State-owned power utility Eskom is no longer committing to a firm date for the conclusion of discussions with BHP Billiton relating to the contracts for the supply of electricity to the resources group's Hillside and Bayside aluminium smelters, in South Africa.

In a response to questions posed by Engineering News, the utility indicated that it was currently "difficult to say" when the talks would be concluded, owing to the "complexity" of the South African smelters contracts.

On May 30, Eskom and BHP Billiton announced that they had reached agreement on an amended power supply contract for the Mozal aluminium smelter, in Mozambique.

In the statement, the two companies highlighted their intention to conclude "binding agreements" on the South African smelters before the end of Eskom's 2010/11 financial year, which runs until March 31, 2011.

But Eskom told Engineering News that both companies were currently still "investigating possible options" and that no firm offers had been made.

It declined to discuss details of a possible offer, but reaffirmed that its principle objective was to eliminate the embedded derivative exposure created by the contracts and to "ensure cost-reflective recovery".

Ahead of the Mozal agreement, it had emerged that the smelters were paying only 12,3c/kWh for their electricity, while the other direct Eskom consumers were absorbing double-digit increases on tariffs well above 30c/kWh.

Together, the Southern African smelters consume about 5% of South Africa's 40 000-MW capacity, with Mozal's maximum demand being 950 MW and the South African smelters 1 300 MW.

Eskom confirmed that priority had been given to the Mozal contract, owing to the fact that the financial impact of that embedded derivative was "greater", owing to the "duration of the contract, the tariff level and the specific contract terms".

Following the May agreement, BHP Billiton confirmed that Mozal would face "higher", but still "internationally competitive" power prices, which represented about one-third of the smelter's operating costs.

BHP Billiton had also assumed all currency and commodity risk, with the new deal being rand denominated. Previously, the contracts had been coupled to both the aluminium price and the rand/dollar exchange rate.

It is also likely that the Mozal contract received greater attention, because the smelter remained the largest single investment in Mozambique's history and the country was, thus, keen to safeguard the investment.

It is understood that both the Southern African country and BHP Billiton are keen to create a more direct, or dedicated, link between the hydropower infrastructure of Mozambique, which could be expanded, and the smelters.

But the company is also not overly optimistic about the immediate supply/demand fundamentals for aluminium, despite strong demand growth.

Should the fundamentals improve, though, observers believe that the next phase of aluminium production will be developed in territories where the source of base-load power is low in carbon and where there is not a large, established middle class contesting for that energy. In other words, countries such as Mozambique and the Democratic Republic of Congo, rather than South Africa.

For this reason, the negotiations surrounding the South African smelters are likely to be more difficult than the Mozal discussions.

Besides the smelter discussions, Eskom is also seeking to extract itself from an embedded-derivative-linked contract with the Skorpion zinc mine, in Namibia, which is currently being sold as part of a larger $1,34-billion zinc transaction between Anglo American and Vedanta.

The three remaining contracts were recorded as a liability of R4,6-billion on Eskom's balance sheet as of March 31, 2010, down from the R6,9-billion liability of 2008/9. In fact, the loss associated with the embedded derivatives in 2008/9 was R9,5-billion and was the main feature of the utility's overall loss of R9,7-billion.