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Even Under Crisis Of Electricity Supply, Xstrata Increases Facilities For FeCr Production
= To Construct Independent Electric Power Plant, Advantage Of Major Resources Company
Under the circumstances, which new projects to produce ferro-alloys have been postponed because of a crisis of electricity supply in South Africa, Xstrata announced on the 20th of October that the Company has decided to implement the second phase of the Lion Project. This second phase was initially scheduled to complete in 2010 but, owing to a crisis of electricity supply emerged in South Africa in January of 2008, a time to complete the second phase was not clear and Xstrata has finally determined to commence the construction in January - March quarter of 2011 and to complete it in the first half of 2013.

This decision to implement the second phase of the Lion Project has meant that Xstrata will be able to have a more power on supply of ferro-chrome to the market of the western world, because other enterprises in South Africa have frozen their new projects for ferro-chrome in relation to a crisis of electricity supply. In consequence of a crisis of electricity supply arisen in January of 2008 in South Africa, new projects to produce more ferro-chrome in South Africa are estimated to be on a scale of approximately 2,000,000 tons per annum but have been driven to defer the times to complete by 3 - 5 years.

New projects to increase the capacities for production of ferro-chrome in South Africa are detailed as per the table attached hereto.

Among these projects, Xstrata has ensured the supply of electric power from Eskom, which is the national electric power corporation in South Africa, but also is conducting a feasibility study for construction of an independent 600 MW electric power plant and has adopted a prudent policy for its compensation.

Xstrata will invest R4.9 billion (US$710 million) in this expansion of the capacity for ferro-chrome, including R700 milliom (US$100 million) for the current development of the 1.2 million ROM tons per annum at Magareng mine within the Thorncliffe mine complex.

Xstrata said that this expansion will utilize Xstrata's proprietary energy-efficient Premus technology and will reduce the overall cost of the total ferro-chrome production by around 6%.

South Africa had maintained a 50% of the world share in supply of ferro-chrome in the past years but had fallen this share to 42% in 2005 and, after that, has continued to fall gradually this share to a further extent. The share of South African ferro-chrome in the world market in 2009 had come down to 38.4%, having broken a level of 40%. The share of South African ferro-chrome in the first half of 2010 had rallied to 42% but, when new projects for production of ferro-chrome in South Africa have been frozen for the next 5 years because of the problem of electricity, there is a possibility that this share of South African ferro-chrome in the world market will fall to a level of 30%.

The matter to materialize the second phase of the Lion Project as announced by Xstrata is a sort of good news and Xstrata is one of the largest companies in the world to generate electricity, which has possessed many coal reserves in South Africa and has been supplying this coal to Eskom. Therefore, Xstrata is expected to be able to fully cope with the countermeasures for construction of an independent electric power plant.

However, as seen from the table attached hereto, the total quantity of ferro-chrome to be produced by these new projects (including that in Zimbabwe) will reach a scale of approximately 2,000,000 tons on an annualized base but, apart from the second phase of the Lion Project, other new projects are not certain to ensure the supply of electricity. Even if the matter to construct an independent electric power plant is decided as a countermeasure to secure the supply of electricity, the enterprises, which are able to ensure coal reserves and to have a margin for arrangement of self-financing, are restrictive. The construction of an independent electric power plant will clarify the future of the ferro-alloy industry in South Africa but it is another question whether the constitution of each enterprise will allow this construction or not.

Also, there is another anxiety for the currency of South African Rand. The exchange rate of South African Rand against US-Dollar has strengthened by 10% for the last several months and the current rate is US$1.00 : R6.88. This exchange rate of Rand / US-Dollar is anticipated to strengthen further. Since the wages of Eskom's employees have been agreed to raise in June of 2010, it is forecasted to rise further electricity fees. Accordingly, it will be inevitable to increase the cost for production of charge chrome.

When the second phase of the Lion Project is successfully materialized, Xstrata will have the gigantic capacity, which is able to produce 2,300,000 tons per annum of ferro-chrome. According to a view by an analyst, the world demand for ferro-chrome in 2013 is estimated to be 9,500,000 - 9,800,000 tons per annum. Therefore, the quantity of ferro-chrome to be produced by Xstrata in 2013 is expected to come to 2,300,000 tons on an annualized base, sharing a 23% of the world market.

However, the 9,500,000 - 9,800,000 tons per annum of ferro-chrome to be demanded in the world have included the 4,000,000 - 4,500,000 tons to be consumed in China (this supply consists of 50% by domestic production and 50% by imports) and, therefore, Xstrata is thought to enlarge their share in the remaining quantity of ferro-chrome to be demanded from the western market. By taking into account of the expanded capacities for ferro-chrome in Kazakhstan, India and Finland, the share of ferro-chrome by Xstrata is diluted but is still supposed to be on a nearer level to 40%. In particular, Xstrata has held the overwhelming shares in sales of charge chrome in Europe, Japan and South Korea.
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