Xstrata-Merafe Cut Ferrochrome Output on Lower Demand (Update2)

NEWYORK, Aug. 4-- Xstrata Plc and Merafe Resources Ltd.'s ferrochrome joint venture, the world's largest producer of the stainless-steel making ingredient, cut third-quarter output after demand fell and power costs increased.

"South Africa cut production in response to higher winter electricity tariffs, but also in response to a decline in demand," Merafe Chief Executive Officer Stuart Elliot said in Johannesburg today. Demand was hit by lower nickel prices during the "traditionally slow" third quarter, the company said. That seasonal weakness in Europe and the U.S. was exacerbated by measures taken by China to slow economic growth, Merafe said.

Globally, the percentage of total ferrochrome plant capacity being utilized fell to about 69 percent in the third quarter from 89 percent in the second, Merafe said. The Reuters/Jefferies CRB Index of raw-material prices fell as much 15 percent this year on concern that the European debt crisis, a withdrawal of government stimulus packages and Chinese steps to curb property prices will slow global economic growth.

While it's "too early" to say whether Xstrata-Merafe will increase output in the fourth quarter, the current slowdown in demand is "short term," Elliot said.

"Continued global economic growth" should contribute to a recovery in demand in the final quarter of 2010 and into 2011, Merafe said in a statement. Global demand should rise to about 8.22 million metric this year, exceeding estimated production of 7.92 million tons, Elliot said.

Return to Profit

Electricity costs doubled in South Africa, the world's largest ferrochrome producer, after an annual average price increase of 25 percent and as premium winter tariffs were implemented by supplier Eskom Holdings Ltd. The country produced 2.2 million tons of ferrochrome last year, or 37 percent of global output, according to Merafe's website.

Earlier, Merafe posted first half earnings of 8 cents a share compared with a loss of 3 cents a year earlier as output and prices both rose in response to demand from the stainless steel industry, the company said.

The Xstrata-Merafe venture plans to build a pelletizing and sintering plant in South Africa at a cost of about 1 billion rand ($137.5 million) by 2013, Merafe said. The project will extend the life of mining operations, save operating costs and tie in with a government push for companies to add value to the metals and minerals they mine, the company said. A sintering plant strengthens metals by heating them.

Merafe, whose share of the venture is 20.5 percent, rose as much as 3.5 percent to 1.48 rand and traded at 1.43 rand by the close of trading in Johannesburg.