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SA miners' power cost shock
18/06/2008 17:33 - (SA)
Allan Seccombe
Johannesburg - The South African mining industry needs to find R1.6bn extra to pay for electricity after the energy regulator granted power utility Eskom permission to raise tariffs by an average 27.5% for the current financial year.
The Chamber of Mines, which has argued hard against Eskom's request for a 53% increase in real terms or a nominal 60%, pushed for a smoother increase in tariffs to allow Eskom to bring new generating capacity on stream without a large loss of jobs and business closures the big-bang approach would entail.
Eskom had wanted a 60% increase in year one (2008/09) and 50% nominal increase in the second year. The National Energy Regulator of South Africa (Nersa) granted Eskom 27.5% and 20-25% nominal increase for the next three years.
"If the current economic climate continues to prevail and Eskom's capital expenditure programme remains as currently stated, then tariff increases of between 20-25 percent per annum are projected over the next three years," Nersa chairperson Collin Matjila said at a news conference.
Eskom has a R343bn capital outlay over the next five years to increase electricity supply. It also needs to pay higher costs for the coal it uses in its plants.
"The increase is not small, but is not as bad as what Eskom originally wanted and now we have an indication of how to manage this going forward," said the Chamber of Mines' chief economist Roger Baxter.
"Yes, there is a cost to bear, the industry realises electricity prices have to rise."
For the gold mines, the increases will entail a two percent increase in cash production costs because of the increase. "That is not insignificant but we weren't going to get away with a zero percent increase," Baxter said.
He calculated that the average increase for the mining sector in the 2008/09 financial year would be 29%.
"Overall, it's going to cost the sector R1.6bn annually in terms of our preliminary calculations," he said.
If Eskom had its way, that figure would have doubled.
Trade union Solidarity said the subdued increase, while welcome, did not address the core problems within Eskom.
"The increase provides for the electricity supplier's rising primary energy costs, mainly coal. It does not, however, allow for expansion of Eskom's capacity and the cost of demand management and we still have no idea how the solution to the electricity crisis is to be financed," said deputy general secretary Dirk Hermann.
"The announcement therefore constitutes only a partial answer to the electricity problem and we await with bated breath an indication of the financing mix for the expansion. Government must provide an answer urgently," he said.
PriceWaterhouseCoopers said in a review of 2007 that the rate of cost increases for the world's top 40 mining companies had for the first time in six years outpaced revenue increases.
Fuel prices have spiked because of crude oil prices continually touching fresh record highs. Steel prices have shot up by more than two thirds. Explosives, chemicals and other inputs have also risen sharply in price, eroding profit margins.
Next year, South African mining companies will have to contend with a new royalty charge on their mineral production, adding to the pressures of having to operate at between 90 and 95% of their normal electricity consumption.
Eskom has argued the cost of producing electricity has increased because it has had to buy about a third of its coal by value on the spot market in part to replenish depleted stockpiles.
- Miningmx.com
For more mining sector coverage, visit miningmx.com.
- Finance24
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