May 2012

Eskom buy-back & the FeCr industry

Vince AgnelloCorporate Services

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Hernic participates in Eskom's buy-back

IFM switches off furnaces in power buy-back deal with Eskom

Eskom set to roll out power buy-back pilot this month Eskom buy-backs boost ferrochrome

price

Evraz Highveld signs Eskom buy-back deal, pushes ahead with cogen plant

Eskom pays smelters to shut down

Overall power demand falls, peak pressure rises

Eskom initiatives: • Mandatory Energy Conservation Scheme or ECS (“mandatory load

shedding”)

• Voluntary Energy Conservation Scheme / ECS

• Co-generation

• Demand participation (voluntary ↓ of demand by client, some

comp.)

• Demand response aggregators (incentive programmes)

Eskom supplies ~95% of local power in 2011, Eskom identified a shortfall for 2012/2013, equiv. to 1,000 MW in 2012 – wanted to secure 2,000 MW through buy-backs. Eskom forecast a critical balance during March to May period.

Recent buy-backs globally - Japan, Burma, Australia

Eskom initiatives (cont.): • 133 of top 250 Eskom customers, incl. 96 of key industrial

customers, have signed voluntary ECS commitments to reduce demand by 10% against agreed baselines.

• Eskom hoping to make ECS mandatory as a last resort or “safety

net” (ECS has no penalties, or incentives)

• Co’s with ‘signed-off baselines’ are currently saving on average 6.4%

against their commitments.

•Buy-back rate determined by mutual agreement with customer taking into account business unique operational requirements, incl.:

operational flexibility fixed cost Eskom’s requirement of no job losses with buy-backs Within Eskom cost of electricity production (i.e.. less than the

cost of running open-cycle gas (OCG) turbines) Eskom does not compensate companies for foregone profits.

The “buy-back”:

•Eskom commenced with negotiating & buying back electricity from large industrial

customers in Dec 2011.

•By 9 March 2012 Eskom had signed agreements for ~800 MW buy-backs

Buy-back developments

• It costs Eskom approximately 38c / kWh from a standard power station. OCG

turbines cost of production is approximately ZAR1.40 / kWh. In Feb 2012, OCG

cost rose to ZAR2.50 / kWh.

•National Energy Regulator of SA (Nersa) approved average 16% increase in

Eskom’s tariffs, from 1 April 2012 onwards.

Other recent developments

•Eskom’s top 140 energy users (mostly mining & large industry), consume ~40% of SA’s electricity; of which ~40% is used by smelters directly from grid (effective 16%).

•Eskom's weekly adequacy report shows demand deficit forecast for week of 4 June & 18 June 2012, of between 2,400 MW and 2,100 MW.

Other recent developments (cont)

Source:www.eskom.co.za

Other recent developments (cont)

Source:www.eskom.co.za

FeCr & Eskom• Ferrochrome accounted for ~6% of SA power in 2010

• SA is world largest producer of ferrochrome, ~37% of global output on gross weight basis

• Seven of eight FeCr producers approached by Eskom

• Up to 45% of SA capacity temp. shutdown through buy-backs

•Snowden estimates that total buy-backs are costing Eskom between ZAR500/ MW & ZAR1,200/MW per contract; equivalent to total Eskom cost of between ZAR0.5 Bn and ZAR1 Bn.

Company Plant FeCr furnaces

2011 output (‘000 t)

Production forfeit

(‘000 t)*

Latest status

ASA Metals Dilokong 4 270 ? Two furnaces shutdown for 6 months

Assmang Machadorp 2 191 ? Assumption is that all FeCr output suspended

Hernic Brits 4 294 10 1 of 4 shut down

IFM Brits 2 180 ? 1 furnace from March 1 to May 31;2nd from April 1 to end May.

Ruukki Mogale 1 18 9 Furnace restart from June onwards

Samancor Ferrometals 6 386

1408 of 16 shut down. Selected JV furnaces operating normally.

Middelburg 4 295

Tubatse 6 279

Tata Richards Bay 2 83 - No plans to suspend any production

Xstrata-Merafe Lion 2 296

1307 furnaces temp. Closed; 4 at Rustenburg, 2 Wonderkop, 1 Lydenburg. Lion operating normally.

Lydenburg 2 291

Rustenburg 6 188

Wonderkop 6 378

Boshoek 4 140 - No shutdowns planned

Total 51 ~3,300 320*

Source: Modified Macquarie Commodities Report, 2012

FeCr price drivers• Demand vs supply of FeCr (as input for stainless steel)

Local FeCr Q2 production ↑ 20% q1-o-q2 ; global demand ↑ 5% Q4 to Q1

• Demand vs supply of stainless steel (Baosteel, Lisco & Tisco cut-backs) Consumption globally, 10% Q4 to Q1 ; inventories high

•Low FeCr stocks at EU & US stainless steel mills (cash conservation)

•China has adequate FeCr capacity, ↑ in chrome ore imports, Q1 to Q2 Q1 2012 chrome imports ↓ 12% y-o-y

• Potential ban on unbeneficiated Cr (India, SA), ↑ cost of FeCr production in China

FeCr consumption & supply

0

2 500

5 000

7 500

10 000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

FeCr

vol

umes

(kt)

FeCr consumption

FeCr supply

Source: www.xstrata.com

0

100 000

200 000

300 000

400 000

500 000

600 000

Tonn

es

Chinese Chrome Ore Imports (2011-2012)

South Africa Turkey India

Source: Core Consulting

FeCr price drivers (cont.)•Expectation that FeCr price would ↑, but Chinese smelter capacity is sufficient (& cheap) to take up production shortfalls.

•FeCr Q3 price neg. in China completed in June, though most prices spot market

Q2 2012 Euro benchmark US$1.35/lb ; 17%↑ vs. Q1 US$1.15/lb prices (before disc. on spot )

•Eskom annual price increase of 16% from 1 April 2012

•Eskom winter power tariffs from end-May to end-August

•Historically, local FeCr producers build-up their inv. in 1st half of year Winter power costs ~50% of total local FeCr production cost

Source: Bloomberg Services

FeCr China spot price 6-8% basis, 60% Cr DDP Renminbi / tonne

Equivalent to US$0.93/lb

0.0

50.0

100.0

150.0

200.0

250.0M

ar-0

2

No

v-02

Jul-0

3

Mar

-04

No

v-04

Jul-0

5

Mar

-06

No

v-06

Jul-0

7

Mar

-08

No

v-08

Jul-0

9

Mar

-10

No

v-10

Jul-1

1

Mar

-12

c/lb

HC-FeCr Contract Prices

Europe Japan

Source: Core Consulting

FeCr summary•FeCr prices buoyant (premium in EU, low vols)

•EU benchmark prices expected to ↑ moderately over Q3, 0% to 4% q-o-q

•Chinese spot prices expected to remain at current levels

•Moderate ↑ in chrome ore imports to China

•Low cost base in China putting SA FeCr producers under significant cost pressures

•Lower FeCr production through SA winter (y-o-y)

FeCr summary•Buybacks may continue if OCG required to operate at higher levels

•Buybacks positive effect at country & co. level , particularly for high cost FeCr producers, but unlikely to affect global supply & demand

•China’s self-sufficiency i.t.o. FeCr production