GOING SOUTH?

As Eskom struggles to deliver power to SA, questions surround the viability of South32’s Hillside aluminium smelter, given its huge power needs and a preferential tariff agreement that is up for renegotiation

It’s hard to imagine a time when electricity in SA was so plentiful that consumers enjoyed the cheapest power in the world and surplus power stations were closed down. This was the case in the 1990s — but it is a distant memory now as Eskom struggles to keep the lights on. The Hillside aluminium smelter in Richards Bay is the last remaining exhibit from this bygone era.

Thanks to a highly favourable power supply agreement with Eskom, the smelter was once an excellent asset for its investors. But today it is fighting for its life. The operations are burning cash and are the subject of a large and complex restructuring. Meanwhile, its power contract is up for renegotiation — and a good deal must be struck if the smelter is to survive.

South32, owner of Hillside, argues that closing it would have a negative effect on the downstream aluminium sector, cost about 29,000 jobs and hurt the Richards Bay and wider Kwazulu-natal economies. However, its critics say Hillside has benefited for too long from cheap power and offered SA little in return.

The Hillside smelter was opened with great fanfare on April 19 1996, when then president Nelson Mandela, in his keynote address, expounded on the potential it held for SA.

At that time the majority shareholder was

Alusaf, which was bought into by Gencore, which later became BHP Billiton. In 2015, Hillside was one of the assets that was spun off by BHP to create South32.

The Industrial Development Corp was a key player in the development of the R7.2bn Hillside smelter. Not only did the development financier provide an R800m loan; it was also instrumental in arranging foreign export credit finance for the project.

At the time Alusaf benefited from accelerated tax allowances in terms of the Income Tax Act.

Critical to the development of the smelter was a power supply deal with Eskom that was linked to the price of aluminium and often resulted in Eskom supplying Hillside at a loss.

Fast-forward 23 years, and the smelter is facing severe financial difficulty. According to South32, Hillside made a loss of $39m in the first half of the 2019 financial year, following a decline in the aluminium price and a 29% increase in operating unit costs. The smelter uses alumina imported from South32’s operations in Australia. In February the company launched a restructuring process that could result in up to 500 of its 1,370 jobs being cut.

South32 COO Mike Fraser says the aluminium smelting industry is highly competitive, margins are relatively thin and most costs fall outside a company’s control.

Labour represents 30% of all Hillside’s costs other than power and raw materials. At present, salary levels are “very high” while productivity is “too low” compared with the rest of the world, Fraser says.

Restructuring is the lesser of two evils for South32, which estimates Hillside’s closure would cause significantly more job losses in the downstream industries.

“If Hillside were to close, SA would have no primary aluminium production capacity,” Fraser says. “The entire SA downstream aluminium industry would become reliant on imports. The impact … would be significant, with the likely closure of several large converters due to the additional cost associated with imports (freight and logistics) and increased working capital requirements.”

The Aluminium Federation of SA (Afsa) agrees that Hillside’s closure would threaten the sustainability of downstream producers because of increased costs and working capital requirements.

According to Hulamin CEO Richard Jacob, his company would likely have to close, or significantly downscale, if Hillside were to shut down. Hillside supplies Hulamin with solid blocks of pure aluminium, which it uses to make various products such as foil. “We are right in the middle of the value chain — all our customers are manufacturers,” Jacob says.

Hillside is the only smelter in the region that can supply Hulamin at a competitive rate, Jacob says. Hulamin exports two-thirds of its production, so to import raw material would render it uncompetitive. “We would lose all our export business. It’s highly doubtful we would keep [the business] open just as a supplier to local industry.”