Higher electricity prices will see metals, engineering companies invest to survive, not grow – Seifsa

3rd February 2023 By: Marleny Arnoldi - Deputy Editor Online

The Steel and Engineering Industries Federation of Southern Africa (Seifsa) says Eskom’s 18.65% tariff increase comes at a time when the cost of living is already exorbitantly high for many South African households and businesses and will see investment being redirected from growth initiatives to survival efforts.

While the federation acknowledges that the National Energy Regulator of South Africa, which granted Eskom the increase, has a difficult balancing act to manage, the increase has been granted when Eskom cannot provide sufficient electricity to its customers at the moment and into the foreseeable future.

“The fact that companies must make alternative plans for electricity during periods of loadshedding, such as running generators where the cost can be anything from three times more per kilowatt hour than the Eskom tariff, means that the effective increase to customers is much more than the 18.65% and 12.74% granted for the next two financial years,” Seifsa explains.

COO Tafadzwa Chibanguza comments that, for the metals and engineering sector value chain, which is made up of energy-intensive upstream industries and relatively less energy-intensive downstream industries, the implication of this tariff increase is extremely damaging.

The cost of alternative energy solutions for the energy-intensive upstream industries is extremely prohibitive, given their consumption, resulting in these industries being bound to Eskom and exposed to the punitive cost increases.

While the downstream industries that are relatively less energy intensive are able to make provision for alternative energy solutions, the cost of running these alternatives is equally prohibitive.

Apart from the fact that the energy crisis detracts from the investment attractiveness of South Africa, a very concerning long-term implication is emerging, Chibanguza points out.

Companies are sacrificing long-term capital that could otherwise be invested in expanding their operations and are spending these scarce resources in pursuit of immediate survival.

The long-term implications will be a continued structural decline in the performance of the metals and engineering sector, which has already been tracked at a rate of 1.6% on a compound yearly basis since 2008.

Employment in the sector, especially among woman and youth, has contracted at the same pace over the same period, contributing to the “socioeconomic calamity” that the country already faces.

Only a clear, honest and dogmatic focus on structural reform in the energy sector will move the country out of this crisis, Chibanguza notes.

While multiple efforts in this regard, including the energy reforms announced by the President in July 2022, are welcome and present a fundamental shift to the management of the electricity supply industry, progress to date has been painfully slow.