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Although the loss suffered by ferrochrome
company Merafe Resources decreased in 2020, its electricity risk remains and
its logistics challenges are intensifying.
Merafe’s revenue and operating income is
primarily generated from the Glencore Merafe Chrome Venture, which has a total
capacity of 2.3-million tonnes of ferrochrome a year. Merafe shares in 20.5% of
the Ventures’ earnings. Overall revenue was 11% down at R4 780-million. (Also
watch attached Creamer Media video.)
In presenting a 26% decrease in loss and
total comprehensive loss for 2020 of R1 003-million, compared with R1
362-million in 2019, Merafe Resources CEO Zanele Matlala reported reduced
ferrochrome production and 55% capacity utilisation. There were also cutbacks
influenced by Eskom electricity tariffs, weaker market conditions, the
Lydenburg smelter and Rustenburg furnace being under care and maintenance and
consultation under Section 189 of the Labour Relations Act resulting in
terminations
Matlala told a media conference covered by
Mining Weekly that, in line with weaker demand, global ferrochrome production
decreased by 11.2% to 12.4-million tonnes. However, South African ferrochrome
production was 25% lower at 265 000 t on Covid-19, winter shutdowns and weaker
demand. Fifteen employees succumbed to Covid, ten of them during the second
wave of the pandemic, and Magareng chrome mine also suffered an occupational
fatality.
Ferrochrome revenue decreased by 10% to
R4-billion and chrome ore revenue by 15% to R777-million.
CHINA'S MAJOR ROLE CONTINUES
China accounted for 61% of global stainless
steel production and 57% of global ferrochrome demand, further entrenching its
dominance, whilst all other regions decreased.
Chrome exports into China declined by 11%
to 14.3-million tonnes, with 82% of the chrome exports from South Africa.
Ferrochrome and chrome ore prices remained
under pressure on weaker demand, with ferrochrome prices declining by 8% and
chrome ore prices by 15%.
“We are encouraged, though by the notable
increase in early 2021 market prices, due to ferrochrome supply restrictions in
China and an increase in demand,” Matlala said.
In response to Mining Weekly during
question time, Matlala said Eskom’s latest electricity tariff increase of 15.6%
was unsustainable and from what the company understand there are indications
that Eskom may need increases at that level again in the next year before the
tariff increases normalised to the level of inflation.
“That is a concern for us,” she said,
adding that electricity costs represented just over 20% of Merafe’s total costs
and a process was under way requesting proposals for self-generation.
Glencore ferroalloys head Japie Fullard
said the high electricity tariff was one of the major reasons why Lydenburg had
been put under care and maintenance, with the latest Eskom increases
reinforcing that the correct decision had been taken.
Fullard said that Eskom and the National
Energy Regulator of South Africa had authorised applications for a negotiated
price agreement, or NPA, and the company’s NPA had been lodged a couple of
weeks ago.
“I must say that we had some quick feedback
from Eskom; we can see that there’s definitely a need to get the special
pricing. If we do not get special pricing, it will just add to our already
stressed environment,” said Fullard.
Electricity intensive users, including
representatives of the ferromanganese industry, had also been in discussion on
how the cross subsidisation penalty suffered by energy intensive users could be
eliminated.
“The cross subsidy is definitely what we’re
pushing very hard, along with the NPA and the on-site generation via carbon
monoxide processes, the Swedish Stirling project at the Lion smelter and also
on top of that we’re evaluating a virtual power purchase agreement, which will
involve off-site generation, via wind and solar - let’s say in the Northern
Cape, and then it will be wheeled on to the grid and used in some of our space.
That’s the concept of that and we are at quite an advanced stage in terms of
evaluating whether this will make sense. Obviously, it’s important for us to
ensure that we take the correct decisions seeing that it’s quite capital
intensive and we will be liable in terms of the agreements,” said Fullard.
LOGISTICS CHALLENGE BECOMING FOCUS AREA
During the Covid lockdown last year, the
venture’s excellent logistical team was able to move most of its product but
post-lockdown the coming back into operation of all the ferrochrome smelters is
putting considerable pressure on the company’s logistical supply chain.
“This is happening to such an extent now
that we’re really battling now to get our product out, and I’m talking
throughout the whole chain, to the ports and from trains. Definitely a big
challenge. It’s actually moved to, I would say, one of our top focus areas. On
a daily basis, we actually relook at logistical challenges.
“I also believe that a part of this issue
that we’ve got with this is unfortunately there are also huge problems on the
logistical networks. I’m sure that you will have seen the many challenges
caused by cable theft. We’ve got ongoing discussions with the chief executive
of Transnet and it’s continuing almost on a weekly basis and we want to join
hands to see how we can assist in getting our logistical challenges sorted.
“One of the biggest constraints, definitely,
is the availability of the rail capacity. We’ve seen utilisation being as low
as 40%. So, really a huge concern for us,” Fullard said.
RECOVERY OUTLOOK
Merafe said in a release that global
stainless steel production is expected to recover with growth of 12.5%
projected in 2021, with the supply restrictions in China, as well as the
expected increase in demand potentially having a positive impact on ferrochrome
prices.
“We will continue to manage factors within
our control by continuing to focus on cost management, efficient and safe
operations, cash preservation and efficient capital allocation. Our balance
sheet remains strong and ungeared which positions us to withstand the
challenging times ahead,” the JSE-listed company stated.
The company’s net cash on hand is
R278-million, compared with R354-million in 2019.
BOARD CHANGES
Independent nonexecutive director Belese
Majova and nonexecutive director Mpho Mosweu will be retiring as members of the
board at the Merafe annual general meeting to be held on May 18 and
shareholders will be advised once the new appointments have been made