LONDON, July 14, 2020
LONDON, July 14, 2020 /PRNewswire/ -- COVID-19 is having a profound impact on the mining sector, financial markets, and the global economy. The pandemic is causing major moves in foreign exchange markets. For commodity-based currencies, such as the South Africa Rand (ZAR) now at multi-year lows against the US dollar, these fluctuations can have major implications on the profitability of producers. This Insight will examine what fluctuations in foreign exchange rates (FX) mean for the chrome market.
Dollar vs. Rand, a double-edged sword
Before the impact of COVID-19 in early 2020, the South African Rand depreciated due to various issues in the South African economy. However, as COVID-19 spread globally, the impact of the pandemic on South Africa was evident, and the rand weakened further. In early April, South Africa saw a deluge of downgrades from credit rating agencies such as Fitch. South African government bonds have been relegated to 'junk status', and South African lenders' ratings have been downgraded to sub-investment grade. Overall, the outlook for the South African economy is negative, with ongoing recession, troubled loans to state-related entities like Eskom, and further pressure from COVID-19.
South Africa is the main source of chrome ore for Chinese FeCr smelters, with around 1.0-1.5 Mt of ore exported every month. In 2019, South Africa supplied 12.5 Mt of chrome ore to China or 80% of all Chinese chrome ore imports. Chinese smelters have gradually ramped up utilisation rates over the last three months, boosting ore demand. Chinese smelters have ramped up as COVID-19 infection rates were brought under control and because of increasing stainless steel production rates, up 5% m/m and 22% q/q.
Yet, the spread of COVID-19 has hit other regions hard. Lockdown measures in key chrome ore producing regions has squeezed supply out of the market. We estimate around 2-3 Mt of chrome ore production has been lost this year due to lockdown measures being enacted in South Africa alone. This tightness can be seen in April's total of chrome ore exports to China from South Africa, which were 265,878 t, or a 60% m/m fall. This is the lowest monthly total seen since December 2011. The South African government previously announced that chrome mine utilization rates were permitted to return to 50% in May and 100% in June, but chrome mine ramp-ups have been slow due to the implementation of new safety measures.
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