DR ROGER Baxter is a senior executive at the South African Chamber of Mines.
SUMMIT TV: The Chamber of Mines has issued one of its starkest warnings yet to Eskom that its five-year tariff hike application will quite simply make power unaffordable in South Africa in their submission. In your statement you’ve said that South African electricity prices are at a "tipping point" and you feel if Eskom is granted a 16% hike every year over five years, that’s going to push us through that tipping point. What, in your view, would the consequence be of that?
ROGER BAXTER: It’s not 16% per year — it’s actually 21% in year one, and then 14%, 14% and 14%.... The overall increase over five years compounded is 104%, which is another doubling in the electricity price. We would have seen the price rise from 18c/kWh right up to R1.24 in an 11-year period, which is a 587% increase. That’s a huge increase for any industry or country to absorb. We are not suggesting that 18c was where the electricity price should have been, but we are reaching a point where at 61c/kWh — which is what heavy users are paying at the moment — to 71c, which is the 2013 tariff, that we are reaching a point where any further big increases are going to make electricity unaffordable. We think the reasons that are being put forward in terms of Eskom’s multiyear price determination application to a certain extent can be modified to reduce the impact.
STV: You talk about the return on capital that Eskom is seeking for these price increases and you say 65% of the tariff application has to do with that, and only 12% to cover the cost of coal increases — we’ve been fed the line that coal is the primary input cost that Eskom is grappling with but you’re saying that’s not the case.
RB: What’s interesting is if you look at the price rising from 61c to R1.24 from 2012 to 2017-18, of that price increase 65% of that is attributable to return on capital invested and depreciation charges. Effectively return on capital goes from about 4% of the total in 2012 to about 28% of the total, making it as big as primary energy just by itself, so we are saying the 8% return on capital that Eskom is feeding through into achieving the 8% by 2017 is focused on their metrics of trying to be a standalone, investment-grade rating company but that’s not taking into account the specific needs of the country as a whole.
STV: Going back to what this will do to the mining industry, if Nersa (the National Energy Regulator of South Africa) does grant these tariff increases and we get to 124c/kWh by 2018, will we see a lot more mines going out of business? Mark Cutifani was saying we will have more restructuring in the gold and platinum sectors — will this render huge chunks of South African mining unviable?
RB: Looking at the facts in our submission to Nersa, there’s a lot more information about the economic impact of this — currently 50% of our platinum industry is either marginal or loss-making at $1,600 per ounce even though the price is slightly higher at the moment. That’s on a cash production cost basis and sustaining capex basis. Any further increases — and electricity in the platinum sector has increased markedly with more than a 200% increase in aggregate costs from 2007 to 2012. This is a cost item that’s become a very big component of platinum mining. It’s not quite as big as the gold sector — in gold electricity costs have gone from around 12% of cash production costs to 20%, in the platinum sector that’s gone from about 3% to about 7% and rising rapidly. Effectively it’s more than doubled in the last five years despite the fact that gold production has been declining and platinum production has been moving sideways. The difficulty behind this is it’s an electricity-intensive business because we have to make it safe underground and take people into conditions where they can work. This cost increase is pushing mines over the limit where we will see shaft closures and we will see further restructuring. That’s not what South Africa needs right now.
STV: It’s pointless to rail against the Amplats restructuring in the context of a broader electricity price increase that will affect the entire South African mining industry...
RB: Exactly, but it’s not just mining. What people are maybe missing in terms of looking at South Africa’s growth profile, in the last 10 years this economy has been a credit-fuelled, consumer-driven, import-intensive imbalance creating growth like the US and other advanced economic models. Our trade and export sectors, which are mostly electricity intensive, have languished — and that’s manufacturing and mining in particular. There is recognition amongst the stakeholders that we need to get those sectors to grow at a much faster pace to elevate our growth rate, and then we will grow with less imbalances. Because our growth rate is taking serious strain at the moment because exports are under pressure from specifically the mining sector. We also employ a lot of semiskilled workers, which helps undo the structural mismatch in the marketplace. It’s critically important that we get the context right — we need our export sectors to grow and they are mostly electricity intensive.
STV: If we have these price increases — or even the electricity price we have at the moment — where are we now if we compare with other economies of a similar nature?
RB: What we’ve done is we’ve used the NUS consulting comparative numbers — they’re available on the web. South Africa had the cheapest industrial electricity price out of the 16 countries surveyed in 2008. By 2012 we were sitting at six so we are still in the first electricity price quartile in the "electricity pricing curve", if one can call it that. Our estimate is that, based on what Eskom is proposing and obviously making some assumptions about the currency on an inflation differential basis by 2017, we estimate South Africa’s electricity pricing will be in the second-highest pricing quartile, which takes South Africa out of the ball game in relation to electricity-intensive industries. I don’t buy the story that South Africa’s electricity price has to go up by that much — the Chamber of Mines doesn’t buy that story. We think there are a number of measures that can be taken to stop the price rising as quickly as this.
STV: What are the two most important proposals that you’ve put forward to Nersa?
RB: The shareholder compact between government and Eskom does not mention competitiveness once — there needs to be a focus on competitive electricity prices to enable the economy to grow from an industrialisation point of view. There has to be a link there. In terms of our proposals we think that government has an excellent balance sheet with less than a 40% debt-to-GDP ratio. We think that further sovereign balance sheet support for Eskom would reduce the propensity for Eskom to ask for these types of increases that are really geared to enable them to get a standalone investment grade rating that we think is at the expense of the development growth and industrialisation objectives of South Africa.
STV: You also talk about a compact between Eskom and the coal producers in the mining sector — because if coal is one of the biggest input costs, you want some sort of agreement where coal prices don’t rise above the inflation rate...
RB: If we look at coal costs in the total equation that’s 21% by 2017 so it’s not the biggest component — it’s one of the components that’s not growing as fast as the others. We are a little concerned that they are under-providing on the coal side. It’s the other metrics that are driving the electricity price and that’s what we are really concerned about.