Noront Resources

JOHANNESBURG (miningweekly.com) – Increases in the price of ferrochrome are likely to be ongoing throughout 2010, says London-listed South African ferrochrome producer International Ferro Metals (IFM).

IFM CEO David Kovarsky expects the upward trend to resume from the beginning of 2010, despite the downturn in demand in the September quarter.

"What the commentators say is that there was an overstocking of stainless steel inventory in China, which was a result of exports into China by Japan, Taiwan, Korea and Europe.

"I think that will ease off by the end of the year and I think that will calm the demand-supply equation," Kovarsky adds.

The ferrochrome price is at $1,03/lb in the December quarter, up from $0,89/lb in the September 2009 quarter, and $0,69/lb in the June quarter.

The $1,03/lb price level is expected to persist as Europe and North America adopt it as the benchmark.

Though the spot price of ferrochrome has been softer in China, it is expected to firm once Chinese stockpiles normalise.

"I think that the Chinese spot price will resemble the benchmark price and commentators are saying that they expect further price increases in the first half of next year," says Kovarsky.

"Although we remain cautious for demand in the near-term, I believe the outlook for stainless steel demand remains intact," says Kovarsky.

IFM started up its second furnace on August 17, after switching on its first furnace on April 20.

"The start up went smoothly and production is now running at full Eskom constrained capacity," Kovarsky said.

On the proposal of South Africa's State-owned electricity utility Eskom to increase its tariff by 45% a year in the next three years on top of this year's 30% increase, Kovarsky says that the tariff would make the South African ferrochrome producers higher cost producers.

But a key aspect is that South Africa, as the largest producer, is generally the price maker and any costs that are increased in South Africa will be built into the selling price, which will have to cater for a higher electricity cost.

Kovarsky doubts whether higher priced product from South African producers would be spurned because of the dependence on South Africa.

"To make up that slack would be extremely difficult. If anything, I think that there is going to be a shortage of capacity in a couple years time because of the constraints that South Africans have on their electricity," Kovarsky adds.

"The first area for the pick up in demand will be China. The Chinese consumption is extremely strong. The three key areas of consumption of stainless steel in China are in construction, infrastructure and automotive and all three are doing well.

"From what we have seen, the destocking should cease by year-end and we should start seeing the pick up of production activity in China and therefore a pick up in demand for ferrochrome.

"I was in the US a couple of weeks ago and although production is relatively low, stainless steel producers are anticipating higher demand. Stainless steel stockists were delaying purchases because of the spike in the nickel price, but the nickel price has since come down and the US expectation is that things are going to pick up in the near future," he says.

IFM is rebuilding its inventory to more normal levels to take advantage of further increases in the ferrochrome price.

Global stainless steel production has increased steadily since the start of 2009 and, although there has been a recent slowdown over the quarter under review, it is expected that the upward trend will resume from the beginning of 2010.

Eloquent IFM chairperson, Tony Grey, quoting Shakespeare, says: "To afford comfort in a time of great stress, Macbeth said, ‘Come what come may, time and the hour run through the roughest day'.

"For the company, the year that has just passed was a period that called for such an observation, Grey says.

The blow of the global financial crisis knocked the ferrochrome producers off balance, but they have slowly got back on their feet, after promptly reducing production.

The scene is now set for better days: "We are now rebuilding inventory to more normal levels to take advantage of any increase in the ferrochrome price and to mitigate against the expected increase in electricity prices in 2010," Kovarsky tells Mining Weekly Online.

IFM produced 36 773 t in the three months to September 30, up from the 18 437 t of the June quarter.

The company's ferrochrome sales of 36 383 t in the September quarter were down 13% on the 41 916 t of the June 2009 quarter, when the company was selling both inventory and production, but 30% higher than the sales in the September 2008 quarter, when the global financial crisis hit.

Continued rand strength is, however, lowered rand-denominated revenue and reduced margins.

Inventory is at a low level of 9 752 t, compared to 9 362 t as at June 30.