Smelters’ agreement again in spotlight

2012-10-23 00:00

ESKOM wants the National Energy Regulator (Nersa) to look at the “special pricing agreement” between the power paratstatal and BHP Billiton Aluminium Southern Africa.

The conglomerate, one of the largest electricity consumers, has two smelters in Richards Bay, namely Hillside and the 40-year old Bayside plant, which it recently indicated it may sell. BHP Billiton has a 47% stake in a public/private partnership with the Mozambique government at a smelter called Mozal.

At a press briefing yesterday where Eskom Chief Executive Brian Dames announced Eskom’s desire to hike electricity rates by 16% a year for the next five years, the parastatal has once again isolated BHP Billiton’s aluminium smelters in Zululand as an area requiring change.

The 16% increase will need Nersa approval before being implemented. Dames said the reason for the proposed electricity price hikes is linked to rising coal costs, among other influences. The parastatal is currently rolling out its R337 billion build programme over the next five years, which includes two new power stations, as the country grapples with critical electricity capacity shortages.

In a statement released by Eskom it said the “special pricing agreements” linking the price the smelters pay for electricity to the dollar price of aluminium “were entered into in the 1990s when Eskom had surplus generating capacity, which is no longer the case”.

According to sources, Hillside requires in the region of 1 200 mega-Watts a day while Bayside needs approximately 300 mega-Watts. To put it into perspective: Durban requires approximately 3 000 megaWatts daily. Bayside is the smallest of all BHP Billiton aluminium smelters in southern Africa. According to the company’s September quarterly production report over the previous 12 months, Bayside produced 98 000 tons compared to Hillside’s 622 000 tons and 264 000 tons at Mozal.

BHP Billiton spokesperson Kesagee Nayager reiterated that the terms of the multinational’s contract with Eskom remained confidential. However, she said prior to the announcement being made by Eskom, they were aware of the approach to Nersa.

Economist for the KwaZulu-Natal Treasury, Clive Coetzee, said the impact of the proposed increases and possible renegotiation of the BHP Billiton terms could be “huge” for the province.

“Richards Bay is the province’s third largest economy and manufacturing is KZN’s single biggest sector. If we start pulling the plug on manufacturing we do the same for the province. In effect what Eskom is doing will put further pressure on the province,” said Coetzee.

He said Richards Bay’s economy relies on the likes of BHP Billiton for its economy. “We can’t have these [regular] shocks [such as electricity tariff increases] coming into the economy. It will have a dire effect on the manufacturing sector which is electricity intensive. Companies can only implement energy efficiency initiatives up to a point and then they have no alternative but to absorb the cost,” said Coet­zee.

BHP Billiton employs about 2 500 people and has roughly a similar number of contractors. Forecasting consultants Econometrix have estimated 100 000 South Africans are dependent on the two local smelters.

In September, Parliament heard Eskom could suffer a loss of up to R5,5 billion over the next eight years on its below-cost electricity supply agreement with BHP Billiton.

At the time, Democratic Alliance MP Pieter van Dalen claimed in the National Assembly that BHP Billiton was paying 8,8c-10c/kiloWatt.

By contrast, the average middle class homeowner in uMhlathuze Municipality pays in the region of R0,93 and R1,17/kiloWatt.

Eskom has been trying for some time to persuade BHP Billiton to accept a renegotiated contract.

In 2009 it blamed the resource company for the parastatal’s R9,5 billion loss. The current contract is expected to end in 2020.

There have been several attempts, including court action by Media24, to uncover the terms of the agreement. In a report commissioned by BHP Billiton in 2008 and undertaken by consultancy firm Econometrix, BHP Billiton defended its “special pricing agreements” with Eskom, claiming if the environment had not been created to allow the industry to flourish, other related sectors would not have developed.

It further claimed the current blame for shortages should not be thrust onto them in a “coal rich country” but was a result of poor planning by Eskom.

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