The recovery of the South African chrome industry over the last four months has been dramatic. Back in March, chrome ore prices were at a six-year low in nominal ZA rand terms; by July, they had rebounded to their highest levels since the global financial crisis in 2008.
The proximate cause of this turnaround is obvious: Chinese demand largely defines the chrome market, and since early Q2 it has been especially strong. A combination of stimulus-linked demand for ferrochrome in China and a relative absence of chrome inventory led to a scrabble for South African ore. Prices rose and have remained stable for about the last two months.
The recovery in chrome prices also coincides with what CRU believes to be significant moves to consolidate the South African industry. These should pave the way for the creation of a stronger South African chrome sector; one that can regulate supply (both of alloy and ore )better than has been possible in recent years, while also ensuring South Africa’s overall charge chrome output increases in future.
Competitiveness via integrated ore supply
The South African charge chrome producers that closed within the last year—Tata KZN, International Ferro Metals (IFM) and ASA Metals (ASA)—did so primarily because they could not rely on a fully integrated supply of ore. They either had no direct link to a South African chrome ore mine, like Tata KZN; or else were burdened with increasingly high-cost, unproductive mines, like IFM and ASA. (Hernic, although still operating, has had much the same difficulties).
These plants’ inability to supply their ore needs meant that all too often they had to buy material on the open market, where prices were on a par with those paid by Chinese importers. As the cost of shipping chrome ore from South Africa to China declined in recent years, the competitive advantage of being located close to chrome ore resources diminished to the point where smelters, which otherwise had no special technical attributes, were no longer profitable.
It now looks as though these plants could come back into operation as a result of a series of takeovers that would consolidate the South African charge chrome sector into two large groups, one led by Samancor, the other by Glencore.
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