Power Cuts Threaten South Africa’s Economic Recovery

Aug. 24 (Bloomberg) -- South Africa’s economic recovery is under threat because its national power utility is unable to raise funds to build power plants needed to keep the world’s biggest precious metal mines running.

State-owned Eskom Holdings Ltd. may on Aug. 27 give details at its annual results on progress in sourcing funds for a five- year, 385 billion-rand ($50 billion) expansion. Eskom already delayed several projects because of funding difficulties.

Underinvestment led to the near collapse of the country’s power system in January last year, closing most mines and metal smelters for five days. That followed months of intermittent power cuts in the biggest cities, as well as power rationing for Eskom’s biggest customers, putting a brake on industrial output.

“Any delay or rescheduling of Eskom’s capital expenditure is ill-conceived,” Iraj Abedian, chief executive officer of Johannesburg’s Pan-African Capital Holdings Ltd., which offers economic research and investment banking advice, said in an interview. “Eskom should be learning from its past mistakes and not procrastinate. We paid the price for it.”

The closing of mines shut off platinum supplies from mines producing almost four-fifths of the world’s supply of the metal and reduced output of gold worth about $22 million a day.

The electricity “crisis has severely compromised key growth sectors, such as platinum group metals, and some experts believe that it has prematurely accelerated the decline of the South African gold mining sector,” Anglo American Plc, South Africa’s biggest private employer, said in a report today.

Gross domestic product from mining in the first quarter of 2008 slumped “a staggering” 22 percent annualized, Anglo said.

‘Serious Electricity Shortage’

Slowing global economies slashed commodity demand, leading to the temporary closing of metal alloy smelters across the country. Companies including Xstrata Plc and Samancor Ltd., the world’s two biggest ferrochrome producers, are now reopening smelters, while Harmony Gold Mining Co. said it increased electricity use in the quarter ended June 30.

“If those smelters come on line and the economy turns around and we reach, say, 3 percent growth, which is not impossible, it will cause a serious electricity shortage,” said Freddie Mitchell, an economist at Efficient Finance Holding Ltd. in Pretoria. “I foresee the possibility of blackouts again.”

Economic decline in South Africa slowed to an annualized rate of 3 percent in the second quarter from 6.4 percent in the first, according to Statistics South Africa Ltd. That was the third consecutive quarterly contraction and came after a 5 percent rate of expansion in the second quarter of last year.

Delayed Projects

While national power use has declined for nine straight months, last month’s contraction of 3.4 percent was the smallest this year, according to the statistics agency.

Eskom, which supplies about 95 percent of South Africa’s power, said in June it delayed hydro and wind power projects because of funding constraints and last year deferred a decision on whether to build a second nuclear power plant.

Chief Executive Officer Jacob Maroga said in April the company needs to secure about 150 billion rand from external sources to fund the entire expansion program, currently focused on building coal-fired power plants by 2012. Other funding will come from Eskom’s own income and a government loan.

“Our electricity supply and demand situation is still tight,” Eskom said in an e-mailed response to questions last week. “The electricity supply system remains vulnerable for the next five to seven years.”

Industrial Use

Eskom has installed power generation capacity of about 41,500 megawatts. BHP Billiton Ltd. alone can use 2,150 megawatts at aluminum smelters in Richards Bay in South Africa and Maputo in Mozambique, which rely on Eskom. Ferrochrome operators, including Xstrata and Samancor, each require several hundred megawatts of power, while Gold Fields Ltd., the country’s second-biggest gold producer, can use 600 megawatts.

Eskom may report an operating loss of as much as 6 billion rand, Business Day newspaper reported today, without saying where it got the information. South Africa is Africa’s biggest aluminum producer and the world’s largest supplier of ferrochrome, a stainless steel raw material, and manganese. BHP, Xstrata and Anglo American Plc declined to comment on whether they expect power supply problems.

While mining only makes up 4.6 percent of GDP, the industry employs more than 400,000 people, while gold and platinum group metals are the country’s biggest exports.

Tariff Increase

Even though Eskom has already won the right to increase tariffs by an average of 31 percent this year, it is still expected to have a funding shortfall this year. For the financial year that began April 1, the utility may incur a 27 billion-rand shortfall unless it raises tariffs by 90 percent, Thembani Bukula, a member of the country’s national Energy Regulator of South Africa, said this year.

“We remain within the risk area,” said Goolam Ballim, chief economist at Standard Bank Group Ltd., Africa’s biggest lender. “The growth rate in electricity consumption could very easily exceed growth in GDP because the concentration of demand comes from the energy-intensive users. Those users will recover more briskly than overall GDP.”

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Article by: Carli Lourens - www.bloomberg.net