How Does Eskom Share Pain of Low Aluminum Prices With BHP Billiton?

The public debate developing in South Africa between BHP Billiton and the state electricity producer Eskom lifts the wraps on the usually secret world of power company-aluminium smelter supply agreements.

Like most aluminium smelters, BHP Billiton has been enjoying a preferential rate of supply with Eskom for its Richards Bay smelters, a deal made in the 1990s when Eskom had an excess of capacity.

In the current environment of brownouts and restricted supply, the price levels the South African electricity generator is providing the Australian mining and smelting company for power are proving hard to justify – or so Eskom is saying ahead of a public hearing on the matter.

current aluminum prices - MetalMiner IndXThe exact formula by which Eskom is required to share in the pain of low aluminum prices – the level by which the price of electricity drops as aluminium prices fall – is being made available to the National Energy Regulator of South Africa in a forthcoming public hearing on the issue.

Apparently BHP Billiton is now the only company in South Africa who is not paying a regulated price for electricity, and as BHP consumes some 9 percent of the power Eskom produces at loss-making prices, it has become a major commercial and political issue.

Business Report states that at Hillside, one of two smelters owned by BHP, Billiton pays for two-thirds of the 1,200 megawatts the smelter uses in accordance with a secret formula agreed upon as far back as 1992 – and which applies until 2028.

Hillside is reported as paying 22.65 cents per kilowatt hour (kWh) to Eskom this month, while residential households pay an average of R1.40 per kWh. It costs Eskom 41 cents per kWh to generate electricity, leaving the generator with a substantial loss on power that is desperately needed for other industries willing to pay a commercial rate.

The BHP-Eskom deal is far from unusual, however.

Continued in Part Two.


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