What does Covid-19 mean for South African Chromium supply and logistics?

Ore and alloy operations suspended as South Africa enters lockdown
Mining has been severely affected this week by respective lockdowns in South Africa and India.

On 23 March 2020, Cryil Ramaphosa, the President of South Africa, announced that at 23:59 26 March 2020 South Africa will go on a 21-day lockdown, in response to the escalating infections of Covid-19 in the region, halting all non-essential operations. CRU understands that mines and smelters will now all be put into ‘care and maintenance’ and that production will be stopped for that period.

While many miners are holding stocks, Transnet, a large South African rail, port and pipeline company, has issued a statement that neither trains nor bulk terminals in ports will be working due to a lack of labour. However, there is no clear signal what this means for vessels currently under loading operations in port, and if they will be allowed to finish. Furthermore, some miners have port stocks in Maputo, Mozambique, and as the virus spreads to Mozambique a lockdown could apply here in the coming weeks. Whilst, trucking to and from the border of South Africa is now being halted.

South Africa is the main source of chrome for Chinese FeCr smelters, with an average of 1.0-1.5 Mt of ore exported every month. In 2019, South Africa supplied 12.5 Mt of chrome ore to China or 80% of all Chinese imports. In China, smelters are gradually ramping up utilization rates as the Covid-19 curve has flattened. Chinese stocks of chrome ore at ports reached 4 Mt in late February due to disruptions in labour and logistics caused by Covid-19. However, stocks have gradually fallen to levels of 3.8 Mt since. A month without South African material will bring stocks down to levels around 3Mt. However, there is lots of ore on the water, which could minimize the decline over the next few weeks.

As South Africa steps up its efforts to combat Covid-19, Chinese chrome ore port stocks can only support the Chinese FeCr industry for 12.5 weeks at current operating levels. If disruptions to supply are elongated after the 21 day lockdown, it will pose an issue for FeCr smelting in China.

Disruptions will support near term prices for ore
Despite a 15% m/m fall in UG2 42% prices, there will be some short-term price support as Chinese FeCr smelting starts to ramp up. The SA lock down announcement and subsequent force majeure notices issued by mining companies -Assmang- will no doubt trigger panic buying from China. CRU has recently heard that due to the lockdown in South Africa, many Chinese smelters have lifted their offer prices to end users.

While transactions for port stocks of ore have not been heard yet, we may well see prices in the short-term spiking to levels above $140 /t for seaborne material. Currently, the market remains illiquid as participants are trying to price in the impact and understand the current and future supply scenario.

Demand outlook increasingly bearish
High stainless stocks and weakening end user demand has softened our outlook for prices in the medium term. The Covid-19 pandemic continues to severely disrupt the supply chain and hit stainless demand. Key chrome using sectors, such as automotive and construction in China, are under pressure. CRU is forecasting a -10% fall in automotive production and a -2% decline in construction output in China. However, as the Covid-19 pandemic has spread globally, the outlook for demand in the rest of the world has weakened also. We believe that this year will see economic recessions in key markets and sharp declines in automotive production globally.

So, we may well see prices in the short term spiking to levels above $140 but the likely hood is that once South African production comes back on line, the correction could likely be as steep on the downside as it has been on the upside.

Prices likely to lose gains after supply disruptions ease
Near term price support could be compounded by a further weakening of the Rand. As we have already seen this year, while the CIF price in USD has deteriorated, the same has not always been the case for the Rand equivalent. However, high Chinese stainless stocks and weakening end consumer demand globally means that chrome ore gains are likely to be short lived as the issue is about expectations for the medium term. Will there be a strong H2 bounce-back or will the spread of Covid-19 elsewhere subdue the recovery in China? Our view is the latter as global consumer spending and thus demand growth is likely to decline.