China’s Ferrochrome Production: Altering the Global Balance – by Jeff Dong (The China Analyst – October 2012)

China owns less than 1% of the world’s chrome reserves. However, thanks to strong growth in stainless steel demand and relatively cheap production costs, China’s domestic ferrochrome capacity has steadily increased over the past decade, with China overtaking South Africa in the first half of 2012 to become the world’s largest ferrochrome producer.

Yet, the lack of both upstream and downstream capabilities, along with looming chrome export restrictions, rising domestic production costs and stricter environmental controls, is putting Chinese ferrochrome producers in an increasingly precarious situation. To overcome these obstacles, Chinese ferrochrome producers will continue going overseas to gain control over upstream resources, significantly altering the global balance of the chrome ore trade. By Jeff Dong

Reviewing the remarkable growth in China’s demand for commodities and its domestic production during the last decade is always eye opening, with the steel industry standing out as the prime example. In 2011, China produced 61% of the world’s total steel output, and consumed most of that production domestically. This is even more astounding given China’s domestic iron ore supply meets only 40% of domestic demand.

In order to delve deeper into the stainless steel industry one must examine ferrochrome, a main ingredient used in steel production. In 2011, China consumed 3.5 million tons of high carbon ferrochrome, more than half of which was produced domestically. With China having almost no domestic chrome reserves, nearly all of the ferrochrome produced in China relies on imported chrome. From 2003 to 2011, though China’s production of high carbon ferrochrome increased by nearly 10 times, from around 420,000 tons to over 2.5 million tons, this still cannot meet domestic demand.

With China’s expanding production capacity, the global chrome mining sector has boomed. Rising demand for stainless steel and subsequent increases in production capacity were the main drivers behind many new chrome mining projects. From 2005 to 2011, global annual chrome output increased from around 18 million tons to 24 million tons.

Without a doubt, South Africa (SA) has been the most important source for China’s chrome imports; this relationship is only becoming stronger with the wider utilisation of chrome pellets to address the sizing issue of SA chrome ore. Apart from SA, Turkey, Iran, India, Oman, and Pakistan are all among the top exporters of chrome ore to China.

China has several key advantages in ferrochrome production including low electricity costs, an adequate supply of relatively cheap labour, a well-established transportation network, as well as low capital investment costs for new plants. While many would argue China’s ferrochrome industry will unlikely grow at the same rate for the next five to 10 years, and may even downsize, China is currently taking a significant share of the world’s ferrochrome production.

As a matter of fact, thus far in 2012, China’s domestic ferrochrome production is still increasing steadily, even amidst worsening prospects for the global economy. At the same time, chrome ore imports continue to rise, while ferrochrome imports are decreasing. Traditional ferrochrome producers such as SA are inevitably facing stiff competition.

South African ferrochrome – will export restrictions help?

While the world has witnessed China’s share of global ferrochrome production surge from less than 5% in 2001 to 33% currently, SA producers are suffering from sub-par performances. Strong competition from China, according to many insiders, is the main challenge facing SA producers. This is particularly startling given China holds very little domestic chrome reserves. South Africa, which owns a majority of the world’s chrome reserves, are feeding the mills and furnaces in the Far East. To address this issue, one can put forward the ‘new colonialisation’ approach in exploiting Africa for its mineral resources in raw material form, leaving local value-added industries in a tough situation, or one can examine this issue through a more analytical lens.

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