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While a chrome ore tax does protect South
African smelting interests, any benefit could be negated by a retaliation from
China or a loss of market share for miners, says commodity analyst CRU chrome
analyst Samuel Grant.
The South African government in October
last year announced it was considering a proposed chrome ore tax to protect the
domestic ferrochrome industry.
Grant explains that, while the tax has been
mooted in previous years, the challenging long-term prospects of the domestic
ferrochrome industry have become more apparent this year owing to rising
electricity costs.
State-owned power utility Eskom’s
electricity tariffs to large industrial customers have increased by more than
500% over the last ten years, impacting heavily on their global
competitiveness.
Grant points out that South Africa has seen
the closure or mothballing of more than 40% of its ferroalloy capacity.
The plight of the domestic smelting
industry has persuaded the government to revisit the tax on chrome ore exports,
which it hopes will make domestic capacity more competitive against Chinese
production.
China’s growing demand for by-product upper
group two (UG2) chrome ore and the rapidly increasing electricity tariffs in
South Africa have supported the development of ferrochrome smelting capacity in
China.
“The impact of this proposed tax will
increase smelting costs in China, tipping them in favour of South African
smelters. However, the tax could erode global market share for South Africa’s
conventional chromite miners, as it will make them less competitive on a global
basis,” Grant notes.
An export tax could push South African
conventional ore producers towards the higher end of the cost curve and above
average costs in Turkey or Zimbabwe.
In the longer term, this could shift mine
investments away from South Africa and “we could see Chinese operators becoming
more global with their investments”, he notes.
In the near term, Grant explains, Turkey
and Zimbabwe will not be able to ramp up to meet demand levels in China and
significant further investment is needed to do so.
However, Chinese companies could invest in
these nations to increase capacity and provide chrome ore competitively to
Chinese smelters. This would chip away at South Africa’s market share, despite
the country having the largest chromite reserves globally.
On the other hand, the tax does offer South
Africa a new source of revenue, which can, in turn, potentially be used to help
ease Eskom’s growing debt pile.
Grant further states that the impact of a
tax on chrome ore will inevitably raise smelting costs globally, but
particularly in China, as it is reliant on South African imports.
In 2020, 82%, or 11.7-million tonnes, of
China’s total chrome ore imports were from South Africa.
CRU does not believe that China will let
its smelter output falter, without some form of retaliatory action. The ban on
Australian metallurgical and thermal coal in late 2020 shows that China is
capable of using the commodity trade to protect its interests.
“China has invested heavily to become more
self-reliant within the stainless steel value chain and will likely act to
defend this position,” Grant says.
Ultimately, he laments that the proposed
tax on chrome ore may not save the ferroalloy smelting industry if
significantly higher energy costs materialise in the medium term.
Lobby group Save SA Smelters on June 21
called for government to act with urgency in implementing the tax, highlighting
that 80 000 jobs are on the line if government does not implement it.
ChromeSA, which represents primary chrome
producers, meanwhile, has argued that the tax will have a destructive impact on
primary and UG2 chrome ore producers, given that they export the bulk of their
production.
ChromeSA does not believe that South
African chrome producers have sufficient market power to increase the chrome
price without losing market share.
Chrome ore production has grown by 50% over
the last five years and close to 60% of all chrome ore is exported, with most
of these exports going to China.
South Africa exports about 13.6-million
tonnes of chrome ore a year, from a total production of 22.7-million tonnes,
with the chrome mining industry employing about 22 904 people, of whom just
under half are employed by nonintegrated chrome producers, alongside integrated
producers and UG2 producers of chrome.