Merafe's ferro chrome production improves on higher stainless steel demand

Merafe, a major South African ferro chrome producer, registered an increase in production by 66% y-o-y in H1CY'21 to 1.99 lakh tonnes.

Merafe's revenue and operating income are primarily generated from the Glencore-Merafe Chrome Venture which is one of the global market leaders in ferro chrome production, with a total installed capacity of 2.3 million tonnes (mn t) of ferro chrome per annum.

Venture's highlights of H1CY'21:

Increased production of stainless steel drove up ferro chrome demand: The company in its interim report stated that the production of stainless steel increased to decadal highs touching 30 mn t in H1CY'21, which is up by 28% y-o-y. Strong growth has been observed in all producing regions, particularly in China, as output increased 26% to 17 mn t. Strong demand, coupled with significant hike in raw material costs, have supported high stainless-steel pricing in H1CY'21. Thus, the increased stainless-steel production drove the ferro chrome demand to 7.4 mn t, an increase by 1.4 mn t from H1CY'20.

Ferro chrome production increased with enhanced capacity utilisation: The company revealed that ferro chrome production increased 66% in H1CY'21 to 1.99 lakh tonnes in line with 83% capacity utilisation in the smelting shops. In addition to better performance, the increase is highly attributable to the lesser impact on the smelting shops due to Covid as compared to the previous year. The company stated, "The Lydenburg smelter remains on care and maintenance for the foreseeable future. However, Rustenburg furnace 5 will resume operations in the third quarter of 2021."

Cost of production decreases 11%: The total cost of production per tonne decreased by 11.4% in H1CY'21 against CPLY. The decrease was mainly due to increased production volumes and lower chrome ore costs. However, it was somewhat offset by the 15.6% increase in Eskom electricity tariffs from 1 Apr'21, and higher cost of reductants. Local procurement of reductants was challenging due to inadequate availability of coke and anthracite, which necessitated the need of importing these reductants at a higher cost. The stronger ZAR against the US dollar did assist to cushion the impact. Meanwhile, the decrease in production cost was further countered by the increased inflation, rising freight costs and cost of fuel. These increases continue to add to cost pressures on the venture's smelters and further reduce the cost competitiveness of the South African ferro chrome industry.

Financial review of H1CY'21: Merafe's attributable revenue from the venture increased by 60% from the prior period to R 3,746 million (mn), ($253.3mn) as compared to R 2,338 mn ($158 mn). Ferro chrome revenue increased by 61% from the prior period to R 3,229 mn ($218 mn) as compared to R 2,005 mn ($136) in H1CY'20 primarily as a result of higher average realised prices and an increase of 39% in ferro chrome sales volumes to 210kt (H1CY'20: 151kt). Chrome ore revenue increased by 55% from the prior period to R 517 mn ($35 mn) as against R 333 mn ($23 mn) in H1CY'20, as a result of higher chrome prices as well a 51% increase in sales volumes to 208kt (H1CY'20: 138kt). Stronger ZAR over the dollar countered the revenue growth despite stronger prices and sales volumes.