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South Africa is considering setting up a chrome exchange, similar to the way potash is marketed in Canada. While the idea has its supporters, critics fear it could encourage speculation and lead to price volatility.
The idea of such an exchange has been around for about two years, and it was pushed last month by Iraj Abedian, an economic advisor to the Mines Ministry, who argued during a presentation that South Africa’s ferrochrome producers would be better served by a chrome exchange than an export tax, which is also being proposed as a way to protect domestic producers of the alloy used in the making of stainless steel.
“In the long term there is no substitute for a chrome exchange market, if you’re a dominant player as South Africa is,” Abedian said at a mining conference in Johannesburg. Business Day reported the CEO of Pan-African Capital warning South Africa could lose its ferrochrome industry if the exchange, allowing the metal to be formally traded, is not set up:
“It won’t control the price, but it will smooth the price over cycles,” he said. “The exchange will give information to the market which is real and not based on speculation. If there is too much inflow, it could inform the producers that there was an oversupply which could affect them.”
It has been suggested the exchange could be modelled on Canpotex, the Canadian agency that has been marketing Canadian potash for export for the last 40 years. The exchange would require the mandatory participation of all South African chrome ore miners and byproduct producers, according to an industry report.
South Africa is the world’s largest producer of ferrochrome and holds some 70 percent of chrome reserves. The ore is primarily locked in the Bushveld Igneous Complex (BIC) and around half of the country’s chrome output comes from platinum mines that produce chromite ore as a byproduct. Platinum miners produce chromite to offset the rising costs of extracting platinum group metals (PGMs).
Ferrochrome — an alloy of chromium and iron — is a value-added product that is estimated to sustain 200,000 jobs in South Africa and provides a healthy R42 billion (US$5 billion) a year to the national economy. The country and the industry would like to hold onto its dominant market position but that position is being rapidly undercut by China, which has begun developing its own ferrochrome industry by importing raw chromite — about one half of it supplied by South Africa.
“The irony of it all is that South Africans are giving China the chrome stick with which to hit it by supplying half of the raw ore it requires,” Mining Weekly’s Martin Creamer wrote in a scathing editorial on the sorry state of the South African ferrochrome industry back in March.
The problem is aggravated by the fact that the platinum-chrome ore known as “UG2″ has flooded the market and depressed chrome prices, both domestic and for export, making it harder for ferrochrome producers to compete.
The industry is urging the South African governnment to implement a “beneficiation strategy” that would support the value-added ferrochrome industry — which is estimated to provide three times as many jobs as the export of raw ore — and also consider proposing an export tax of $100/ton as a way to protect local producers. So far, however, the government has not acted. Creamer estimates the indecision could shed between 60,000 and 80,000 jobs and predicts the sector’s contribution to GDP could plunge to R23 billion ($2.7 billion), along with chrome prices.
Meanwhile China’s ferrrochome industry is thriving. Examiner.com notes in the last 12 years, the Asian economic juggernaut has captured all of the world’s growth in ferrochrome, steel and stainless steel production, needed to fuel double-digit economic growth.
Statistics show the biggest loser in the growth of China’s ferrochrome industry has been South Africa. Examiner.com notes that output of South African ferrochrome declined 9 percent in 2011 while China’s rose 13 percent. Chrome imports to China, used to make Chinese ferrochrome, logically rose significantly — 51 percent in 2011 according to the website.
So what is to be done?
Supporters of the chrome exchange say it would “dynamically optimize South African ore exports while ensuring a fair and competitive domestic market,” (read the full industry report here), but critics warn the exchange could encourage speculation, exaggerate price volatility and distort demand. The logistics of setting up an exchange could also be problematic.
MiningMx quotes one commodities expert saying that a physical exchange would require investment for warehousing, a bank to serve as a clearing house, and be industry-owned:
“It would be much easier to do this in the coal market and even then, it’s not that easy,” said Bevan Jones, GM of the Johannesburg office of trading house London Commodity Brokers (LCB).
The wheel doesn’t necessarily have to be re-invented, however; some observers say a chrome exchange could possibly be finessed from existing commodity marketing operations such as the South African arm of the LCB:
“It is conceivable that chrome-mining companies, which currently market their own output, opted to make use of a neutral marketing intermediary, for example LCB or others like it, to sell South African chrome to all the international chrome buyers and stabilise the ferrochrome industry at the same time,” Mining Weekly reported.
While the nuts and bolts of how the exchange would work have yet to be pieced together, chromium investors would be wise to keep an eye on the exchange as a potential investment vehicle. It also seems clear that the ferrochrome situation in South Africa is urgent and requires concerted industry and government action. Stay tuned for further developments.