THE Chamber of Mines on Thursday tore into Eskom’s application for a tariff increase, saying the utility was more interested in its credit rating than the interests of South Africa.
More than half of South Africa’s platinum mines are loss-making or marginal and 37% of gold mines are in a similar position. Over the past five years, electricity added R7bn to their costs.
The mining industry would be pushed over the tipping point if Eskom’s application to the National Energy Regulator of SA (Nersa) for a 16% increase in electricity prices each year over the next five years was approved, the chamber said at a Nersa hearing in Midrand.
If Eskom was granted the hike, this would mean that between 2007 and 2018, electricity prices would have risen 589%, Roger Baxter, senior executive at the chamber, told the hearing.
He said Eskom was too focused on the return on capital, or profit, from its new power plants and it was not the price of coal that was the major driver behind its application. This was evident in the fact that two thirds of the proposed increase in electricity prices was attributable to return on capital and depreciation charges.
"This clearly shows Eskom is primarily focused on achieving a standalone investment grade rating at the expense of the competitiveness of South Africa’s electricity intensive tradable sectors," he said.
Political, regulatory and operational concerns saw several ratings agencies lower South Africa’s sovereign rating late last year and state-owned organisations, including Eskom were downgraded too.
"If power costs continue to rise, we would be in an ironic situation where all the major companies operating in South Africa are not investment grade and Eskom is," Chamber of Mines president Mark Cutifani said on Thursday.
"That would be an unbelievably crazy outcome. That’s why the government, Eskom and industry have to agree what a great South Africa looks like."
It appeared that Eskom needed the large return on capital to secure its investment-grade status, and the annual 16% increase over the next five years would deliver that, Mr Cutifani said.
"To get there in five years is crazy, because you’d sacrifice every one of the other major corporates in the country. I can’t understand why anyone would think that’s a good idea."
The increase would not only harm the mining sector, it would also push South Africa into the world’s second-highest quartile of electricity prices — from being the cheapest country for electricity in 2008, Mr Baxter said. To keep it within the most competitive range, the rise should be closer to the inflation rate of 6%.
"The economic impact of Eskom’s proposals is substantially negative. The South African economy cannot absorb the proposed further doubling of the price on the back of a price that has already trebled," Mr Baxter said.
Eskom’s proposed price trajectory would lead to further deindustrialisation of South Africa, he said.
Eskom was working a weighted average cost of capital of 8%, but Mr Baxter said it should be closer to 6% as the utility could secure reasonably priced finance because — unlike private companies — it had a sovereign balance sheet to back it. Furthermore, its objectives should not be entirely commercial.
Not generally given to hyperbole, Mr Cutifani — Anglo American CEO-designate — said the mining sector was in a "crisis".
"People use the word crisis and in many cases it’s overused. In this case, it’s a legitimate word. If this proposal goes forward, mines will close and jobs will be lost. Pure and simple," he said.
Anglo American Platinum, the world’s largest producer of platinum, has temporarily delayed plans to shut four loss-making shafts and plants at the cost of up to 14,000 jobs because of weak demand and prices, and soaring input costs.
At AngloGold Ashanti, which Mr Cutifani is leaving to join Anglo, electricity as a share of costs has risen to more than 20% from 12%. Eskom’s proposal would take it beyond 40%.
"At these sorts of numbers we really will struggle. We’ll all struggle," he said.
"This strategy is inconsistent with the government’s strategy to industrialise and increase employment across the country."
The chamber’s vice-president, Mike Teke, said the mining sector would like to see an increase in electricity prices of 6%.
Its coal specialist Dick Kruger said it costs about R650m to establish a new colliery with a 1-million ton-per-year capacity.
The country needs to find 100-million tons of coal in the coming years — ironically also for Eskom’s immense needs — and mining companies need to be convinced about the economic viability of their investments over the long term before making decisions to build mines.