Chromite market’s uncertain footing

By Davide Ghilotti
Published: Tuesday, 19 January 2021

Multiple push and pull factors continue to affect supply and demand for chromite, with market participants struggling to see beyond the immediate future.

Market participants active in non-metallurgical chromite are looking ahead to a year of uncertainty in 2021, with the recovery in demand remaining elusive and supply security equally far from clear.

The chromite sector was dogged by a second year of unfavorable market drivers in 2020 following a first reversal of the cycle during 2019 on oversupply and falling consumption. While the past year saw an exacerbation of issues for both South African producers and consumers, the new year will be marked by push and pull factors that continue to affect the supply/demand balance and prices.

"The curtailing on the supply side has been stronger than the reduction in demand," a South African chromite producer told Fastmarkets in June last year, referring to a series of issues that had taken a sizeable chunk of output offline throughout the country.

Output has been particularly inconsistent during 2020, especially since the month-and-a-half national lockdown imposed by the government at the height of the Covid-19 pandemic in March and April, with only a reduced output capacity from May onwards.

In reality, a number of small- and medium-sized mining and processing operations decided not return to production after the first wave of closures because of the continuing restrictions on operational rates, logistics bottlenecks and low market prices.

At the same time, large and more established companies faced their own set of closures: Samancor’s operations were out of action for at least two months; the Glencore-Merafe Kroondal chrome mine was also down for longer than the initial national closure period, with only a slow and gradual restart; and the Lanxess chrome mine, which was sold to local chrome processor Clover Alloys, has yet to resume operations pending the conclusion to the transfer of ownership.

Each producer incurred a meaningful reduction in their yearly output. And for those that remain closed, when they will return to production remains unclear.

Adding to the uncertainty on the supply front is the potential introduction of an export tax on chrome products leaving South Africa – a proposal the government put forward in an effort to encourage added-value creation within the country for its ferro-chrome supply chain.

Because, under current conditions, customs does not differentiate between met and non-met chrome products, the advent of a levy would also affect foundry and chemical grade material. Market participants estimate the rate could be as high as 30-40% of the sales price: and there is no clarity from the authorities as to how the tax would be implemented, or along what timeline.

The effects of the pandemic have not gone away, however, and the mining sector is particularly exposed. And with workers routinely traveling long distances between their towns and the working mine sites, any health-related emergency can have drastic consequences for the workforce at operations.

Demand slowdown

Demand also took a severe hit in 2020, thereby extending the period of oversupply that characterized the 2019 price decline.

The first wave of national lockdowns in developed economies in the first half of 2020 brought industrial activity to a halt. And in terms of chromite, this crucially affected the automotive and steelmaking sectors – the two largest industries to use foundry material.

As the economic slowdown brought countries into near-recession territory, this took a heavy toll on both the production and the consumption rates of commodities, products and services. In some key destination markets, such as Europe, that weakness was then added to the seasonal slowdown during the summer months, further stifling demand for raw materials.

Until the summer, suppliers were hopeful that trading volumes would pick up in the last quarter of the year, especially in October and November – two of the busiest months for commodity trading. At the time of writing in mid-December, however, we saw that this was not the case, with spot demand remaining weak until the year’s end. This is indicative of the weariness with which consumers are still approaching their purchasing strategies.

Crucially, as has been the case for other materials used in foundry and refractory applications, chromite sand supply in 2020 has been sufficient to cover demand only because refractory applications have been particularly badly hit. While both supply and demand have reduced, market participants estimate 2020 consumption fell below the reduced output for the year.

But against a situation of rebounding consumption rates, supply channels may see tightness building again. "We saw this happening in the past, with supply gradually being lost along the way and no one taking any notice. Then a large operation goes 'boom’, and everything changes," one market participant said.

This was the case in 2015 when, at the bottom of the market, the Dilokong chrome mine closed, taking its large output offline for good. That marked a before-and-after in the supply cycle, which turned in subsequent months into a three-year bullish price run.

Some in the market have been drawing parallels with that situation, but also point out crucial differences in the state of supply. "Because of the pandemic, everyone tried to run down their inventories [last] year. [So] the stock level in the system now is lower than it was during the last bearish cycle in 2015," a supplier said. "That means the market can turn faster than it did before."

All in, while the chromite sector finds itself in uncertain waters as it heads into 2021, there are factors that could steer a change in direction either way, as demand takes time to recover and supply looks uncertain. As a third market participant put it: "This won’t continue for long. Something’s got to give."