Chrome cut, price outlook stings Merafe
Allan Seccombe
Posted: Fri, 16 Jan 2009
MERAFE Resources shares fell hard on Friday after it said ferrochrome production at its joint venture with Xstrata would be further curtailed, bringing the reduction to 80% of installed capacity.
The outlook is poor for contract ferrochrome prices, with a drop of at least a dollar expected this quarter. Some analysts said the price could drop from $1.85/pound (lb) in the December quarter to between 80-90 cents in the March quarter. If the steel makers get their way, it could go as low as 70 cents, some say. Merafe shares fell 12% in early trade on the JSE before recovering slightly to 74 cents from yesterday’s close of 81 cents. Merafe draws the bulk of its revenue from ferrochrome sales.
![]() in a fairly nasty situation ![]()
"It's obviously bad for the value of the company because their earnings are going to fall significantly. For as long as this situation lasts they're going to be in a fairly nasty situation," said an analyst who declined to be named. Merafe has poured money into its debt and the analyst reckoned it should have around R300m on its books at the end of the December 2008 financial year after a strong first half, in which it posted a 570% improvement in post-tax profit of R602m. Xstrata is the world’s largest producer of ferrochrome and has been steadily reducing the amount of the material used to make stainless steel since late last year. Xstrata has a diversified portfolio. Its shares in London traded up six percent. The latest news from the joint venture is that six more furnaces have been shut after the closure of 11 furnaces in December. The suspended furnaces represent 80% or 1.37 million tonnes of annual operating capacity. “We have stocks left from the previous year that we are using to serve current levels of demand. We believe it is sufficient to service that demand,” said Lindiwe Montshiwagae, corporate finance and investor relations manager at Merafe, the junior partner in the joint venture. She declined to give figures on the amount of stock the JV has or what demand there is from customers partly because Merafe is in a closed period ahead of reporting its results.“This is not jut about the money, but also about relationships. You can’t hold the guys to the letter of the contracts if they say they just can’t take up the tonnages they’re contracted to,” Montshiwagae said. “We’ve got stock and we have to realise cash from that. There’s no point in continuing production and incurring more cost if we do have stock available.” The analyst said stainless steel demand depended heavily on economic health and there was no reason to see a recovery much before the end of 2009, even 2010. "There's no real optimism this year, I don't think, unless something really turns around signficantly, but we're seeing no signs of that." "The timing of when things will get better is very, very difficult to call," he analyst said. Talks on ferrochrome prices for this quarter have started late. The attacks in Mumbai in December last year led to traditional year-end talks at the International Chromium Development Association conference in New Delhi being postponed. Like many other mining stocks taking a battering from the down turn in demand for commodities and the fall in metal prices, Merafe has touched fresh lows in the past 12 months, hitting 56 cents, well off a high of 434 cents.
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