Chrome market could change with new export tax regime, dissuading Chinese offtakeA “delicate” balancing act between chrome ore mining and stainless steel production may be under threat as South Africa changes its export tax regime to boost the commodity’s “welfare benefits” and to favour local chrome buyers instead of foreign buyers, Simon le Roux, a student at Rhodes University, states in a thesis paper.
Under the supervision of Rhodes University professor Gavin Keeton and with reference to Dr Ferdi Botha, Le Roux posits that, historically and traditionally, South Africa produces more than 50% of global chrome ore and is responsible for about 71% of chrome ore exports.
At the other end of the spectrum, he points out that China produces 53% of global stainless steel and, because it has no local chrome ore production, accounts for 84% of global chrome imports.
Ferrochrome, which is used in the production of stainless steel, is geographically concentrated, with South Africa accounting for 49% of global exports and China for 35% of imports in 2018, reveals Le Roux.
However, he says China’s share of ferrochrome imports used to be much greater, but that, of late, Chinese local ferrochrome production has continued to grow while South African production continues to decrease because of rapid increases in the price of South Africa-sourced chrome, compounded by unreliable electricity supply.
As such, Le Roux posits that the market balance has become more uncertain as the South African government has recently proposed the implementation of a tax on chrome ore exports, because it wants to “increase the welfare benefits” of South Africa’s large chrome ore reserves and halt the rapid shift in much higher value ferrochrome production from South Africa to China that has occurred in recent years.
He suggests that, by doing this, government wants to ensure that Chinese ferrochrome producers pay a higher price for chrome ore than South African producers. “Whether this strategy will work is uncertain, because a key disadvantage South African ferrochrome producers have faced is the unreliability and rapid rise in the price of local electricity,” notes Le Roux.
One way South African producers are seeking to overcome this disadvantage is by implementing new energy-saving technology, he states, adding, however, that any advantage could be short lived if Chinese ferrochrome producers implement similar cost saving technologies.
Further, Le Roux suggests that Chinese ferrochrome producers may protect their market share by absorbing the higher chrome ore prices, or Chinese stainless steel producers may prefer locally sourced ferrochrome supply and so will be willing to pay a higher local price.
“More worrying” he says, is that the export tax could change the historical nature of price transmission within the stainless steel value chain.
“Chinese ferrochrome producers may seek to claw back the higher input cost imposed on them by not passing on future increases in ferrochrome prices to chrome ore exporters. An industry previously characterised by price symmetry may become one in which price asymmetry prevails. The beneficiaries of this change are unclear.”