How is South Africa losing 2.3 ton of ferrochrome alloy production per day?
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By Roelof Retief
Since 2005 there has been a dramatic change in the ratio of alloy produced to ore produced in South Africa. The ratio has fallen from 0.32t alloy/t ore to 0.18t alloy/t ore in 2019. Refer to the graph below.
During the period 2005 – 2019 approximately 95 million tons of the ore produced in South Africa was not processed into ferrochrome, (“FeCr”). Assuming 10% chrome ore is used for non-ferrochrome applications and based on 2.3 ton ore per ton alloy requirement this is equivalent to approximately 37 million tons of “lost” FeCr production in SA.
Although a large portion of this production could have been produced locally it does not necessarily mean that South Africa could have produced all this “lost alloy“ during this time as there were other constraints; predominantly power.
Chinese stainless steel production capacity grew from 8.6mt in 2008 to 30.7mt in 2019. This increased demand for ferrochrome fuelled the rise in exported ore from South Africa, especially cheap produced UG2 as by-product from the PGM producers. The dramatic Chinese growth caught the major South African ferrochrome producers by surprise. They were ill prepared to keep pace with the necessary expansion.
The typical timeline for new production including Environmental Impact Assessments etc. put them at a disadvantage. Adding to the difficulties in South Africa was the beginning of energy constraints in the form of the first serious load shedding. Overall, the expansion of the ferrochrome industry in the country proved to be challenging.
The Chinese ferrochrome producers on the other hand were able to expand their capacity more economically and in much shorter timelines due to lesser environmental requirements. In addition, they adapted their processes to accommodate the abundant UG2 available from the South African PGM producers.
UG2 was incorporated in makeshift agglomeration (pelletizing, briquetting) processes and smaller, shallower furnaces were used which could handle higher percentages of fines. In recent years the new capacity in China is mostly large closed submerged arc furnaces with Outotec pelletizer and sinter plants, similar to the technology used in South Africa.
Claims made by China regarding their cost of FeCr production do not make sense as their largest cost component is chrome ore and it is shipped halfway around the world. With the current freight market, the logistics disadvantage to the Chinese ferrochrome producers is approximately US$ 125.00 per ton of ore versus SA ferrochrome producers.
Assuming 2.3 tons of ore per one ton of alloy this equates to a logistics disadvantage of $162.50 per ton or $0.147 cents per pound chrome contained in the alloy. Yet last year the Chinese were selling ferrochrome below $0.80 cents per pound chrome and below the cost of South African production.
This is impossible without subsidization from somewhere. In fact, with the Chinese government placing more emphasis on stricter environmental controls a reasonable conclusion can be made that their costs have only increased.
South Africa did not do itself any favours by allowing the highest cost variable to Chinese smelters, namely ore, to be exported at prices that made the Chinese ferrochrome industry viable to the extent that they surpassed South Africa as the number one ferrochrome producing country in the world. This against a backdrop of increasing power prices to South African smelters, which is local producers highest cost variable.
Should SA manage its chrome resources and ability to produce more ferrochrome, it should no longer be necessary to transport 2.3 tons of ore halfway around the earth to produce 1 ton of FeCr. South Africa is blessed with 70% of the world’s chrome ore resource and barring the availability of energy it is surely time to evaluate methods to entice ferrochrome production back to South Africa.
South Africa should be the beneficiary of having more than 2/3 of the world’s chromites ore under its direct control. The first issue raised regarding South Africa’s ferrochrome production is that the industry needs to become competitive. In fact, the compressible portion of the industry’s cost has reduced significantly over the past few decades. The remaining factors include ore quality in the country and the optimum process efficiency achievable with the available technology. While there is always room for improved efficiency, and this is indeed a focus, it does take time to develop these improvements and to manage the associated risk.
Producing ferrochrome rather than exporting ore would provide massive opportunities for local employment and local spend. The local spend (excl ore reductants and power) increases by 100% when FeCr is produced. Revenue increase for fiscus increase by 2,5 times by exporting FeCr instead of ore.
Considering the above, it is clear that South Africa would benefit from reclaiming its market share by increasing the production of ferrochrome and inviting investors into the FeCr market.
In 2020 the government, in order to entice local beneficiation of chrome ore, announced its intention to introduce a tax on ore which is exported. It is likely that this step would encourage real market value for ferrochrome countering any subsidies that might exist in the Chinese system. The ferrochrome industry in South Africa would welcome this development.
Furthermore, differentiated taxation will also aid the survival of traditional chrome mining in South Africa – an industry that will not survive the low chrome prices dictated by the Chinese.
It would also drive more UG2 to local ferrochrome facilities and if managed prudently preserve the valuable insitu chrome ore resources for future generations. During recent times energy supply has represented one of the biggest constraints in terms of reliability and price predictability. Currently there is a move towards regulatory changes allowing for Independent Power Producers (IPP’s) to enter the market with less bureaucratic challenges, and Eskom is making strides in debt reduction and plant improvements.
The ore tax will buy some time for all these initiatives to reach maturity and become adopted by the alloy producers.
Projections indicate that in the next 7 to 10 years there will be an increase in ferrochrome demand of approximately 2.5m tons, of which a critical mass will be outside China. Seeing that China is a net importer of ferrochrome, realistically it can be assumed that any demand outside China will have to be sourced from regions with chrome resources i.e. South Africa and to a lesser extent Kazakhstan.
It is unlikely that ore will ever be processed exclusively in South African facilities, but the intent must always be to process as much as the local resources will allow. Depending on the definitions of nameplate capacity there are currently facilities amounting to approximately 1.2m tons per annum which are not in use. It is likely that the ore tax and its effect on the alloy price will act as a catalyst to, with some efficiency enhancement, bring back most of the dormant capacity.
During the last decade very little resources were spent on research and development. In the past most ferrochrome producers had an active spend on research and development, either through in-house departments and or contributions to MINTEK and tertiary institutions. In recent times, due to tight margins, very little of these efforts remain. With increased margins and or the contribution from ore tax, these research and development efforts could be revived to further enhance the competitiveness of our industry.
A decade from now, it is unlikely that an ore tax will still be in place. Natural market forces would have ensured that the South African ferrochrome industry has regained its rightful market share, evolving from “price takers to price makers” based on sound supply and demand principles.