By Carli Lourens
Aug. 24 (Bloomberg) -- The pace of South Africa’s recovery from its worst economic recession in 17 years is threatened by the inability of its national power utility to raise funds to build the power plants needed to keep the world’s biggest precious metal mines running.
State-owned Eskom Holdings Ltd. may on Aug. 27 give details at its annual results presentation on the progress it has made in sourcing financing for a five-year, 385 billion-rand ($50 billion) expansion program. Eskom has already deferred several projects, citing funding difficulties.
Underinvestment led to the near collapse of the country’s power system in January last year, closing most mines and metal smelters for five days. That was preceded by months of intermittent power cuts in the country’s biggest cities and resulted in electricity rationing to Eskom’s biggest customers, curbing economic output.
“Any delay or rescheduling of Eskom’s capital expenditure is ill-conceived,” Iraj Abedian, chief executive officer of Johannesburg’s Pan-African Capital Holdings Ltd., which offers economic research and investment banking advice, said in an interview. “Eskom should be learning from its past mistakes and not procrastinate. We paid the price for it.”
That closure shut off supplies of platinum to the world market from mines producing almost four-fifths of the world’s supply of the metal and cost production of gold worth about $22 million a day.
‘Serious Electricity Shortage’
The global economic crisis has slashed commodities consumption, leading to the temporary closure of a number of metal alloy smelters across the country. Companies including Xstrata Plc and Samancor Ltd., the world’s two biggest ferrochrome producers, are now reopening smelters while Harmony Gold Mining Co. said it boosted its electricity use in the quarter ended June 30.
“If those smelters come online and the economy turns around and we reach, say, 3 percent growth, which is not impossible, it will cause a serious electricity shortage,” Freddie Mitchell, an economist at Efficient Finance Holding Ltd. in Pretoria, said. “I foresee the possibility of blackouts again.”
Economic decline in South Africa slowed to an annualized rate of 3 percent in the second quarter from 6.4 percent in the first, according to Statistics South Africa Ltd. That was the third consecutive quarterly contraction and came after a 5 percent rate of expansion in the second quarter of last year.
Delayed Projects
While national power use has declined for nine straight months, last month’s contraction of 3.4 percent was the smallest this year, according to the statistics agency.
Eskom, which supplies about 95 percent of South Africa’s power, said in June it delayed hydro and wind power projects because of funding constraints and last year deferred a decision on whether to build a second nuclear power plant.
In April, Eskom’s Chief Executive Officer, Jacob Maroga, said the company needs to secure about 150 billion rand from external sources to fund the entire expansion program, which is currently focused on building coal-fired power plants that will start opening in 2012. Other funding will come from Eskom’s own income and a government loan.
“Our electricity supply and demand situation is still tight,” Eskom said in an e-mailed response to questions last week. “The electricity supply system remains vulnerable for the next five to seven years.”
Industrial Use
Eskom has installed power generation capacity of about 41,500 megawatts. BHP Billiton Ltd. alone can use 2,150 megawatts at aluminum smelters in Richards Bay in South Africa and Maputo in Mozambique, which rely on Eskom. Ferrochrome operators, including Xstrata and Samancor, each require several hundred megawatts of power while Gold Fields Ltd., the country’s second-biggest gold producer, can use 600 megawatts.
Eskom may report an operating loss of as much as 6 billion rand, Business Day newspaper reported today, without saying where it got the information.
South Africa is Africa’s biggest aluminum producer and the world’s largest supplier of ferrochrome, a stainless steel raw material, and manganese. BHP, Xstrata and Anglo American Plc declined to comment on whether they expect power supply problems.
While mining only accounts for 4.6 percent of gross domestic product, the industry employs more than 400,000 people and gold and platinum group metals are the country’s’ biggest exports.
Tariff Increase
Even though Eskom has already won the right to increase tariffs by an average of 31 percent this year, it is still expected to have a funding shortfall this year. For the financial year that began April 1 the utility could incur a 27 billion-rand shortfall unless it raised tariffs by 90 percent, Thembani Bukula, a member of the country’s national Energy Regulator of South Africa, said this year.
“We remain within the risk area. The growth rate in electricity consumption could very easily exceed growth in GDP because the concentration of demand comes from the energy- intensive users,” Goolam Ballim, chief economist at Standard Bank Group Ltd., Africa’s biggest lender, said. “Those users will recover more briskly than overall GDP.”
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To contact the reporters on this story: Carli Lourens in Johannesburg at clourens@bloomberg.net
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