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Seifsa warns of impact of higher electricity tariffs on metals, engineering sector

29th July 2020

By: Tasneem Bulbulia

Senior Contributing Editor Online

     

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Industry organisation, the Steel and Engineering Industries Federation of Southern Africa (Seifsa) says it is “disappointed” about the recent court judgment against the National Energy Regulator of South Africa (Nersa).

The judgment stated that Nersa had acted unfairly in the Multi-Year Price Determination (MYPD4) decision concerning the exclusion of a R23-billion government grant in the State-owned power utility's allowable revenue without allowing Eskom to submit its representation.

Seifsa economist Marique Kruger says the court’s ruling to review and set aside Nersa’s decision on Eskom’s MYPD4 for the 2019/20, 2020/21 and 2021/22 financial years is “really bad news” for the metals and engineering (M&E) sector.

She notes that local companies will have to absorb additional shock in the form of increased electricity tariffs of at least 10%, at a time when the country is buckling under a struggling economy, aggravated by the impact of the Covid-19 pandemic.

“Already, the electricity-intensive subcomponents of the M&E sector are under immense pressure and can ill afford this additional threat to their sustainability.

"Moreover, the ongoing Covid-19 pandemic has compelled a revision of growth forecasts significantly downward from a mild 0.6% to -9.1%, following weak domestic growth, stagnant demand and heightened load-shedding, which compounded increasing intermediate input costs, poor production levels, low capacity utilisation and rising unemployment,” says Kruger.

She says the court’s ruling does not bode well for business, given the fact that the rest of the year was expected to be tough for the economy.

The coronavirus, she says, has erased any hope of recovery in the medium term, with growth projected to occur only in 2022.

“Regrettably, this judgment merely adds to the strain.”

She mentions that electricity costs represent a significant portion of the turnover of the electricity-intensive subcomponents of the M&E sector. With high energy intensity indicating a high price or cost of converting energy into gross domestic product, and vice versa, generally, this results in lower economic productivity, she points out.

Kruger says companies were still taking strain from rising energy costs, despite the increasing elasticity of demand for electricity as companies explore other means of sourcing power.

“Any further increase in electricity costs will further slow production and growth in the sector, increase selling prices and result in a decline in exports due to poor export competitiveness. It will also lead to more job losses.

“We recommend that a moratorium be placed on any further electricity tariff hikes in order to accommodate struggling businesses and support the economy at this unprecedented time, characterised as it is by increasing closure of many companies in the sector and an accompanying jobs bloodbath,” she states.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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