Publication: Mail and Guardian
Reporter: Lynley Donnelly
Mail and Guardian
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
This fattens the company's profit margins, while consuming South Africa's
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 -
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
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
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
"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
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
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.