Alloys

Markets

Ferrochrome and Vanadium

The first half of 2008 was characterised on the one hand by robust supply demand fundamentals driven by high stainless steel melt production, which steadily increased from the beginning of the year and on the other hand by supply-side cutbacks resulting from power restrictions imposed by South Africa’s power utility Eskom. Ferrochrome base prices remained strong throughout the year and the average European benchmark price for 2008 of 175.8¢ per pound was 97% higher than in the previous year.

In the first half, global ferrochrome production reached 2 million tonnes per quarter for the first time, 6% higher than for the same period in 2007. However, a typically slow third quarter was exacerbated by lower steel production in China during the Olympic Games and was followed by a dramatic fall in demand during the fourth quarter as the global financial turmoil impacted all major commodity markets. Between July and December 2008, the European benchmark ferrochrome price fell by 9% while the spot price fell by 53%.

The supply-side response to weaker demand has been rapid and significant cuts were announced by all the major ferrochrome producers during the fourth quarter of 2008. Stainless melt growth will be significantly below its long-term average for the second consecutive year, with global production for 2008 estimated to have declined by approximately 11% to 25.5 million tonnes.

Exports of South African chrome ore increased significantly as a result of the power restrictions in the first half of 2008 which constrained domestic beneficiation. As a result of the increased availability of ore and robust ferrochrome prices enabled previously uneconomical capacity to restart in various regions, including China and India. The increased supply of ferrochrome coupled with deterioration in demand resulted in the ferrochrome spot price softening to levels below the prevailing international contract price towards the end of 2008.

The Bokamoso pelletising project at Wonderkop in South Africa reached full production capacity during 2008, exceeding name-plate capacity by more than 15% for three consecutive months

Similarly, demand for vanadium was robust in the first half but weak in the latter part of the year. Strong demand and severe supply disruptions in China and South Africa during the first part of the year resulted in prices more than doubling. The impact of the global financial crisis from September caused the ferrovanadium price to decline by 71% from its highs earlier in 2008, to end the year at $26.50. The average price for 2008 of $61.18 per kilogram of vanadium was 65% higher than the previous year.

Outlook

Planned expansions to South African ferrochrome capacity in 2008 were largely deferred due to the ongoing power constraints. These deferrals have been further extended in South Africa and globally, in response to the current economic slowdown.

The outlook for ferrochrome and vanadium remains, however, robust in the medium to long term. In the medium term, steel production is expected to increase from current low levels, supported by major economic stimulus plans, which include significant investment in infrastructure. Stainless melt production in 2009 is expected to decrease by around 3% to approximately 24 million tonnes. As global demand recovers, production cutbacks coupled with the deferral or cancellation of capacity expansions will reduce oversupply and will again place upward pressure on prices.

Platinum Group Metals

Strong demand in recent years for platinum group metals (PGM) has been driven by growth in automobile production and tightening emissions legislation creating increased demand for catalytic converters, while tight supply was due largely to mine underperformance at a number of producers. In early 2008, platinum and rhodium prices rose to all time record levels of $2,275 and $10,100 per ounce, respectively, in response to the South African power constraints, adverse weather conditions and temporary mine closures due to safety issues.

Demand for platinum from the auto catalyst industry fell in response to weakening global economic conditions, particularly in the fourth quarter of 2008 as the severity of the global financial turmoil became apparent. The platinum price traded down to parity with gold for the first time since 1997. From the record highs reached earlier in the year, platinum and rhodium prices decreased by 61% and 88% respectively, ending the year at $899 and $1,250 per ounce respectively.

Weaker demand is leading a number of PGM producers to scale back production and to defer planned expansions.

Outlook

Despite the current economic situation, the medium to long-term outlook for PGMs remains positive. Recent deferrals of capital projects are likely to lead to more severe supply-side constraints, while demand is expected to improve in line with economic conditions and in response to the stimulus packages introduced by major countries, the tightening of emissions legislation globally and increased penetration of diesel- powered vehicles in Europe and, in particular, the US.