Eskom tariff hikes will ‘materially squeeze’ mine profit margins — Minerals Council SA

15 Jan 2023

The Eskom tariff increases of 18.65% and 12.7% for the next two financial years will ‘materially squeeze’ the profit margins of South Africa’s mining sector, the Minerals Council SA has warned. This could push marginal mines into closure and profitable operations will have less capital for wages and investment.

Because of the hikes announced last week by energy regulator Nersa, the Minerals Council SA — the main industry body for South Africa’s mining sector — said in a statement that electricity would rise to 12.5% of the sector’s costs by the end of 2024 from 9% currently.

That may not seem like a lot, but it means that such costs will rise by more than one-third. It can mean the difference between a marginal mine staying afloat or closing down because it falls into the red. There are almost certainly a few gold mines that already fall into this category, so further job losses are on the horizon against the backdrop of sky-high rates of unemployment.

It can also mean the difference between expansion plans or the decision to commit capital to build a new mine, a process that has very long timelines and requires a degree of certainty on the cost curve.

“Over the four years between 2021 and 2024, electricity tariffs would have increased by 46%. Since 2008, the price of electricity for the mining industry has increased eightfold while consumer prices, as measured using the consumer price index [CPI], have only doubled,” the Minerals Council said.

But basic electricity costs are only part of the story. It gets much worse as you dig into the numbers.

Ripple effect

“The higher cost of electricity means the share of energy in intermediary inputs will increase from 24% to 38% in gold mining, from 22% to 37% in iron ore mining, and from 13% to 19% in the platinum group metals sector,” the Minerals Council said. That speaks to the ripple effect on prices throughout the pipeline that provides the mining sector with the stuff it needs to operate.

“The consequences of the latest tariff increase must be seen in the wider mining sector context. Average input costs were running at above 15% at the end of 2022. These new tariffs could add four percentage points to costs, materially squeezing profit margins. The Minerals Council estimates mining production declined by 6% during 2022,” the council said.

This will, in turn, mean that there is less capital available for wages, investment and exploration. Labour relations in SA’s mining sector have never been better, with a spate of inflation-linked wage agreements of up to five years signed across the sector last year and in 2021 with minimal strike action. Wage talks may be tougher down the road as rising power costs chow profits.

It also means less money available for the “social and labour plans” that are required for a mining licence, so it’s possible that fewer schools, clinics and roads will be built by the mining sector.

When the sector is reaping record profits, it might be able to absorb some of these costs. But the global economy is forecast by the World Bank to have its third-worst calendar year performance in three decades in 2023, and that is not good for commodity prices.

Rolling blackouts

The Minerals Council also touched on the effects of Stage 6 rolling blackouts and the perpetual loss of power.

“For mining, the deepening electricity crisis will be felt at processing, smelting and refining plants, while mines need absolute energy certainty when sending employees underground to ensure they can safely return to the surface,” it said.

So rolling blackouts are a safety hazard which is putting the lives of South Africa’s miners at risk.

The constant loss of power is also a threat to smelters, and any damage inflicted on such industrial mammoths is hugely costly. Households are experiencing this with appliances. But fixing a fridge is not that hard in most cases. A smelter is clearly in a different league.

“Smelters require sufficient time to ramp down as sudden loss of power will result in catastrophic damages. With the current levels [Stage 3/4, before the recent Stage 6 announcement] of load shedding, smelters were already experiencing uncharacteristic trips as they were not designed to operate under these conditions,” the Minerals Council said.

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That’s right: they are designed with a perpetual supply of power in mind, which is a very 20th-century concept. But we are more than a fifth of the way into the 21st century.

The silver lining is that the rush is on to procure renewable sources of energy, which also means that Eskom’s customer base will remain in decline. The mining sector accounts for 14% of the demand for Eskom’s electricity, and when smelters and refineries are added to the mix, the wider industry consumes 30% of the unreliable power the stumbling state-owned enterprise provides.

“The private sector in South Africa has a total pipeline of 9GW [gigawatts] of energy projects in solar, wind and gas, and in battery storage. By expediting these projects and reducing industry’s reliance on Eskom, the power utility will secure the time and space it needs to undertake critical maintenance and refurbishment of its power plants. The mining industry alone accounts for about 7.5GW of these projects at a cost of more than R150-billion,” the Minerals Council said.

The bottom line is that the tariff hikes last week are new nails in the coffins of Eskom, the mining industry and the wider economy. DM/BM

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Ripple effect

Rolling blackouts