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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.