January 23, 2009 / 8:38 AM / 11 years ago

UPDATE 2-Ferrochrome Q1 price in Europe slides 57 pct

(Adds Merafe statement, share prices)

By Eric Onstad and James Macharia

LONDON/JOHANNESBURG, Jan 23 (Reuters) - Contract prices for ferrochrome between South African producers and European steelmakers for the first quarter have tumbled 57 percent amid weak demand, producers said on Friday.

Ferrochrome, a key component in stainless steel, has seen a sharp fall in consumption, sparking a wave of closures and cutbacks in production.

South Africa’s Merafe Resources Ltd (MRFJ.J) issued a statement, confirming what a source at another producer told Reuters, that contract prices for the first quarter slid to 79 cents per lb from $1.85 in the fourth quarter.

Business has been very slow and many customers were requesting that shipments be deferred, added the source, who declined to be named.

There has been no settlement yet between South African producers and Japanese steelmakers, but typically the Japanese price is 8 cents higher than the European settlement, he added.

“I’m not sure how that’s going to be handled, so far there’s been no new business into Japan,” the source said.

The settlement of 79 cents was less than expected by many analysts, Michael Rawlinson at Liberum Capital in London said.

“The market had been very much in the dark about expectations around pricing. The worst case brokers forecast we have seen is $1.10/lb... therefore this turnout is a big outlier on the downside.”

PRODUCERS CUT BACK

South Africa is the world’s biggest source of ferrochrome and hosts 70 percent of chrome ore reserves.

Major producers there are Xstrata XTA.L, which runs joint operations with Merafe, and privately held Samancor while International Ferro Metals IFL.L is a smaller player.

Kazakhstan mining group ENRC ENRC.L is one of the biggest ferrochrome producers.

Xstrata shares fell 4.4 percent to 690.5 pence by 0925 GMT, IFM lost 1.4 percent to 17.25 pence, ENRC declined 2.9 percent to 301.25 pence and in Johannesburg Merafe shed 4.1 percent to 71 South African cents. This compared to a 3.1 percent fall in the UK mining index .FTNMX1770

Rawlinson said ferrochrome accounts for 65 percent of earnings before interest, tax, depreciation and amortisation (EBITDA) for ENRC while the figure is 10 percent for Xstrata and 100 percent for IFM.

The sector, burdened with heavy inventories that need to be worked off, has seen a wave of production cutbacks.

On Jan. 16, Xstrata and Merafe said they had deepened their production cutbacks to 80 percent of total capacity.

They said production at a further six furnaces had been suspended, raising the output cuts to 1.37 million tonnes since November.

Reporting by Eric Onstad, Editing by Peter Blackburn

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