Ashruf Kaka. Picture: FINANCIAL MAIL

Ashruf Kaka. Picture: FINANCIAL MAIL

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A “SUBSTANTIAL” but unspecified foreign investment in a new ferrochrome operation near Rustenburg, FerroChrome Furnaces, was announced last week.

On the face of it, it is good news that South Africa is attracting investment in the midst of a commodities downturn, but there are some puzzling aspects.

For example, why is a big investment being made in ferrochrome manufacture in South Africa when a lack of electricity is constraining existing operations? And why is it being so loudly publicised as an investment “worth billions of rand” while the investors will not specify the amount? It is also curious that the CE of JSE-listed Andulela Investments, Ashruf Kaka, is also CE of FerroChrome Furnaces, though Andulela has no stake in it.

UAE-Dubai based Russian businessman Alibek Issaev is buying 50% of FerroChrome Furnaces in a deal with the Moti family, who are the major shareholders in Andulela through a trust. Issaev declines to reveal the cost of the acquisition or further investments he will make in the smelter, because he says FerroChrome is a private company and there are no plans to list it on the JSE.

Former AngloGold Ashanti chairman Sam Jonah, whose Jonah Capital was a founding shareholder of Andulela but has since exited, is non executive chairman of FerroChrome Furnaces.

Mr Kaka says Jonah has no direct investment in FerroChrome, but he took the position because he was a longstanding friend of Abbas Moti and has a keen interest in this sector.

Issaev’s main business interest is a social media company called Dudu Communications. He says he is seeking international diversification and has chosen to invest in SA because he believes the country has great potential, and he foresees other investment opportunities, for example in supplying Transnet with locomotives.

FerroChrome Furnaces will make low-and medium-carbon ferrochrome, a niche product that commands a premium over high-carbon ferrochrome. Ferrochrome is used in stainless steel.

According to Core Consultants’ latest report, EU benchmark high-carbon ferrochrome prices were settled at US112c/lb for the third quarter, which is 11% weaker than in the second quarter. Low-carbon ferrochrome prices have increased since January and were trading at around 194c/lb-198c/lb in early September, with expectations of higher demand because of improved macroeconomic conditions.

In Russia, low-carbon ferrochrome prices reached 236c/lb-239c/lb in the second quarter as a result of a price war between the two biggest producers in Eastern Europe, Eurasian Natural Resources Co (ENRC) of Kazakhstan and OJSC Chelyabinsk of Russia, Core Consultants say.

ENRC dominates the low-and medium-carbon ferrochrome market and FerroChrome Furnaces intends to challenge its position by being the cheapest producer, Mr Kaka says, through its use of technology, its proximity to raw materials, logistical advantages and the weak rand. For ENRC to install a plant with similar low-cost technology would require time and considerable capital investment.

Most of SA’s ferrochrome production by companies like the Xstrata/Merafe joint venture and Samancor Chrome is high carbon, though Samancor Chrome makes a relatively small quantity of low-to medium-carbon ferrochrome, Mr Kaka says.

South Africa’s place in the global ferrochrome market has been slipping because prices are weak and the local producers have had to idle furnaces to save electricity, which has encouraged exports of raw chrome ore to China. But somehow, despite the electricity squeeze on other producers, FerroChrome Furnaces has managed to secure 34megavolt ampere (MVA) from Eskom and the Rustenburg municipality and is assured that it can secure another 80MVA, of which half will be available at the end of 2015, Mr Kaka says.

FerroChrome will not own or buy a chrome mine. It will use slag from ferrochrome dumps, partly beneficiated chrome ore from Zimbabwe and local chrome ore.

Gert Kriel of advisers Venmyn Deloitte says the company’s use of semibeneficiated ore will make it considerably more energy efficient than companies that process raw chrome ore. The technology being installed is argon oxygen decarburisation and vacuum oxygen decarburisation, which will also make it possible for FerroChrome to tailor the carbon content of the ferrochrome to suit customers’ requirements.

The ferrochrome plant is being built now, with first production planned for early next year. Initial output will be 300000t/year by December 2014, and with a further cash injection output will increase to 420000t over the next two years, Mr Kaka says. The global market is 585000t/year, according to Udo Heck, MD of German-based Metal Partner, and is expected to grow to about 700000t/year, so FerroChrome Furnaces is aiming for a market share of about 60%.

Mr Kaka says FerroChrome Furnaces will create about 7000 jobs directly and indirectly over the next four to five years. Since the plant is fully automated, it is not highly labour intensive, but jobs will be created indirectly in the feedstock and associated industries.