South Africa is the world’s biggest producer of ferrochrome, which is used to make stainless steel.
For most of this year, SA’s ferrochrome companies, which include the Xstrata-Merafe joint venture, Hernic Ferrochrome, Samancor Chrome and International Ferro Metals, have mothballed substantial amounts of their production capacity because of low prices.
Marc Elliott, an analyst at London-based investment house Fairfax, said in a note to clients yesterday that the impetus for higher prices would come from Asian stainless steel makers and higher power costs in SA.
According to Metal Bulletin, China, Korea and Taiwan were back to full production of stainless steel while Japan was producing at 60%-90% of its capacity. Elliott said ferrochrome prices could increase further on rising freight rates to Asia.
“South African producers are keen for a substantial rise in contracts, especially as they face a 34% increase in power prices from state utility Eskom to fund capacity expansions,” he said.
“This increase comes on top of a seasonal 20% increase in power costs from June 1 as SA enters peak winter power demand.
“In order to meet the rising power costs, South African ferrochrome producers need prices to be settled at a minimum of 90c/lb.”
Reuters reported on Monday that ferrochrome traders were forecasting that prices would rise to more than 1/lb later this year, better than in the first and second quarters but still below the more than 2,50/lb in April last year.
Macquarie Securities analyst Jim Lennon said that there could be a sharp rise in the ferrochrome price in the second half of this year as stainless steel producers exhausted stocks and steel producers started to crank up production.
However, Khayyam Jahangir, an adviser at metals consultants Roskill, said there were conflicting reports about increasing activity in China and he continued to forecast a 24%-25% drop in global production of ferrochrome this year.
Reuters said South African ferrochrome producers could be forced to make further cuts in output capacity if power prices forced production costs higher.
Source: Business Day
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