Eskom has been played for a sucker by the Aussies. It’s got to stop
Secret deal has seen the utility provide South32 with power at a massive loss. The contract is up for renewal
Once again the power supply agreements between Eskom and the Hillside aluminium smelters in Richards Bay, owned by Australian company South32, are set to hog the headlines. For more than 10 years these contracts have intrigued the public, media and courts as they were kept secret for many years and were hugely unprofitable for Eskom and the public.
The first of the two contracts (for Hillside potlines 1 and 2) ends on June 30, and South32 is working hard to have this highly favourable arrangement (for them) extended. The contract started in July 1995, and is unusual due to its duration and size: it entails the sale of about 900MW a month for the two potlines, the equivalent of 3% of Eskom’s capacity.
The contract commits Eskom to charge a price for the power that is linked directly to the price of aluminium on the London Metal Exchange (LME). In this way Eskom has been the main party at risk in the production of aluminium at Hillside. But in 1995 Eskom had ample capacity to produce electricity, and everyone was convinced the price of aluminium – then about $2,000/ton – could only rise. This it did for some years, peaking at more than $3,000/ton in 2008.
But since then the price of aluminium has been falling. Today it stands at less than $1,700/ton, and over the past decade Eskom has lost the capacity to meet the demand for energy from the SA public and industry. These factors have resulted in Eskom losing billions (some estimates are as high as R20bn) over the years on the Hillside supply contracts.
Eskom has been selling power it no longer possesses, and at a huge loss. One must ask the following questions and keep these facts in mind:
- Any new contract entered into between Eskom and South32 for the Hillside smelter must be fully transparent to the public before being signed off by energy market regulator Nersa.
- Eskom cannot be allowed to sell power it does not have – the country, and industry in particular, should not have to continue to endure blackouts just to keep these smelters running.
- Eskom cannot be put at risk in future by being bound by fluctuations in the price of aluminium on the LME – the risk must be carried by the owners of the smelter, who have made handsome, risk-free profits over the past 25 years.
- Based on the information available to the public, Eskom is charging Hillside about R0,285/kWh in terms of the existing contract from 1995. This is as much as five times less than the price paid by the public and big industrial consumers, and well below Eskom’s cost of production.
- The Hillside smelter adds value to a fully imported raw material, alumina, which is imported by South32 from its own mines and refineries in Australia. Since labour at an aluminium smelter accounts for no more than 5% of the total cost of finished aluminium, the Hillside smelter, with its three potlines, employs fewer than 1,000 people. The main value added in SA is energy.
- South32 has repeatedly claimed that as many as 29,000 South Africans are dependent on Hillside, including the local downstream aluminium industry. But the primary aluminium ingots and billets it sells in SA are benchmarked internationally, with prices set in dollars by the LME, so no local customer is paying any less than it would pay any other smelter around the world. Buying aluminium from the Hillside smelter, or any semi-finished products from producers such as Hulamin, proffers no price benefit. The bulk of the Hillside aluminium production is exported anyway.
- Any change to the compensation paid for the supply of coal from South32 to Eskom’s Duvha power station cannot be allowed. These are two different issues and contracts; they were never combined before and have nothing to do with each other now. South32’s coal business in SA was always profitable in the past. That this has suddenly changed is no coincidence – it is intended to put pressure on Eskom and Nersa.
In the past 25 years, Eskom and the public have carried the bulk of the commercial risk of the operations at Hillside, and for the past 10 years at least it has been obliged to sell electricity it did not really have at the expense of the SA public and economy. It is time to bring this charade to an end.
• Schütte is founder and director of SA aluminium products company MTT and a director of aluminium trading companies in Shanghai, Singapore and Germany, as well as South America.