Electricity price hikes crushing vital South African industry

A sustained rise in energy prices in South Africa is threatening to smother an industry that makes a key stainless-steel ingredient and alter supply chains to the US and other nations.

Ferrochrome smelters built over decades — now run by a Glencore venture and Samancor Chrome — are grinding to a halt.

The energy-hungry furnaces consume about 7% of Eskom’s output, but rising tariffs after years of mismanagement and corruption at the utility are forcing companies to shut the facilities. 

Home to the world’s largest reserves of chrome ore, South Africa lured companies with cheap electricity to process the metal close to mine sites, helping add jobs in a country with sky-high unemployment.

But the widespread hit from expensive and often unreliable power supply has upended the ferrochrome sector, resulting in closure of furnaces and shifting the stainless-steel supply chain overseas — mainly to China.

“Electricity is our big problem,” Glencore Alloys Chief Executive Officer Japie Fullard said at a conference on 10 September. “In the absence of a solution, South Africa is going to bleed.”

None of Glencore’s 22 furnaces is operating, while only three of Samancor’s 24 are still running. Glencore’s venture has started discussions to cut thousands of jobs.

Power costs have surged eightfold since 2008, according to the Energy Intensive Users Group, whose members account for about 40% of the nation’s electricity consumption. Eskom also faces competition from private power producers.

Even existing negotiated price agreements with Eskom haven’t been enough to slow the de-industrialisation trend.

The South African ferrochrome industry — faced with electricity tariffs that are 50% higher than China’s and account for as much as 60% of production costs — has lost about 2,000 direct jobs in the two years through 2024, according to the Ferro Alloy Producers Association, or FAPA.

During the same period, its contribution to the economy declined 16% to R62 billion.

Chinese smelters 

South Africa is now supplying more than 80% of the chrome ore demand of Chinese smelters as furnaces at home shut down. 

Ferrochrome production capacity in China has increased 50-fold since the turn of the millennium. It overtook South Africa as the biggest manufacturer of the alloy in 2012.

The slump in ferrochrome production could have ramifications for buyers in other industrial nations including the US, which designates chrome as a critical mineral.

South Africa is the US’s single biggest supplier of both the ore and the metal, which is mainly used in stainless steel, but also plays an irreplaceable role in so-called superalloys used in jet engines. 

In South Africa, the industry could lose 2,500 more jobs at Glencore-controlled operations, Fullard said. “This is not a threat, this is the reality.”

The Glencore-Merafe joint venture has five complexes that process ore into ferrochrome used to manufacture stainless steel.

Since 2020, four of them have been mothballed, and the remaining plant was recently suspended for maintenance.

“We now need to migrate to a process where there’s clarity in terms of what sectors of the economy require interventions from an electricity pricing point of view”, and the criteria for them to qualify for such measures, Eskom Chief Executive Officer Dan Marokane said in an interview.

“Whoever doesn’t pay the full price, someone else is actually carrying the slack.”

In June, South Africa’s government approved a plan to support the ferrochrome industry, by agreeing on new electricity tariffs as well as introducing controls and taxes for exports of chrome ore. Those reforms are yet to be finalized.

“There are plans on the table from the government, but there’s no timeframe, and there are no details yet available about that,” FAPA Chairperson Nellis Bester said at a conference last week. “And we are running out of time.”

Members of the National Union of Mineworkers “were devastated” when the job cuts process was announced alongside ongoing discussions to reduce the price of power, said Livhuwani Mammburu, a union spokesman.

“We want the ferrochrome industry to be sustained.”

Failure to save the smelters will also hit industries that utilise ferrochrome, said Johan Strydom, the chief executive officer of Columbus Stainless, which is the only stainless steel factory in Africa and owned by Spain’s Acerinox SA.

“If I lose the ferrochrome industry today in terms of major supply into stainless steel manufacture, why do I need to manufacture stainless steel in the first place in South Africa?” Strydom said. “We can just import.”