Rising Power Costs Feature in South African Zinc Smelter's Shutdown

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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--The shuttering of South Africa's sole zinc refinery means that domestic galvanized steel producers will now have to look for overseas suppliers to meet their requirements.

Exxaro Resources' (OTC:EXXAY) (Pretoria, South Africa) 100,000-ton-per-year Zincor refinery at Springs, in the Johannesburg-East Rand conurbation, will cease production as part of the company's plan to divest its zinc assets. The decision was made in the context of difficult conditions in the zinc market, including its cyclical nature and low margins. Other key reasons contributing to the closing were the soaring cost of the electrical power supplied by state utility Eskom and patchy rail-freight service from transport utility Transnet.

In 2006, the company paid about $7 million for electrical power out of its total cost base of about $90 million. In the current year, the power costs shot up to $30 million out of a total cost base of $105 million; they are expected to increase to 50% of the cost base next year, at more than $52 million out of $105 million.

"Issues that have influenced the board to take an in-principle decision to permanently cease zinc production at Zincor include the fact that, as a zinc-making operation, it has proved to be unsalable to potential investors," said Sipho Nkosi, Exxaro's chief executive officer. "Continued zinc-making is financially unsustainable, with the refinery incurring mounting financial losses. Turnaround and improvement interventions have proved fruitless and are unlikely to get Zincor atop a sustainable financial performance level."

Exxaro's current portfolio of zinc assets include Zincor; a 50.4% stake in the Rosh Pinah zinc and lead mine in Namibia; a 26% stake in the South African Black Mountain Zinc and lead mine; and the Gamsberg zinc project. The company also has a 22% interest in the Chifeng zinc smelter in China. Exxaro is involved in ongoing discussions with interested parties for the sale of the Rosh Pinah and Chifeng shareholdings.

Reports say that 14 companies have looked at the Zincor operation, but none has made an offer. The refinery is based on an old, re-designed uranium plant, is labor intensive, and is far from sea ports.

The closure will result in the loss of 640 permanent jobs and 108 contractor jobs. The company is starting a consultation process in accordance with labor legislation under the national arbitration body.

Stakeholders and steel company customers are surprised at the speed and timing of the closure decision and are looking at the possibility of paying higher prices for zinc in terms of trading margins and shipping costs.

Exxaro has a diversified, world-class commodity portfolio in coal, iron ore, mineral sands, base metals and industrial minerals. It is South Africa's second-largest producer of coal, with a 45 million-ton-per-year capacity, and is the world's third-largest producer of mineral sands. It is internationally positioned.

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