[miningmx.com] — ESKOM CEO Brian Dames is expected to offer further details about the construction delays at the new Medupi power station, outside Lephalale, when the power utility announces its results on November 23.
The entire mining and industrial sector will follow this keenly, as it will determine how long the current electricity shortfall will continue.
January 2008 – when the country’s lights were literally switched off owing to the shortage of electricity – seems a long time ago. What few South Africans outside Eskom realise is that Dames and his team are practically daily teetering on the precipice of a repetition of that disastrous event.
Because the demand for electricity grows in step with the growing economy, the threat of a second load-shedding period increases as the delay in the commissioning of Medupi’s first generation unit continues.
However, a second item in Eskom’s results that will have to be closely examined is the loss the utility has suffered through derivative instruments – the contracts for supplying electricity to BHP Billiton’s Hillside aluminium smelter in Richards Bay.
This contract stipulates the tariff at which electricity is delivered to Hillside. The tariff is calculated according to a formula in which three derivative instruments are used: the price of aluminium on the London Metal Exchange, the rand/dollar exchange rate, and the US producer price index. There are several producer price indices in the US and Eskom has never disclosed which is used – but it’s probably the PPI related to manufacturing.
That’s the formula over which Sake24 and I have instituted a court case against Eskom and BHP Billiton, because we believe the public has the right to know our exact exposure to these variables.
This aspect should be carefully examined on November 23, because the price of aluminium on the London Metal Exchange has fallen sharply in the past six months.
The price dropped from $2 797/tonne in May to $2,122, which means that Billiton would have paid considerably less for the 1,100MW-odd of electricity Eskom supplies to Hillside.
Another 550MW-odd is supplied to Mozal, but this contract was renegotiated so that a fixed tariff is being paid for the power. Just as in the case of the Hillside contract, the Mozal contract is under wraps – even after the renegotiation.
The issue is whether South African electricity consumers are subsidising the production of aluminium at Hillside. Electricity usually represents just over a third of aluminium’s production cost.
In the year to end-March 2009, which included the previous sharp drop in the aluminium price, Eskom suffered a book loss of R9.3bn from the aluminium contracts.
That’s a book loss – the projected loss that Eskom would suffer over the remaining life of the contracts.
The true loss – the amount by which Eskom subsidises the smelters – cannot be calculated owing to the secrecy surrounding the contracts.
ALUMINIUM ON THE SLOPES
Bloomberg reported electricity prices have risen 15% globally since May this year. That means that about 25% of global aluminium production is produced at a loss when the aluminium price falls below $2,350/tonne and 50% of the production is loss-making below $2,000/tonne.
Jochen Hitzfeld of UniCredit in Munich, an aluminium market analyst regarded by Bloomberg as the most accurate forecaster of aluminium prices, predicted that some 10% of the world’s smelter capacity would be shut down by the first quarter of 2012.
According to a survey among 17 analysts, in the next six months prices will range between $2,000 and $2,350/tonne. But the course of the financial crisis in Europe could rapidly change this.
Billiton’s profit (described as earnings before interest and tax) from aluminium amounted to $266m in the year to end-June – 34% down on the year before. In the financial year costs rose by $519m. The average price the company received for aluminium rose 19% to $2,515/tonne.
The two plants together consume about 5.7% of Eskom’s base generation capacity (electricity generated from coal or nuclear power), but because the plants operate 24 hours a day and seven days a week, they use closer to 7% of all the electricity generated by Eskom.
This is at a time when we have an ever-increasing electricity shortage which could have disastrous consequences as the Medupi delay worsens.
Should the delays get much worse, Billiton and Eskom will sooner or later have to sit down and seek answers to a difficult question: is aluminium production in our country still worthwhile?
– Sake24
