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Chronic electricity supply shortages dents ferrochrome production at Merafe Resources

Time:Thu, 23 Mar 2023 09:27:41 +0800

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Merafe Resources, the junior empowerment partner in a chrome joint venture with Glencore, said on Monday that attributable ferrochrome production increased marginally by 1%, plagued by electricity supply challenges in the second half of the year.

In its results for the year ended December 31, 2022, the group said it produced an attributable 384 000 tons of ferrochrome, from 379 000 tons in the previous year.

Merafe reported headline earnings of 56.4 South African cents a share which compares to 66.8 c for 2021, and a 2% decrease in revenue to R7.94 billion.



The board declared a final cash dividend of R325 million, nearly 41% lower compared to 2021's R550m payout.

"This amounts to 13 cents per share before dividend tax and brings the total dividend for the year to R625m, compared to 2021's R725m.,’ the group said.



Merafe CEO Zanele Matlala said 2022 had been characterised by a number of uncertainties.

"The Russia/Ukraine conflict contributed to the rise in global inflation and supply chain constraints. Cost pressures continue to mount, and this resulted in the Glencore-Merafe Pooling and Sharing venture's unit production costs rising by an unprecedented 30% year-on-year," she said.

The increase in the total unit cost of ferrochrome production was mainly driven by general inflation, higher market ore prices, reductant prices and electricity tariffs.

Matlala said despite the challenges, Merafe recorded a profit after tax of R1.4bn driven by higher commodity prices and a weaker exchange rate.



According to the group, the venture continues to pursue the Negotiated Pricing Agreement (NPA) with Eskom to mitigate against the unsustainable high energy costs. The group had approached Eskom in 2021 for the NPA.

Electricity tariffs increased by 9.61% with effect from April 1, 2022. The National Energy Regulator of South Africa has approved a tariff increase of 18.65% with effect from April 1, 2023.

"The hike will certainly add more cost pressures. The reliability of the electricity supply remains a serious concern. The venture’s operations were impacted by the curtailments of stage 3 and stage 4 and had to reduce load," it said.


Merafe said inadequate local supply of reductants continued to be a challenge, and as a result, the venture had to import at higher prices.

"Massive logistic challenges continue to plague the industry, contributing to increased logistic costs. The increased reliance on road transportation, combined with higher diesel cost has pushed this cost component higher," it said.

Merafe said only 30% of its exports were transported by rail with the majority by road.

Looking ahead, the group said given the operating environment, 2023 was likely to be a challenging year. There was an expectation that a global recession would affect commodity prices negatively.

"On the positive side, the reopening of China after their zero Covid-19 policy suggests that there might be compensating increased economic activity from that region. Forecast growth in stainless steel demand, underpinned by growth in Asia and Europe, is positive for the ferrochrome industry.

"Our production profile will be influenced by several factors including Eskom's inability to meet the country's electricity demand and rolling electricity outages, as well as our stock holding levels," it said.



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