Publication: Mail and Guardian Issued: Date: 2008-02-09 Reporter: Lynley Donnelly

Crisis Two



Mail and Guardian




Lynley Donnelly

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Lynley Donnelly reports on government's rush to attract investors and hand over vast amounts of electricity at giveaway prices

Just one energy user, BHP Billiton, uses enough electricity to power a city the size of Johannesburg. The kicker, though, is that the resources giant gets this whacking amount of power at cost *1, using it to produce a profit of R6-billion. Government's deal with BHP Billiton and its three aluminium smelters is the subject of a confidential agreement between the company and government.

But it is thought to get its electricity at about l2c a kilowatt hour, while most of South African industry pays 16c and consumers up to 44c.

One energy expert estimates Eskom's cost of generating electricity at about 10c a kilowatt hour *2 - about half of which is the cost of the coal *3.

BHP Billiton's aluminium operations earned it $1,8-billion before tax, according to its 2007 annual report. Global operating profits for the whole group were $18,4-billion before tax. Billiton could not confirm how much its local aluminium profits contributed to global profits, but last year Mining Weekly reported that BHP Billiton's South African business represents more than half of global earnings before interest and tax.

The company's 2007 report puts South Africa's contribution to profit by location of assets at $1,15-billion or R8- billion. If Billiton's South African aluminium interests contribute to about half of the aluminium sector's global profits, it amounts to about $900- million or R6,3-billion.

Government policy has been to attract energy-intensive industry but, as Eskom's excess capacity has run out and become a deficit, it finds itself contractually bound to industries that keep running while the rest of the country experiences blackouts and the associated traffic chaos and loss of business.

But government also finds itself facing a huge bill to build new capacity to keep the lights on.

It will cost tens of billions of rands to build the equivalent capacity being used by BHP Billiton's smelters.

One critic, Richard Young, an arms deal whistleblower *4, estimates that BHP Billiton's Hillside operation puts R5-billion into the economy annually, of which R1-billion is in tax.

Young also estimates that Bayside earns BHP R8,9-billion gross profit and Mozal R5,3-billion.

This fattens the company's profit margins, while consuming South Africa's energy.

Young estimates brown phase two load-shedding costs the economy R2-billion a day, R600-billion a year. He called for the shutdown of BHP Billiton's aluminium smelters until there is a sufficient supply and safety margin or they can supply their own power.

"Even if Billiton had to be compensated for its losses by the government using taxpayers' money, this would be far better than allowing the damage caused by load-shedding to continue," he says.

Minerals and Energy Minister Buyelwa Sonjica announced on Wednesday that government's development electicity pricing programme (Depp) will continue, despite the need for a review of how to allocate local energy resources. The Depp aims to attract energy-intensive foreign investment through Eskom's "competitively priced electricity offering.

T-Sec's Mike Schussler told Inet Bridge that South Africa's neighbouring countries receive rates of 11c a kilowatt (sic - kiloWatthour *5).

According to its half-year results published this week, BHP Billiton's global aluminia production over six months.amounted to 675 000 tons, making annual production about 1,3- million tons. Oddly, its website puts the combined output of its three South African smelters at 1,4-million tons a year.

Last week the Mail & Guardian reported that BHP Billiton pays an estimated 12c/kWh for electricity at its smelters - well below what domestic users pay (about 40 c/kWh). The combined power usage of BHP Billiton's three smelters is 2 400 MW. The Rio Tinto/Alcan smelter brings the total to 3 750 MW. To produce new capacity of about 4 000 MW will cost South Africa nearly R80-billion - or the total cost of the Medupi power station.

But the South African aluminium industry does not appear to benefit from local aluminium production.

The price of primary aluminium on the London Metals Exchange is about $2 500 a ton (about R17 000). In the past local buyers paid a 5% "regional premium" on that price.

According to the department of trade and industry, although aluminium was being sold at something "approximate to import parity prices", discussions with BHP Billiton took place regarding the company's pricing regime. Nimrod Zalk, chief director of industrial policy at the department, said "a subsequent review of pricing regimes has seen the removal of [South African] regional premiums''. With respect to aluminium we are much less concerned than we have been in terms of other markets, such as carbon steel, for instance," he said.

Zalk admitted that, given South Africa's "energy crunch, government needs to be "more strategic *6 about energy allocation".

"One of the mistakes in terms of government policy in the past is granting lots of concessions without conditions beneficiating products *7 in the South African market," said lie said that one of the new conditions was to ensure that in the case of smelters such as Alcan, at least 40 000 tons of aluminium is made available to the local market at export parity prices.

Analysts balked *8 at the idea of shutting down energy-hungry smelters, saying that for South Africa to remain a desirable foreign investment destination the country must be seen to honour its contractual obligations.

To shut down the smelters is not a simple process, said one analyst. Government would be paying the cost of the ripple effect on BHP Billiton's aluminium value chain - including its aluminium refineries and bauxite ore mines in Australia.

With acknowledgements to Lynley Donnelly and Mail and Guardian.

*1       Very possibly, below cost.

*2      This is not true, Eskom publishes it power generation cost and this is 16,09 c/kWh.

*3      Effectively what is happening is that foreign companies are being allowed to convert South Africa's finite long-term mineral and chemical energy storage, i.e. coal, into offshore dollar profits, with, in the greater scheme of things, a very modest slice for the citizens.

The insult to this injury is that the aluminium ore is imported.

This is truly a case of modern-day colonialism.

*4      One of the original main thrusts of my analysis of the power shortage is that Eskom came to its 1 355 MW power supply agreement (for switch--on in 2010) with Alcan's Coega aluminium smelter, a legacy of the Arms Deal national industrial participation programme, at the end of 2006, right at the time it knew very well that the country would be in a power deficit situation by 2007.

Eskom very clearly warned the Cabinet of this looming situation, as it had done repeated since 1998.

This elevates the conduct of Government and Eskom to criminal recklessness as it was done with foresight, knowingly and wrongly.

Of course, such conduct is also massively delictual and will surely lead to massive claims against Eskom, which will be bailed out by its legal "shareholder" the Government using taxpayers' money. So this is a double whammy for the true shareholders, the taxpayers.

The only way to offset this double delictual whammy is to prefer criminal charges of negligence and reckless against the resposible persons, i.e. Thabo Mbeki, Alec Erwin, Phumzile Mlambo-Ngcuka, Buyelwa Sonjica, etc.

*5      Power is provided as kiloWatt (kW); Energy is delivered in kiloWatthour (kWh).

*6      Let us start off with plain common sense.

*7      My point entirely about insult and injury.

*8      Analysts can balk all they like.

What is the use of making foreign companies happy while our country is being driven back into the dark ages?

The balkers need to respond with a compelling counter-argument whereby, with all the true facts and figures, they prove that the balance of convenience lies with a few foreign-owned companies and not with tens of millions of critically inconvenienced taxpaying citizens.

Suffering up to 24 hours per week of Eskom load dumping and facing a 150% tariff increase over the next five year period, this is going to be a tough call.