You have pushed it as far as it can go. We have now reached a tipping point.
This was the clear message from business and mining today at the last day of the public hearings on Eskom’s applications for a 16% annual increase in average electricity tariffs over the next 5 years.
Roger Baxter, senior executive for strategy and economics at the Chamber of Mines of South Africa said that already 50% of the local platinum industry is marginal or in a loss-making position. In the gold mining industry this percentage is 37%. These industries have seen electricity price increases of 258% and 143% respectively over the last four years, adding about R7bn in costs onto their costs profile.
Baxter said that further increases of this magnitude will cause a “tipping point”, forcing companies to either restructure – leading to job losses – or by deferring or cancelling energy intensive projects that again hamper economic growth. This could actually lead to a decline in electricity demand over the coming years, throwing a “spanner in the works” of Eskom’s projected demand for electricity, Baxter said.
He called mining the “flywheel of the South African economy”, employing a bulk of the country’s labour market and accounting for about 19% of GDP. He put it to the National Energy Regulator of South Africa (Nersa) that to reach the objectives set out by department’s such as the department of trade and industry to create jobs and increase industrialisation “reliable and competitively priced electricity is a fundamental prerequisite”.
“We are reaching a tipping point where electricity is just becoming too much of a large cost component,” he said.
These are not empty threats if recent events are used as background. The recent furore over Anglo American Platinum’s announcement that it needs to restructure, leading to the potential loss of 14 000 jobs and the department of minerals and energy accusing the company of not consulting with them, highlighted the issues faced in the platinum industry.
Chris Griffith, CEO of Anglo American Platinum, has said that the platinum industry is in a very difficult situation. “We made a loss last year of R1.5bn (headline earnings); we’re not at loggerheads with the department of minerals and energy, but the message is a very difficult message,” he said.
Speaking to Mineweb earlier this week, UASA’s division manager, Franz Stehring, pointed to power price increases as the biggest culprit affecting Amplats’s profitability -which had led to the need for restructuring – saying the company’s electricity bill for Rustenburg had increased dramatically.
Late last year, Lonmin highlighted the continuing cost pressures that are expected to affect the group in the new year. Lonmin expects unit costs to increase by around 10% as a result of the wage agreement signed to put an end to the violence at Marikana and because of the inefficiencies inherent with any ramp up to full production, whilen the Sibanye Gold pre-listing statement’s “risk factors” section, Sibanye mentions disproportionate power cost increases.
Professor Raymond Parsons, on behalf of Business Unity South Africa, said that any further price shocks for electricity will have a negative effect especially on the small and medium enterprises, where a lot of the hope for job creation is placed.
“The external and domestic economic circumstances have changed quite considerably and it can’t be business as usual in either the public or private sector,” he said. He added that in an ideal world price increases should stick to inflation levels, but that BUSA realises this is not realistic. “The question is now how we arrive at a number between 6% and 16% smartly,” he said.
Parsons also highlighted the difficulties caused by the way municipal prices are determined.