Merafe’s profit surges despite drop in sales

Merafe Resources, the junior partner in a chrome joint venture with Glencore, reported a hefty inventory build-up as production exceeded sales, while global demand for the stainless steel ingredient slowed and the market stayed under pressure.

The joint venture is one of the world’s leading sources of ferrochrome and chrome ore, and it operates in SA.

Merafe said revenue attributable to the company increased 7% to R2.58bn for the six months to end June compared with that of the same period a year earlier. Profit increased to R486m from R57m, allowing the company to declare a 3c per share dividend. Net debt fell by half to R208m.

Stronger prices in the first half of the year offset a 28% drop in sales to 157,000 tonnes for Merafe’s account, while a stronger rand against the dollar eroded the revenue line.

Inventory levels now stand at up to five months’ worth of sales after a 10% increase in output to 216,000 tonnes of ferrochrome.

“Overall, the second quarter of 2017 has seen a marked pullback in the market following the exceptional heights reached during the recovery in the second half of 2016. The volatility witnessed is symptomatic of the current need for a flexible approach, with a focus on operational efficiency and strict cost discipline,” Merafe said.

The ferrochrome price has fallen sharply since reaching a high at the end of 2016 and was settled at $1.65/lb in the first quarter of the year. It fell to $1.54/lb in the second quarter and $1.10/lb in the third.

OVERALL, THE SECOND QUARTER OF 2017 HAS SEEN A MARKED PULLBACK IN THE MARKET

“The global chrome market continued to be oversupplied throughout the second quarter of 2017, which led to significant downward pressure on pricing into the third quarter,” Merafe said. Stainless steel output was expected to grow 1.6% in 2017 to 46.3-million tonnes.

Looking ahead, stainless steel production was expected to average 4.3% a year up to 2021, “indicating strong demand prospects for chrome”.