hardly positive.
Europes demand for ferrochrome for current steel production is likely to require a protracted convalescence, though steelmakers appear to be replenishing alloy stocks, as are US steelmakers. China appears set to draw down its stainless stocks before raising production.
In the EU, this years first-quarter high-carbon ferrochrome contract benchmark prices fell by some 4% quarter-on-quarter to $1,15/lb but are expected to advance to $1,25 or more in the second quarter. In the US, spot prices of between $1,17-$1,21/lb were 12% higher quarter-on-quarter.
In contrast, first-quarter low-carbon prices declined generally across the globe, falling from $2,18-2,28/lb early in January to $2,07-2,12/lb in early March. SA largely produces the high-carbon product.
High-carbon ferrochrome producers are being squeezed by rising input costs. For the longer term, Core estimates that rising costs will force producers to lift prices to $1,32-$1,35/lb by 2016 if they are to remain profitable.
Ore may be cheap, but the SA smelters that are crucial to the countrys beneficiation hopes will be closely watching Eskoms electricity prices and supply.
