Foundry, chemical and refractory grades dragged into purported 30% to 40% figure – which could yield billions in tax revenue for the South African government – despite the beneficiation on these grades having already taken place.
South Africa’s non-integrated chrome ore exporters want to discuss ways of solving the existential threat to South Africa’s struggling ferrochrome industry to avoid the need for a tax being imposed on the export of locally mined chrome ore.
A recent proposal by the South African government to impose an export tax on chrome ore could hit the industry hard and backfire. This is according to a report prepared by Genesis Analytics for domestic non-integrated producers part of ChromeSA (an independent Chrome Ore Producers Group representing primary and UG2 chrome ore producers), who are in strong opposition to the tax as compared to the two main ferrochrome players Samancor and Glencore, who support the tax implementation.
While the tax has been mooted in previous years, the challenging long-term prospect of the domestic ferrochrome industry has become more apparent because of increasing electricity costs. A further 15% increase in electricity tariffs by Eskom in 2021, as well as most ferrochrome smelters putting out section 189 redundancy consultations in 2020, forced the issue on the Department of Mineral Resources and Energy (DMRE). While a chrome ore tax does in theory protect South African smelting interests, any benefit could be negated by a retaliation from China or a loss of market share from conventional miners.
The proposed tax, which was announced in a Cabinet statement on 21 October 2020, took the industry by surprise. Ostensibly, it is aimed at supporting the domestic ferrochrome production and its chrome value chain sector. Some reports say South Africa’s government is seeking ways to support its ferrochrome smelters, which industry sources say contribute 13.8 billion rand to state-owned power utility Eskom’s revenue.
“The interventions include the proposed introduction of the export tax on chrome ore, the usage of energy efficiency technologies on smelters, and the adoption of cogeneration and self-generation technologies,” said the late Minister in the Presidency Jackson Mthembu, reading the statement at the time. He did not disclose details of the export tax.
“All very well but where are we going to get the power to run our own smelters? It will just push the world to find other alternatives to our chrome. Nothing more than a tax grab dressed up as support for local business,” said a critic.
South Africa accounts for 50% of global chrome ore production and the metal has become a critically important by-product credit to platinum-group metal (PGM) mining. This has sparked interest in the economics of PGM orebodies and the contribution of chrome to offset mine costs, and supply to China. By far the most important driver of ferrochrome, and thus chrome ore, is the Chinese stainless steel industry. NB: Figures vary depending on where you do your research but they are all more or less within a couple of percentile of each other.
Similar to ferrochrome, chrome ore prices in recent years have been closely related to the demand and production of stainless steel in China.
World chromite reserves are estimated to total around 7.6 billion tons, with the majority of this located in South Africa. The country is by far the single largest holder of the world’s chromite reserves, accounting for 5.5 billion tons, much of which is held in the Bushveld Igneous Complex.
Other important sources of chromite include Zimbabwe (with 12% of the world’s reserves), Kazakhstan (4%), Finland (2%), India (1%) and smaller amounts in Turkey and elsewhere.
The vast majority of the world’s chrome ore is mined in South Africa. Historically it has accounted for approximately 72 per cent of global reserves, according to a KPMG commodity insights bulletin – chromite, November 2018. As a result of South Africa’s abundant chromite reserves, it has a well-developed infrastructure and technology allowing it to be one of the lowest-cost chrome ore producers in the world. In 2016, these advantages allowed South Africa to produce 49 per cent of the world’s chrome ore. Roughly half of the chrome ore that is produced in South Africa is exported for smelting into ferrochrome, which is then used in the production of stainless steel.
Chrome ore is a key ingredient in stainless steel. In 2019 South Africa supplied 12.6 million tons of chrome ore to China – 83% of China’s total chrome ore imports.
South Africa, with 4.9 million tons of ferrochrome production capacity, is the world’s second-largest ferrochrome producer after China. In 2019 South Africa produced 3.64 million tons of ferrochrome, down by 10% from 2018, data from the International Chromium Development Association shows. China, on the other hand, produces 53% of global stainless steel and, because it has negligible local chrome ore production, accounts for 84% of global chrome ore imports.
But the industry has struggled in recent years owing to a range of factors, including low prices, oversupply and rising production costs mainly caused by power and logistical issues.
China has surpassed South Africa as the leading source of ferrochrome, relying heavily on South Africa’s chrome ore. Merafe Resources, which is Glencore’s partner at its chrome mines and ferrochrome plants in South Africa, noted in its year-end results presentation that South Africa accounted for 12.6 million tons of China’s 16 million tons of chrome ore imports in 2019. South Africa’s exports grew from the 10 million tons in the previous two years. Merafe’s data showed Chinese ferrochrome was 6 million tons, up from 5 million tons two years earlier, while South Africa stayed flat at about 3.6 million tons. It should though be noted that South Africa’s ferrochrome producers are also significant exporters of chrome ore.
Scrap metal, steel and aluminium taxes
Government pressure to beneficiate minerals to create jobs and thus increase tax revenue is not aimed solely at the chrome ore industry. Steel producer ArcelorMittal have been enjoying some cosy import duties to the detriment of the downstream industry and now the latest revelation – see separate story – sees Trade, Industry and Competition minister Ebrahim Patel slip through a huge 15% import duty on aluminium sheet products in the very last government gazette of 2020. Questions are being asked about the timing of this notice.
The last issue of Castings SA documented government’s proposed imposition of a 20% export duty on scrap metal.
Foundry chromite sand
Africa’s resources have been a tempting target for adventurers, kings, traders, governments and companies for centuries. The quick growth of Chinese mineral demand and the vast untapped resources of Africa attracted Chinese foreign direct investment (FDI) into exploration and mining when domestic resources were no longer sufficient.
Sinosteel’s acquisition of the Dilokong chromite mine in 1997 marked the start of Chinese investment into African mining. This was not, however, the first contact between African and Chinese miners. In 1904, in the aftermath of the Boer wars, the shortage of labourers on the South African gold mines was acute. In the next two years, a total of 64 000 indentured Chinese workers were imported to South Africa. In 1906, they represented 34% of the total number of unskilled workers on the mines.
Chinese companies are far from taking control over African or global mining. In 2018, they controlled less than 7% of the value of total African mine production. Chinese investments in African mining of non-fuel minerals between 1995 and 2018 have contributed to production growth but it has also increased Chinese control over African mineral and metal production. There is evidence pointing to a continued Chinese expansion in African minerals and metals but at a slower pace than in the past decade. Through a detailed analysis of every mine, fully or partially controlled by Chinese interest in Africa and all other parts of the world the paper also measures total Chinese control over global mine production to be around 3% of the total value.
Caught up in the new tax proposal are those companies involved in the so-called by-products of chrome ore production, products such as foundry, chemical and refractory grades. Foundry chromite production, a niche product in the chromite market but with a high-added value, is almost completely dominated by South African companies, which provide the largest share of supply and the best foundry grade quality. The sought-after foundry grade is almost exclusively manufactured from underground mines and incurs extra costs in producing it compared to the open cast mining of UG2 production, which is also a lower quality ore.
Evolving market dynamics in foundry grade chromite have reshaped trading patterns between South Africa and China. Bearish market conditions prior to COVID-19 in consuming markets and supply uncertainty in South Africa affected trading patterns and foundry-grade chromite prices. Reports suggest that chemical and foundry grade chromite consumed around 3% each of total chromite production, with about 1% used in refractories. Still sizeable numbers.
Overall it is estimated that chrome ore production contributes 0.5% of South Africa’s GDP. In 2019 South Africa’s GDP was R5.077 trillion (StatsSA) so if my calculations are correct this 0.5% equates to R25.385 billion. With the proposed tax on the export of chrome ore – 50% of annual production is generally exported – and the non-metallurgical grades, this will bring in a sizeable amount into the fiscus.
However, local producers and marketers of all three grades are complaining because government is pressurising local mining companies to beneficiate minerals to create jobs and increase tax revenue. Foundry grade chrome sand, for example, has already gone through a beneficiation process before being sold and should not be subject to these proposed export duties, they say. Adding to the debate is the fact that there can be no more beneficiation of the foundry grade.
These chromites derive from layered intrusion-type deposits. While metallurgical-grade chromite is cheap and abundant, foundry sand grade is more expensive, as its high-quality parameters are much harder to attain. Thus, it is profitable for such companies to further enrich metallurgical-grade ore to reach foundry grade quality. As of January 2021, foundry chromite prices were between 245 $/ton and 325 $/ton (46% Cr2O3 min, dried and bagged, fob South Africa) and between 200 $/ton and 220 $/ton (46% Cr2O3 min, wet bulk, fob South Africa).
Selling out to the Chinese
Australia and Southern Africa are the most important target areas for Chinese mining investments. There are two main reasons for this. Firstly, they are major mining countries/regions with large resources in particular of iron ore and copper, which are in focus for Chinese investors, and there are plenty of investment opportunities. Secondly they are geographically relatively close to China. In addition, particularly in Australia, there is a vibrant junior mining community and many investors with an appetite for risky exploration and mining projects.
The stock exchange in Johannesburg does not have as many listed junior exploration and mining companies as has the ASX exchange in Sydney. There is, however, a host of mining companies, exploration and construction service companies and experts of all professions needed in exploration and mining in South Africa, and it is still the most important entry point to all of Southern Africa. It was the final steps of the Zambian privatisation process which raised Chinese interest in Africa in the late 1990s. Australia came into focus during the Super Cycle years from the mid-2000s to mid-2010s. A range of Chinese companies, both private and state-owned, were caught by the general enthusiasm, and invested in Australian projects.
But Australia and regional heavyweight China are caught up in an escalating trade and diplomatic spat and South Africa is now benefitting. Normally, China does not import coal from South Africa, but 2021 has seen a seismic shift. Shipments to mainland China are up 100% to around 3.7 million tons a year, African Source Markets’ Weekly Coal Index Report reported. However, is it just another step towards selling out resources to China by South Africa’s government?
The one-sided trade war has been gathering momentum between China and Australia, ever since Australian Prime Minister Scott Morrison called for an “independent” international investigation of the origins of COVID-19, which infuriated China.
China is Australia’s biggest trading partner with two-way trade worth A$ 235 billion in financial year 2018-19, which amounts to 26% of Australia’s total trade.
In recent months China has imposed import bans or tariffs on a smorgasbord of Australian commodities using technical terminologies such as dumping and standard controls, which western countries often use in trade sanctions against developing countries.
China’s blacklist has been largely delivered verbally in doses to commodity traders and includes Australian exports such as barley, copper, coal, sugar, timber, wines and lobsters. But, it does not include iron ore or natural gas, imports that are crucial for China’s own economy. About 60 per cent of China’s iron ore comes from Australia.
Bleating by China
Australia has stood up to China and there has been much bleating by the communist/socialistic country. Whereas China has not said a word about the proposed export tax on chrome ore. South Africa’s cabinet backed the imposition of the tariff as, supposedly, part of a raft of interventions to ‘support domestic ferrochrome production and its chrome value-chain sector’.
Maybe China is waiting to see what percentage of export tax will be implemented but the more feasible reason say industry insiders is that China can find alternative sources for chrome ore and are playing a waiting game as South Africa’s producers first go into care and maintenance, as many are already doing so, and then into liquidation. This will enable Chinese investors (The Chinese government) to obtain valuable South African assets at much reduced prices. The damage to the non-integrated chrome ore mining companies would be permanent.
“The suspicions all started back in 2017 when President Cyril Ramaphosa visited China. There was much fanfare about what investments China had promised but we have seen nothing concrete to emerge subsequently, or nothing that is visible. Were they just securing the promises of bailouts by the Chinese government in return for securing interests in our mining industry.”
“At the same time that South African government delegation was in China the price of chrome ore was in the region of 300 $/ton but this dropped to 100 $/ton shortly thereafter. Rumours also started to surface about Samancor, one of South Africa’s major privately-owned mining and minerals processing companies that sits on 70% of the unmined chrome ore body, being sold to China.”
For years Chinese ferrochrome producers have been in a stand-off with ore producing countries, including Turkey and South Africa, to drive down chrome ore prices. One way to do this is hold governments to ransom, which China seems to be doing successfully in Africa, and also to acquire local assets.
Samancor Chrome is currently implicated in a theft and corruption case totalling over $500 million (about R7.5 billion) by its previous owner and chairman, Croatian billionaire Danko Končar. The case is being brought by the Association of Mining and Construction Union (Amcu) and rests on testimony from a whistle-blower, former Samancor director Miodrag Kon, who is a relation of Končar.
To find out who owns Samancor Chrome, which is owned by Samancor Holdings, is difficult.
In Kon’s affidavit, two redacted decisions by the SA Competition Commission have been put together to describe who the owner of Samancor is today. It is not easy to know. Neither is it easy to accept why the South African authorities are playing by deleting information about ownership on each row in the documents.
A company called ‘Terris Mining’ in Mauritius owns Samancor Holdings. But that company is owned by ‘Terris Steel’ in Mauritius, which is owned by another ‘Terris’ in Cayman Island, which is owned by ‘Terris SPV’ in Cayman Island, which in its turn “is controlled by a financial investor in London”.
Kon asserts that these arrangements of ownership in chains by companies in tax havens are there to confuse the authorities. He also alleges that it is likely that the Kazakh IMR group is still in secret control of the second largest chrome company in the world.
The bottom line
ChromeSA believes that the struggling ferrochrome industry should be given a special electricity dispensation rather than export tax protection. They are concerned that one of the key factors that is being under estimated is the ability for China to substitute South African ore from other producing countries. Counter claims are that the Chinese ferrochrome industry has been setup to process the UG2 ore.
Another concern of Chrome SA is that government is just moving ahead with the tax without due consultation with the industry. ChromeSA has tried to engage with them but with little success.
“The government is just making unilateral decisions without meaningful engagement and consultation with the industry. What are their motives?” says ChromeSA.
Others in the industry say the Chinese want to buy the chrome ore at between 100 $/ton and120 $/ton. At that rate many of the South African mines producing chrome ore would have to close.
They also question why is it only the chrome industry that is being targeted by the South African government with the implementation of this export tax. Why not iron ore, manganese and others? There is not much beneficiation happening with these ores. They are just being exported.
In world terms South Africa is a significant producer of iron ore. In 2019 the country’s production of iron ore amounted to an estimated 77 million metric tons with the majority of it being exported. Over 60% of South African exports of iron ore goes to China.
The Chinese connection
Besides the rumours about Samancor other Chinese involvement in the chrome industry is Tubatse Chrome, which is involved with Samancor is owned by Chinese state-owned conglomerate Sinosteel. As is Chrometco Limited, currently listed on the Alt-X section of the JSE and has a majority shareholder (90%) in the Sail Group of Companies, a Chinese owned company. Sinosteel also own the Dilokong chromite mine.
Example to learn from
In June 2015, the Zimbabwean government lifted a ban on chrome exports that had been in place since 2011 and eliminated a 20 per cent export tax to help the sector. The original intent of the prior ban was to increase the smelting of chrome ore into ferrochrome in Zimbabwe. Instead, chrome ore stockpiles grew because of the lack of smelting capacity, high production costs and power shortages. The government has also increased its royalty from two per cent to five per cent on chrome ore but subsidises electricity tariffs for chrome ore processing. As a result, Zimbabwe’s chrome ore exports have increased.
Foundry industry benefit
In a funny way if the export tax is implemented it should benefit the local foundry industry. The foundries using chrome sand in their process should become more competitive with the favourable pricing, as compared to the international foundries. That is if the local suppliers don’t increase their pricing to match the proposed export tax.
But what our government is up to we will not know. Because they are not communicating with the industry and just being dictatorial.
Further reading can be found at: