Alloys | Chrome
Market
Global ferrochrome demand remained robust during 2004, increasing to approximately 5.5 million tonnes, compared to 5.2 million tonnes the previous year. Continued growth in the production of stainless steel, which accounts for around 80% of global ferrochrome consumption, was the main driver for this increase. In China stainless steel melt grew by around 24% during the year, strongly underpinning the higher demand.
Strong stainless steel melt growth was also evident in Europe, estimated at around 8.9 million tonnes in 2004, an increase of 6% versus the previous year, in South Korea where melt grew by 16% to 2.3 million tonnes per annum and in the United States, with an annual increase of around 8% to 2.4 million tonnes.
Quoted European base prices for ferrochrome increased by almost 30% from 57US¢ per pound in the first quarter of 2004 to 73US¢ per pound in the final quarter of the year. Ferrochrome prices were supported by strong demand, with price increases also reflecting significant increases in cost drivers experienced by producers during the year, including a stronger South African rand, higher metallurgical coke prices and rising sea freight rates.
The outlook for ferrochrome demand and prices for 2005 remains strong, with stainless melt forecast to continue to increase by around 9% in 2005 and no meaningful increase in ferrochrome production capacity expected before Xstrata's Lion Project comes on stream in 2006.
Operations
Turnover in 2004 increased by 74% from the previous year, predominantly driven by higher prices. EBIT improved by over 140% to $149 million.
2004 was a challenging year for all major South African producers from an operating perspective, given the dramatic rise in the cost of key raw material inputs during the period and a decline in metallurgical efficiencies, due principally to transformer failures and electricity supply reliability issues, together with a shortage of quality chrome ore. The sharp rise in the cost of reductants (primarily coke) had the greatest negative impact of approximately $43 million on costs in 2004, offset to some extent by the success of Xstrata's coke reduction programme which resulted in savings of around $11 million. Despite these setbacks, unit costs increased by only $17 million in real terms and higher received prices drove EBIT up by over 140% to $149 million, which more than offset the impact of a strong South African rand.
Xstrata has continued to enhance its relative cost competitiveness by increasing ore agglomeration capacity, securing a captive supply of reductants, improving the energy efficiency of capacity expansions and aggressively pursuing a general reduction in unit costs.
Challenging geological conditions at the Western mines reduced mine output and lowered head grades during the period, giving rise to the shortage of quality chrome ore mentioned above. An open cast mining section was opened in the latter part of 2004 to produce 80,000 tonnes ROM of chrome ore per month. This initiative is expected to make a significant contribution towards alleviating ore supply and associated quality difficulties in 2005.
As announced in November 2004, the two Samancor joint venture furnaces at Wonderkop were temporarily closed on 1 December 2004 for routine maintenance. It is envisaged that these furnaces will only be returned to production around August 2005, due to the elevated power costs that are specific to these furnaces. The closure had no material financial implication for Xstrata in 2004 and is not expected to impact 2005 financial performance materially.
Developments
The establishment of the Xstrata-SA Chrome Pooling and Sharing Venture (the "PSV") in July 2004 is the first black economic empowerment transaction for the Group and represents a considerable step forward in achieving compliance with the New Minerals and Petroleum Resources Development Act in South Africa. The PSV reinforces Xstrata's position as a market leader with total managed annual capacity increasing by 240,000 tonnes to a total of 1.4 million tonnes per annum, excluding the existing Joint Venture with Samancor.
The integration of the two businesses has been seamless, with many synergies materializing in the first 6 months of the venture. Production levels at the Boshoek plant have increased by over 20% since Xstrata assumed day to day operating responsibility in June 2004 to an average of 650 tonnes per day and it is expected that these higher production rates will be sustained into 2005. Xstrata has an initial 89% participation in the EBITDA generated by the PSV, which decreases to 82.5% over the next few years as Merafe's participation increases. Merafe's shareholders include Royal Bafokeng Resources and the Industrial Development Corporation of South Africa.
In January 2005, Xstrata Alloys acquired the African Carbon Group, a char producer situated in the Mpumalanga province in South Africa. The purchase extends Xstrata Alloys' strategy to secure its supply of reductants, and to gain greater control over key inputs into the ferrochrome manufacturing process. Other reductant supply alternatives continue to be actively pursued.
Construction started on the 360,000 tonnes per annum first stage of the Lion project in late December 2004, following the finalisation of the environmental impact study. Initial production is expected to commence in the second half of 2006, ramping up to full production in the first half of 2007.
During 2005 a feasibility study will be undertaken to evaluate retro-fitting pre-reduction pelletising technology to the Wonderkop operations as part of the ongoing focus on cost reductions.
Alloys |Vanadium
Markets
The continued robust growth in carbon steel production, estimated at approximately 8% for 2004, combined with increased demand for high strength and speciality steels, supported an improved vanadium market. Global vanadium supply rose 9% year on year, principally from higher secondary production. Producers did not anticipate the strong increase in demand, and struggled to keep pace with market growth for vanadium units. As a result, the average published price for ferrovanadium in 2004 rose to around $27 per kilogram, a significant increase compared to recent years and the tight supply of vanadium has led to further price increases into 2005.
The short-term outlook for vanadium demand looks healthy due to continued strong carbon steel production, but is unlikely to be sustainable over the longer term, with prices expected to revert towards historical levels. Despite an improved short-term outlook for demand, supply of vanadium continues to be unpredictable. Whilst some supply was taken out of the market with the closure of both Vantech and Windimurra during 2004, the vanadium market continues to be characterised by a large number of secondary producers, whose production decisions are largely independent of underlying market demand.
Operations
Turnover increased by 89% to $134 million compared with the previous year, while EBIT increased to $29 million. Increased profitability was principally driven by higher sales prices, despite the effects of US dollar weakness and marginal increases in real unit costs during the period. Vanadium pentoxide volumes were lower than the previous year, due to the suspension of production at Vantech at the end of December 2003 and subsequent permanent closure of the site, as well as the permanent closure of the Windimurra vanadium operation, which had been on care and maintenance since production was suspended in February 2003.
Despite an unscheduled maintenance shutdown at Rhovan in January 2004 that negatively impacted throughput, record production levels were achieved for the year. The vanadium trioxide (V2O3) plant and furnace was successfully commissioned during the year and has materially reduced aluminium consumption at Rhovan.
Developments
The permanent closure of Xstrata's Windimurra operation in Western Australia was announced in May 2004. The decision to close the plant was taken following a thorough assessment of the operation's ongoing financial viability, taking into account the estimated cost and timeframe of returning the plant to operation, the expected cost of production and Xstrata's assumptions regarding the long-run vanadium price and Australian dollar exchange rate. Xstrata has recently upgraded its environmental rehabilitation and closure team to ensure a timely and fully compliant closure of the Windimurra asset. This is being done in close consultation with the relevant government departments and key stakeholders in Western Australia. Leases on the Windimurra resource will be relinquished to the Western Australian Government as soon as this process is complete, or earlier if the Government wishes.
In November 2004, Xstrata announced the permanent closure of its Vantech vanadium operation in South Africa, which had been put onto care and maintenance in early 2004, following depletion of the Kennedy Vale deposit in December 2003. The decision to close the plant was taken following a thorough assessment of the financial viability of opening a new mining area to exploit the Steelpoortdrift deposit. Rehabilitation of the site is currently underway.