Eskom hike to hit smelters
Price uncertainty threatens investment, jobs — metals lobby
What is the government going to do? What are the plans to protect beneficiation in SA?
Nellis Bester
Ferro Alloys Producers Association chair
● Jobs, industrial capacity and new investment are at risk if Eskom’s proposed 20.5% tariff increase is approved, says a lobby group for chrome, manganese, and siliconalloy producers.
The National Energy Regulator of SA (Nersa) has until February 25 to decide whether to approve the increase, which would be implemented from April 1.
The Ferro Alloys Producers Association (Fapa), whose members employ 13,000 people directly and 92,000 indirectly, says increases in electricity prices well above inflation over the past decade have led to soaring smelting costs and eroded the industry’s competitiveness.
As a result, local producers of chrome, manganese, and silicon alloys, are increasingly exporting the raw materials — mainly to China, where the beneficiation costs are cheaper, and depriving SA of much-needed foreign exchange.
Fapa chair Nellis Bester says higher power prices will increase smelting costs further and render more furnaces idle, leading to business closures and job losses.
Electricity accounts for 40% to 45% of ferro alloy producers’ costs, Bester says, adding that Fapa members consume more than 10% of Eskom’s total power output.
Though current high commodity prices provide some buffer for producers, the situation will deteriorate rapidly should prices and demand fall.
Economists have pointed out that the current commodities boom, driven by pentup demand as the global economy emerges from the coronavirus pandemic, is unsustainable.
“The April price increase will not only put more jobs at risk during 2022, but looking at the amount of job losses over the last decade, this reality will escalate when commodity prices reduce,” Bester says.
About 2,000 direct jobs and 12,000 indirect jobs have been lost in the past decade as a result of rising power costs, he says.
As many as 500 direct jobs are under threat in 2022 should the latest tariff increase be implemented together with additional carbon taxes, Bester adds.
General demand for ferro alloys has recovered from the slump of the past two or three years, resulting in stronger demand for silicon-based alloys, ferrochrome and manganese alloys, and Bester says it is an important opportunity for both local beneficiation and exports.
Still, high power costs and international competition have resulted in several smelters — in Lydenburg, Meyerton, Richards Bay, Polokwane and Newcastle — halting production, Bester says.
Moreover, Eskom implemented loadshedding on Wednesday for the first time this year and unreliable power supplies, coupled with the costs of restarting idle furnaces is adding to the problem, he says.
The utility’s ageing coal-fired power stations are vulnerable to breakdowns after years of neglect resulting in rolling blackouts. Eskom says the tariff hikes are crucial if it is to turn the business around, manage its R400bn debt and end years of relying on government bailouts.
“We have between 1,000MW and 1,500MW of idled furnaces because the cost of electricity is making the restart of these extremely difficult,” Bester says, adding that 1,500 direct jobs could be created if the furnaces restarted.
He says that though load-shedding is a problem, the cost of electricity is by far the biggest issue.
“It’s not load-shedding that is keeping the capacity offline, although it is contributing negatively to our production cost; it is the cost of power. Our concern is what is the government going to do? What are the plans to protect local beneficiation in South Africa?
“No-one is going to invest in a smelter if there is uncertainty about electricity pricing going forward.”
Stats SA this week reported that electricity generation decreased by 3.7% year on year in December and distribution fell by 2.7% in the same period.
Investec economist Lara Hodes says Eskom remains a major drag on the country’s fiscus. “The absence of cost-reflective tariffs and the unmanageable debt burden continue to weigh on the utility’s profitability, which is exacerbated by significant overdue municipal debt,” she said.
Fanele Mondi, CEO of the Energy Intensive Users Group (EIUG), says load-shedding is disruptive in the short term but, more important, it influences medium-term to longterm investment plans.
“People find it difficult to invest in an environment where there is no energy security. It is one of the major concerns,” Mondi says. “We have uncertainty in terms of the reliability of energy supplies and we also have uncertainty with regard to price.”
Uncertainty about the amount of the latest tariff increase is adding to the headaches for the EIUG’s 26 members — who include major mining, manufacturing and beneficiation companies — because they are unable to plan ahead, he says.
“Considering that some of our members spend between 15% and 50% on electricity as part of their basic cost structure, that becomes a significant uncertainty. The price increases further erode our international competitiveness.”
Though some companies are looking at options to generate their own electricity, Mondi says it is important to get Eskom back into shape.
“It is not an option for us to abandon Eskom. We don’t think that self-generation will replace Eskom electricity entirely,” he says.