JSE-listed ferrochrome producer Merafe says its results for the first half of the year were impacted not only by Covid-19 but an already fragile operating environment.

A slowdown in global economic activity has contributed to not only reduced volumes of commodities sold, but also to lower realised cost, insurance and freight (CIF) ferrochrome and chrome ore prices.

Merafe recorded a loss after tax of R961-million for the six months ended June 30, compared with profit after tax of R165-million in the prior comparable period.

Impacting on the company’s profits were depreciation of R100-million, the impairment of assets of R1.3-billion, net financing income of R4.1-million and a net taxation income of R318.2-million.

The taxation income includes an income taxation expense of R4.5-million and a deferred tax credit of R322-million, which arose primarily as a result of temporary differences on property, plant and equipment, as well as those relating to provisions and accruals.

A weaker average rand:dollar exchange rate provided some cushion to the company’s losses.

Owing to the company's key focus areas, especially during these challenging times, being working capital management and cash preservation, no interim dividend has been declared.

In the six months under review, Merafe posted a basic loss a share of 38.3c, compared with basic earnings a share of 6.6c reported for the six months ended June 30, 2019.

Headline earnings a share were 1.1c in the reporting period, compared with headline earnings a share of 6.6c apiece reported in the prior corresponding period.

Earnings before interest, taxes, depreciation and amortisation amounted to R157-million in the reporting period, compared with R435-million in the prior corresponding period. This is after accounting for corporate costs of R13.2-million.

Revenue declined by 16% year-on-year to R2.33-billion in the six months under review, while net asset value decreased by 31% year-on-year to R2.31-billion.

The company further recorded a 42% decrease in production for the six months under review to 120 000 t, compared with 206 000 t produced in the prior comparable period.

Merafe has advised that operations have resumed fully at the Lion smelter, the Kroondal and Eastern Chrome mines and UG2 plants, as well as the Boshoek and Wonderkop smelters.

The Lydenburg smelter, however, will remain on care and maintenance indefinitely.

Merafe says Covid-19-imposed lockdowns in key global stainless steel producing regions in the first half of the year resulted in production curtailments of 11% year-on-year.

While Chinese stainless steel production in the first quarter of the year plummeted to levels last seen in early 2016, it recovered strongly during the second quarter of the year, backed by government infrastructure spending.

As a result, Chinese stainless steel production is expected to end the first half of the year down 8%, compared with the first half of 2019. Non-Asian stainless steel production remained mostly stable during the first quarter of the year, owing to the delayed onset of Covid-19.

However, as national lockdowns took effect and demand rapidly reduced, the rest of world’s stainless production dropped quickly during the second quarter of the year, with European production down 18% and US production down 12% year-on-year.

Weak demand and inflated stainless steel stocks outside of China continue to weigh on global stainless steel pricing.

Global ferrochrome consumption fell 8% year-on-year during the six months under review, with global supply experiencing a more severe 20% drop during the same period.

Production in South Africa was particularly impacted, falling 50% in the second quarter, not only because of Covid-19 cutbacks, but also owing to the ongoing cost pressure, including unsustainably high electricity pricing.

Chrome ore exports from South Africa were down 16% year to date in May, compared with the same period in 2019, at 4.8-million tonnes.

Pricing remained subdued during the first quarter of the year, given an oversupply, with the second quarter seeing higher prices owing to concerns relating to South African export volumes – as a result of Covid-19-related supply interruptions.

Despite the current challenges, the Merafe board remains positive about the future prospects of the business, which are supported by industry fundamentals that remain in place.

“While the impact of the Covid-19 pandemic remains a key concern, we have had to review our business to ensure that our operations continue with minimal unplanned disruptions and our growth strategy remains pursued. 

“We will continue to closely monitor the pandemic and market developments, and respond accordingly. In accordance with our strategy, we remain committed to maximising return to our shareholders in the near term  and we will continue to assess opportunities to deliver shareholder value,” Merafe states.