The South African government’s Industrial Policy Action Plan 2018/19 – 2020/21 including a chrome ore tax proposal

In 2017, the South African mining sector’s contribution to GDP declined to 5.1% – down from 6% in 2015 and 5.4% in 2016 – illustrating the extent of the slowdown the sector is facing. The industry attributes the decline both to subdued commodity prices and policy and regulatory uncertainty. The continuing decline has led to mass retrenchments and mothballing of

assets and projects.

The current slowdown will affect

The international drive to reduce greenhouse gas (GHG) emissions in terms of the Paris Agreement commitments could be positive for the industry in terms of the adoption of platinum fuel cell technology. However, as alternate competing battery technologies are adopted, the demand for platinum will remain under threat, with the mining sector exposed to enormous risk. Consequently, there is an urgent need to develop new applications and markets for platinum as well as to provide international markets with reassurance on the sustainability and security of platinum supply.

The fuel cell industry development initiative is aimed at exploring and facilitating new market opportunities for platinum, to ensure the continued growth of PGM mining. In early 2016, the IDC established a steering committee of mining houses, local engineering and manufacturing companies and technology providers to work with government to jointly craft and implement a roadmap for PGM beneficiation in South Africa – with the special focus being on fuel cells.

Globally, the demand for energy storage has risen and continues to grow, especially as a result of the rise of distributed energy generation models. For SA, energy storage systems offer the ability to complement distributed energy generation through transmission and capital deferrals and arbitrage (storing production surplus during low demand periods and meeting higher demand during peak periods). In addition, significant opportunities are emerging in the form of mineral beneficiation-linked energy storage solutions utilising key SA mineral resources like vanadium, nickel and manganese.

Key Action Programmes
1. Interventions for a sustainable steel industry
1.1 Monitoring and evaluation of short to medium term interventions Nature and purpose of the intervention

Steel is fundamental to manufacturing in SA, accounting for significant value-add and representing about 190,000 jobs in the direct iron-ore, steel making and fabrication industries. Top steel-consuming industries (mining, construction, autos) contribute ~R600 billion to SA’s GDP (~15%) and employ ~8 million people (directly and indirectly).

For the past 2 years, since the onset of the global steel crisis, government, in consultation with a broad range of stakeholders, has proposed and implemented a number of policy measures to save the industry from the threat of closure and loss of capacity – balancing support for both the upstream and downstream steel industry.

the long-term sustainability of the sector and its supporting services, which could result in ruinous knock-on effects – especially on mining inputs manufacturers – as both capex and opex levels dip. Overall, the domestic medium to long-term prospects for local suppliers of goods and services is unfavourable and growth in revenues will have to be explored in export markets.

For the next three years the dti will closely monitor the implementation of the programme and general developments in the sector and will participate in local and global forums to ensure continuing support and intervention across the whole steel value chain.

Targeted Outcomes

  • A competitive primary steel industry;
  • A fair price for downstream manufacturing;
  • Development of local capacity and capability through increased local content;
  • Investment growth along the whole value chain, including technology upgrades;
  • Job retention and creation.
  • Inadequate investment in plant maintenance, equipment and upgrades.
    • Discontinued production of certain key primary steel products (particularly higher value-added flat products) for mining, tooling, rail and automotive applications.
  • Downstream industry facing increasing competition from low-priced imports of finished goods, which continues to erode manufacturing capacity and capability and shrink the local share of domestic and regional markets;
  • High logistics costs;
  • Highelectricitypricesandotheradministeredcharges;
  • Difficulty of access to fairly-priced scrap metal is a threat to new and future mini-mill investments (global trends are moving towards more profitable modern mini-mills).

An interdepartmental task team was established in 2017 to develop a short-term framework which sets out the criteria against which a transparent negotiated pricing agreement can be evaluated, approved and monitored. The target is medium to large industrial consumers supplied by Eskom or a municipality – aiming to provide qualifying consumers with access to lower electricity prices for a period of up to 24 months.

Given the current energy demand-supply situation, the proposed short-term framework is a positive initiative for energy-intensive users. While the intention is to transition to higher levels of value-addition and reduce our dependency on resource-based energy and capital-intensive industries, the smelting and refining stages are required to move to higher levels of value-add with important backward/side-stream linkages.

The following interventions are in progress:

  1. Silicon Smelters Pricing Framework Implementation – implementation of the pricing framework for silicon smelters.
  2. Approval of short-term framework for energy intensive users – preventing the closure of more smelters, refineries and foundries through approval and implementation of the broader pricing framework for industrial customers.
  3. Long-term policy, programme and project interventions – aligning electricity provision with industrial policy: pricing, access to the grid, quality of supply and procurement.

Key Milestones

2018/19 Q1-Q4:

2018/19 Q1-Q4: 2018/19 Q4:

Determine and monitor monthly steel pricing in accordance with the agreed flat steel pricing agreement and monitor all commitments agreed with industry. Submit reports to ITAC Steel Committee.

Monitor roll-out of Downstream Steel Competitiveness Fund through the IDC-led steering committee.

Annual Report assessing the impact of all support measures (tariffs, designation, incentives) and reciprocal commitments (jobs, investment, pricing); submit recommendations for adjustments where required.

Lead departments/agencies: the dti, EDD, ITAC, IDC Supporting departments/agencies: NT

1.2 Medium term interventions

Nature and purpose of the intervention

The effects of the global steel crisis have been severe as miners, primary steel mills and downstream manufacturers struggle to sustain jobs and invest in new capacity. The impact of the crisis is exacerbated by the fact that the steel industry in SA faces the following deep challenges:

Targeted Outcomes

A re-built, globally competitive SA steel industry that supports and balances the interests of both upstream and downstream sectors.

In the medium term, mass transportation initiatives in the metros and by major fleet owners offer an opportunity for the country to introduce fuel cell-based transport solutions that will help reduce GHG emissions.

The dti/IDC study on fuel cell opportunities in the public transportation sector was completed in June 2017, laying out the proposed activities related to the public transportation sector which could stimulate the required demand for the localisation of fuel cells in SA. The action plan suggests that:

Key Milestones

2018/19 Q2:

2018/19 Q3: 2018/19 Q1-Q4:

Short- to medium-term electricity pricing framework implemented for steel and other energy-intensive users.

Chrome export tax proposal submitted.

Trade policy measures implemented (rebates, “other” products, trade remedy and customs duty increases).

 

 

 

ZCE Sept. FeSi contract down but SiMn up

The growing threat of a major trade war between the US and China has frozen the ferroalloy market with prices at a standstill. The ZCE’s September ferrosilicon contract traded down rmb 38 to rmb 6,440 per mt on 253,274 contracts changing hands while the silicomanganese contract rose rmb 54 to rmb 7,976 per mt on 196,790 contracts.

Jefferies: EU steel imports, past import growth faces a nearing of safeguard quota reality

Key Takeaway

The first month in a post-232 world saw April EU imports of finished steel rise +5% MoM from a strong March figure and +14% YoY. With an upward trend taking shape calls for immediate EC action are growing louder, and most parties expect safeguard measures in July. We estimate EU product-specific quotas could cut imports by c.5.0Mt (-16%) vs YTD trend, providing needed relief in pressured stainless and long carbon while supporting price upside for coated sheet.

 

Steel Imports Increase Further from Elevated March Levels. EU imports of finished steel in April increased +5% MoM (daily basis), and +6% vs record quarterly average in 1Q18 (See Exhibits 1-3). Finished imports were up +14% YoY and +10% YTD in April, with disparate trends by product category. On the flat side (+7% MoM; flat YTD), plate imports continued to recede (-21% MoM; -13% YTD), offset by pressure to CRC (+20% MoM; +4% YTD), and coated from a sequential perspective (+18% MoM; -15% YTD). HRC imports (+1% MoM; +10% YTD) remained at high levels as resurgent S. Korean and Iranian volumes helped offset a sequential decline from Turkey (See Exhibits 12-17). Finished long imports declined vs the record high reached in March but continue to stand out as the most notable pressure point in carbon at +73% YTD (vs flat products unchanged YTD), as evidenced by rebar volumes (-22% MoM; +110% YTD). Semis noticeably rebounded (+28% MoM; +17% YTD) but remain below their six-year high in January (-9%).

 

Stainless Imports Stand Firm at Monthly Record. April imports of finished stainless were unchanged on a daily basis from their March record, but remained +30% YoY and now stand +16% YTD, reflecting stainless producers’ recent commentaries on rising import pressures. CR stainless imports (+12% MoM; +37% YoY; +26% YTD) stand out as April’s most worrying piece of data. While carbon steel imports have increased, there has been little direct price impact to date. However, a flurry of headwinds for stainless, highlighted by rising imports, have pressured EU base prices (-€70/t since Jan). OUT1V, which was the loudest voice calling out the import threat in recent months, has been more optimistic of late noting potential price improvements from expected EU safeguard measures (Link to note).

 

Import Arb Narrowing; Deliveries to Decline into Summer. Reassuringly, one of the main reason no preliminary safeguards have been adopted to date is that imports have failed to broadly damage the EU steel market, with import offers at little discount to domestic prices. As of June, the discount for imported HRC into N European ports declined to €20/t from €35/t in early May. With the import arb narrowing, import offers have remained uneconomic and reportedly failed to incentivise new orders, aided by current extended lead times and uncertainty on the form/timing of safeguard quotas/tariffs. Traders at a recent industry conference noted they expect imports to fall meaningfully into summer reflecting recent months of low orders (Link to note).

 

2002-Style EU Safeguards to Bring Relief and Opportunity into H2. In our base case, we assume EC safeguard measures lead to product-specific tariff-rate-quotas in-line with 3-year average import vols, similar to policy used in 2002. On this basis, safeguard quotas could drive a meaningful reduction in EU finished steel imports from their elevated annualized 2018 and 2017 levels by c.5Mt (-16%) and c.0.8Mt (-3%), respectively. Key quota winners: 1) rebar capped -36% below 2018 YTD run-rate, 2) stainless capped -25% below 2018 YTD, and 3) coated sheet capped -21% below 2018 YTD, providing potential price upside for all products (See Exhibits 8-9).

 

Coverage Implications. Across our Euro coverage, SZG (Hold) and SSAB (Buy) have max exposure to HRC; SZG and VOE (Buy) max exposure to plate; TKA (Buy) and VOE max exposure to galv; and OUT1V (Buy) and APAM (Buy) max exposure to Euro stainless.
 
Click here for full PDF version: https://javatar.bluematrix.com/pdf/S9hqvzkn?id=apryan2733@gmail.com

 

Battle over South African chrome ore reignites

As expected the comments on the possibility of a chrome ore tax has triggered many responses. One came from a frequent contributor:

I guess now the question is 30% or 20%. Not about, would it be done? When Michelle Taylor, Tharisa COO, said last November in the ICDA conference in Johannesburg, “South Africa is, without doubt, an irreplaceable producer of chrome ore globally”, it reflects how even a Chrome Ore producer would look at an Export Tax. Now, the issue is that of the Department of Trade and Industry with the new Industrial Policy Action Plan (IPAP 2018/19-2020) and not about any Smelter. For far too long the narrow stance of an Export Tax dislocating the Chrome mining and affecting 17500 jobs has got far too much of importance than it deserves. This has resulted in international/national level absurdities in the past, which is only increasing. For example (1) Eskom has troubles with excess capacity, low demand, high tariffs and is perennially on the verge of bankruptcy or perennially handholding the exchequer.  (2) The country itself hasn’t kick-started basic industry (steel, stainless steel related,  upstream/downstream or even FeCr) which is required for a developing country. This has led to a larger scale of unemployment. (3) China has started exporting plants, instead of products – as a long-term phenomenon. The “absurdities” have been magnified with this “phenomenon”, recently, by an in-your-face kind of episode with Indonesia replacing 10% of Global Stainless Steel capacity via the Chinese; Gujarat getting a new plant from the Chinese, Zimbabwe getting investments from the Chinese. All the while, South Africans protecting their Chrome Ore industry and 17500 jobs and probably protecting the supply chain of the investments in Indonesia and in Gujarat 🙂 This is so brilliant. Not tenable anymore. The new president is much more business-like and China’s resistance has weakened too, because of pollution and consequent plant exports.

As a side note: I just saw yesterday that a trader in Switzerland thinks Q3 EU Benchmark should be 10-15% down from Q2’s. So, am not so sure, who really requires what.

 

My comment, its’ not so easy to write off 17,500 miner jobs and replace them with a few hundred smelter jobs IF new plants are being built. Tharisa is a European based company, not South African, even though its assets are in South Africa. And, probably a majority of its shareholders aren’t South Africa and they will get most of the benefits. As for Eskom, it as a surplus now but just a few years ago, it was a deficit. The country has a dismal record for power generation. And, somehow I don’t think anyone is going to build a new stainless mill in South Africa either.

Could South Africa be considering an export tax on ore? Why?

The idea of a export tax on South African chrome ore is again making the rounds after going nowhere a few years ago. While the fully integrated miners, most notably Glencore and its lap dog Merafe, were the principals behind the previous attempt, and it failed one for a couple of very important reasons. None of the South African ferrochrome producers are owned by South Africans except Merafe which owns a 20.5% share in Glencore’s chrome operations.

On the other hand, many of the miners are South Africans who depend on ore exports to live and anything that is disruptive to their export sales will be opposed.

There is also the question of whether the export tax will be implemented to raise revenue for the government and God knows the South African government is broke. If that is the case, the export tax wouldn’t have to be high.

However if it is too high, the South African miners would lose the export market and be forced to sell to the domestic, e.g. foreign, South African smelters at non competitive prices. A no brainer as Zimbabwe discovered.

Finally, any export tax on ore from South Africans will raise all export prices for all supplies. However, in the case of South Africa, the money will go to the government while other miners will pocket the money while increasing output.

Jupiter still living off Tshipi’s good fortune

Tshipi’s operations continue to exceed plan with annualized production and sales for the first three months of FY2019 exceeding the 3.3-million mtpy target. As a result of the strong operating performance of Tshipi, the robust manganese price (currently around $5.50 per dmtu, FOB), along with FOB cost of production at around $2.20 per dmtu, has resulted in stronger than budgeted cash generation.

Tshipi’s cash is forecast to reach ZAR2-billion by the end of August 2018, based on sales concluded till July 2018. Accordingly, Tshipi’s Board has resolved, subject to no adverse developments, to distribute ZAR1.5-billion to its shareholders in September 2018. Jupiter accordingly expects to make a healthy first half-year distribution to its shareholders in September 2018, equivalent to the cash received from Tshipi, well in excess of the 70% distribution policy stated in the company’s prospectus.

Marginal drop in US steel production last week

US raw steel production was 1,740,000 net tons in the week ended June 16, 2018 while the capability utilization was 74.2%m, according to the AISI. Production was down 0.4% frome the same 2017 week when output was 1,747,000 net tons while the capability utilization was 74.9%. Production for the week ended June 16, 2018 was down 0.7% from the previous week ending June 9, 2018 when production was 1,753,000 net tons and the capability utilization was 74.8%.

Adjusted year-to-date production through June 16, 2018 was 42,061,000 net tons at a capability utilization rate of 75.4%. That is up 1.7% from the 41,344,000 net tons during the same 2017 period when the capability utilization was 74.4%.

Jefferies breaks down Outokumpu’s FeCr financials

In its report (I published the summary with the link to the full report) Jefferies predicted that Outokumpu’s ferrochrome production would increase to 520,000 mt in 2019, up from 489,000 mt this year and 415,000 mt in 2017. Jefferies said the adjusted EBITDA per mt would be E392 in 2018 and E292 in 2019 while the EBIT per mt would be E152 in 2018 and E119 in 2019. In 2017, the unit’s EBITDA per mt was E523 and its EBIT was E187.

GSM stock settles close to $9 per share, down almost 4% today

GSM/Ferroglobe’s stock fell another 3.59% to $9.01 per share today, the lowest level since 2017.

Silicones added to the USTR’s list of Chinese commodities subject to a 25% duty

President Trump went through with his threat to impose $50-billion against additional Chinese imports. In addition to the already announced material, the USTR proposed a new 25% ad valorem duty on Chinese imports of primary silicones. Its not official yet and the USTR is asking for comments on whether to add silicones.