Minerals Council's Langenhoven warns of tipping point for mining if electricity tariffs increase by 15% a year

30th January 2019 By: Nadine James - Creamer Media Writer

Minerals Council's Langenhoven warns of tipping point for mining if electricity tariffs increase by 15% a year

JOHANNESBURG (miningweekly.com) – State-owned utility Eskom’s proposed tariff increases would cost some 150 000 direct mining jobs, all but eliminate the gold sector and, as a consequence, reduce Eskom’s mining client base by around 36%, thereby exacerbating the utility’s “death spiral”, Minerals Council South Africa chief economist Henk Langenhoven said on Wednesday.

The National Energy Regulator of South Africa (Nersa) is currently holding public hearings across the country to gather input into the power utility’s request for a 15% a year increase in electricity tariffs for the next three years.

“I’ve been trained all my life not be alarmist, but this is the tipping point for the mining sector,” Langenhoven commented during a media briefing, on Wednesday, to discuss the Mineral Council’s submission to Nersa.

He noted that, taking the multiplier effect into account, the proposed tariff increases would imperil around 300 000 jobs and adversely affect three-million people.

Gold is the most electricity-intensive commodity owing to the depths involved and the subsequent level of ventilation and cooling required.

Langenhoven noted that, since 2007 and the beginning of the electricity crisis, 53 500 jobs have been lost in the mining sector, with 34.2%, or 18 303, of those specifically attributable to electricity tariff increases, the Minerals Council pointed out.

Further, of the 18 303 job lost, 7 341 were lost in the gold sector.

Langenhoven added that, in 2018, 71% of gold mining operations were either marginal or loss-making and, should the proposed tariff increases occur, about 96% of gold production would become loss-making or marginal by 2021.

He also pointed out that more than 52% of platinum group metals production was unsustainable – even taking the palladium price rally into account – and, should the tariffs be implemented, that percentage will increase to about 75%.

Minerals Council CEO Roger Baxter added that, in terms of deep-level platinum mining, “the costs curves tend to be a lot flatter, so any changes on a cost curve side tend to exacerbate that marginal status.”

He further stated that, “Eskom already have a 4.4% regulatory clearing account approval”. The proposed 15% a year increase in tariffs will result in an effective tariff increase of about 70% by 2021 – this calculation excludes the impact of the 4.4.% clearing account, which means that the industry's reality will be a lot more dire than the council predicts.

“I’m not sure that there’s any electricity-intensive industry in South Africa that’s going to survive that level of price increase in the short term.”

Langenhoven said Eskom assumes that a 15% tariff increase will result in the collection of R48.1-billion in revenue from its current 993 mining clients by 2023. However, the estimated 36% decline in Eskom’s mining clients owing to the cost pressures that the tariffs will introduce will result in Eskom only collecting R19.5-billion.

Baxter commented that, continuing its “self-defeating” behaviour, Eskom would seek to recoup its losses from other clients by driving up the overall price of electricity again, putting undue pressure on existing clients before pricing them out entirely.

“Our view is that a price increase on its own is not a solution. Eskom has to be restructured and the State, as a shareholder, has to intervene,” said Langenhoven.

He and Baxter agree that some level of price increase is necessary, but “15% is just not possible for the industry to absorb.”

Baxter stated that the entire electricity supply industry had to be modernised because the old models of concentrated power utilities were outdated. He stressed that the creation of competitive electricity generation was a necessity.

“Over the last decade, it's Eskom’s customers that have borne the brunt of its poor decisions and of other factors like State capture . . . the fact of the matter is that Eskom cannot keep forcing us to bear the cost.”

He added that outright privatisation was probably not the solution but that “restructuring and allowing private participation” would be a move in the right direction.