Charlotte Mathews
21 May 2007
Johannesburg — SPOT prices for ferrochrome, of which SA is the single largest producer in the world, are running well ahead of contract prices, a promising indicator for local producers about to enter negotiations for third-quarter contracts.
SA's three major ferrochrome producers are JSE-listed Merafe Resources, which is in a joint venture with Xstrata; Samancor Chrome; and Hernic Ferrochrome. A third company, London AIM-quoted International Ferro Metals (IFM), is ramping up production at its integrated chrome mine and smelter in Mpumalanga.
Tata Group started construction of a R700m ferrochrome smelter in Richards Bay late last year, in which it will initially use Indian ore.
Ferrochrome is mainly used as an additive to stainless steel to prevent corrosion. It is also added to other steel alloys to increase hardness. London-based Numis Securities analyst John Meyer said in a note to clients last week on IFM that spot prices for high-carbon ferrochrome were 92c-98c/lb against current contract prices of 83c/lb.
At the beginning of last year ferrochrome prices dropped as low as 65c/lb as a result of market surpluses, which came in the midst of expansion programmes by all SA's leading producers. The Xstrata-Merafe Chrome joint venture has invested R1,67bn in the first phase of Project Lion, an integrated chrome mine and ferrochrome smelter near Steelpoort; Brits-based Hernic Ferrochrome expanded its capacity to 420 000 tons a year at a cost of R450m two years ago while Samancor Chrome is in the midst of a three-stage, $1,5bn expansion programme at Steelpoort. Merafe Resources financial director Stuart Elliot agreed yesterday that spot prices were higher than contract prices and new contract prices generally took their lead from spot prices. But he added that price negotiations for the third quarter would start shortly and he would prefer not to conduct those negotiations through the media.
Hernic Ferrochrome chief financial officer Hannes van Dyk said the higher spot price could be an indicator of a higher contract price in the third quarter.
Elliot said there were various reasons for the strong spot price but it essentially reflected demand outstripping supply as there were huge increases in stainless steel production in China, for uses ranging from domestic appliances to the building and automotive industries. Meyer said ferrochrome was reported to be critically short in Europe, with limited supply from Kazakhstan, SA's main competitor.
The Xstrata-Merafe joint venture has 20 furnaces, of which two have been temporarily closed. A decision would be made later this year on whether to bring them back on line, Elliot said. Van Dyk said Hernic had four furnaces, all of which were running at 100% capacity. Hernic had just completed an expansion programme and had no immediate plans to expand further, but if demand continued to be as strong as it was at present, Hernic could consider this.
Meyer noted the strengthening of the rand against the dollar, which was negative for margins for South African producers. But he said the strengthening in the ferrochrome price looked sufficient to compensate for the exchange rate.
Samancor Chrome could not be reached for comment on the price or its production capacity.
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