Diamonds regain their sparkle

Ferrochrome is an alloy of chromium and iron that is essential in the production of stainless steel 80% of the mineral is used for this purpose. Back in 2003, South Africa was by far the world’s largest producer with a 51% market share. However, in 2004, this had fallen to 45% and by 2013 it had fallen to 32%. Meanwhile, in 2012, China overtook South Africa as its share of ferrochrome output rose from 9% to 36%, over the same period.

This is worrying because it is a case of one step forward, three steps back. South Africa has around three quarters of the world’s ferrochrome reserves and had been the dominant force globally in this sector. What has taken place over the last decade is effectively de-industrialisation.

The tragedy is even greater since China’s rise to dominance is being driven by South African raw material exports. In 2003 China consumed 2.1m tonnes (South Africa exported about 100k tonnes to China that year) but by 2013 China’s consumption had risen to 12.1m tonnes (with 6.7m tonnes coming from South Africa). South African competitiveness has been (and seems likely to continue to be) undermined by rising electricity costs (beneficiating ferrochrome is an energy intensive process) and power shortages.

Turning the tide will take political will to move permanently away from raw material exports to local value-addition with the benefits that will come in terms of more jobs and greater revenues. Export duties would be one such method and the industry has been lobbying for such support, calling for a duty of $100/tonne. On current trends, the research company Roskill sees China’s dominance continuing, forecasting a 53% share for the country within five years.

Oversupply is likely in the market in the medium term and prices remain (currently $1.05/lb) around four-year lows. The market for stainless steel has been buoyed by a booming aviation market but supply growth is exceeding demand growth.