Johannesburg/London - Ferrochrome production cuts in South Africa are likely to persist into the second quarter, boosting prices at a time of weak demand, traders said.
South Africa is the world's second-biggest producer of the alloy used to make stainless steel, but several companies have shut down operations in recent weeks to help power utility Eskom to manage the country's tight electricity supply.
The businesses that have cut production include International Ferro Metals and Hernic Ferrochrome, along with a subsidiary of Indian steelmaker Tata Steel and a joint venture between South African Merafe Resources and London-listed Xstrata.
Under deals with Eskom, companies agree to suspend production temporarily, allowing the utility to buy back the energy that would have been used by the furnaces and feed it back to its starved electricity grid.
Traders estimate that, between December 2012 and March this year, the buyback arrangement will remove about 350,000 tonnes of ferrochrome from a market that has been struggling with weak demand and an oversupplied stainless steel sector.
Prices are expected to be supported by further production cuts in the second quarter as South Africa enters a colder period in which electricity demand is stronger.
“The rumours are ... that the cutbacks will have to continue into Q2,” one Europe-based trader said. “Nothing has been said at the moment, but demand is higher for electricity in Q2 than in Q1 and the maintenance work (on Eskom's ageing power stations) still hasn't taken place.
“The concern is that the supply cuts will be rolled over and that is bound to continue to tighten the (ferrochrome) market. Prices are certainly going to rise in the short term.”
Market sources said that supply tightness is already being felt in Asia, where more spot business is conducted. If production cuts linger, the European market is also likely to see higher spot prices, they said.
In Europe, high-carbon ferrochrome stands at about $0.96 per lb and low-carbon ferrochrome at about $2 per lb, against about $0.60 and $0.91 in China.
“Producers were keen to go into the buyback deals because the market was looking very weak in November and December. Rather than stockpiling, they had the option to cut output,” a European ferrochrome trader said.
South Africa has been struggling to meet demand for power, especially as new power plants meant to plug the shortfall have been delayed. Supply will remain vulnerable until the first of the new stations being built by Eskom becomes operational later this year.
The national grid nearly collapsed five years ago, forcing mines and smelters to shut for days and costing Africa's richest economy billions of dollars in lost output.
All of Eskom's current buyback agreements end at the end of March, but the utility may negotiate extensions into the second quarter.
“We are looking at extending it, but it has to work for them and for us,” said Eskom spokeswoman Hilary Joffe.
At the peak of the buyback programme Eskom will acquire up to 950 megawatts of electricity, mainly from ferrochrome producers, the company said. - Reuters