Merafe Resources, junior partner in the chrome joint venture headed by the world’s largest commodities trader, Glencore, is likely to remain a strong dividend payer after a record-high interim payout of R200m as uncertainty over electricity prices hampers investments.
Glencore-Merafe Chrome Venture is one of the world’s largest producers of ferrochrome, used in the production of stainless steel.
It is an electricity-intensive product to make.
"We have to adapt to the reality that things have changed in SA. If you go back 20 years, it was very simple: you built smelters, we had the cheapest electricity," said Deon Dryer, MD of the joint venture at a results presentation on Monday.
Due to "uncertainty with electricity prices, it doesn’t make sense for us to look at Lion 3 [ferrochrome project] … we are not looking to expand in smelting capacity. If things changed and preferential tariffs are offered by the government, that’s something we would look at and [we would] expand again, but it’s not in the plan," he said.
Glencore and Merafe would focus on the mining, ore upgrade as well as smelting businesses to improve operational performances incrementally to bump up recoveries, but will not invest in more large growth projects in SA.
Standard Bank analyst Tim Clark said that the venture was "ex-growth" and at a "standstill" period, with Lion 3, the third phase of expanding its low-cost Lion ferrochrome smelting complex near Steelpoort in Limpopo, long held in the pipeline of potential projects.
The partners were likely to increase their presence in the chrome ore market rather than build new smelters and increase their ferrochrome capacity beyond the 2.3 million tons they have installed. SA is the leading source of chrome ore to Chinese ferrochrome plants.
"If you don’t grow and the Chinese stainless steel industry does grow, as has historically been the case, the chrome ore industry will eat your lunch. We have to balance the market and the market will balance through the price of chrome ore," Clark said, pointing out the case if the venture did not invest in further ferrochrome output.
Merafe’s attributable production of ferrochrome dipped 2.3% to 211,000 tons for the period, which equated to the joint venture utilising 88% of its installed capacity in SA, a two percentage point decline on the previous year.
Looking at the stainless steel market, the key consumer of ferrochrome, Merafe said global production had increased 10%, driven mainly by a strong, 13% growth in Indonesian stainless steel during the six months. Output from Chinese stainless steel makers was 7% higher.
Due to Indonesia’s reliance on imported chrome, its increased stainless steel production pushed up global demand for ferrochrome 11%.