* 350,000 tonnes removed from market - traders
* Eskom may extend electricity buyback deals
By Agnieszka Flak and Harpreet Bhal
JOHANNESBURG/LONDON, Jan 30 Ferrochrome
production cuts in South Africa are likely to persist into the
second quarter, boosting prices at a time of weak demand,
South Africa is the world's second-biggest producer of the
alloy used to make stainless steel, but several companies have
shut down operations in recent weeks to help power utility Eskom
to manage the country's tight electricity supply.
The businesses that have cut production include International
Ferro Metals and Hernic Ferrochrome, along with a
subsidiary of Indian steelmaker Tata Steel and a joint
venture between South African Merafe Resources and
Under deals with Eskom, companies agree to suspend
production temporarily, allowing the utility to buy back the
energy that would have been used by the furnaces and feed it
back to its starved electricity grid.
Traders estimate that, between December 2012 and March this
year, the buyback arrangement will remove about 350,000 tonnes
of ferrochrome from a market that has been struggling with weak
demand and an oversupplied stainless steel sector.
Prices are expected to be supported by further production
cuts in the second quarter as South Africa enters a colder
period in which electricity demand is stronger.
"The rumours are ... that the cutbacks will have to continue
into Q2," one Europe-based trader said. "Nothing has been said
at the moment, but demand is higher for electricity in Q2 than
in Q1 and the maintenance work (on Eskom's ageing power
stations) still hasn't taken place.
"The concern is that the supply cuts will be rolled over and
that is bound to continue to tighten the (ferrochrome) market.
Prices are certainly going to rise in the short term."
Market sources said that supply tightness is already being
felt in Asia, where more spot business is conducted. If
production cuts linger, the European market is also likely to
see higher spot prices, they said.
In Europe, high-carbon ferrochrome stands at about $0.96 per
lb and low-carbon ferrochrome at about $2 per lb, against about
$0.60 and $0.91 in China.
"Producers were keen to go into the buyback deals because
the market was looking very weak in November and December.
Rather than stockpiling, they had the option to cut output," a
European ferrochrome trader said.
South Africa has been struggling to meet demand for power,
especially as new power plants meant to plug the shortfall have
been delayed. Supply will remain vulnerable until the first of
the new stations being built by Eskom becomes operational later
The national grid nearly collapsed five years ago, forcing
mines and smelters to shut for days and costing Africa's richest
economy billions of dollars in lost output.
All of Eskom's current buyback agreements end at the end of
March, but the utility may negotiate extensions into the second
"We are looking at extending it, but it has to work for them
and for us," said Eskom spokeswoman Hilary Joffe.
At the peak of the buyback programme Eskom will acquire up
to 950 megawatts of electricity, mainly from ferrochrome
producers, the company said.