In the murky world of South African politics and big business, it is tough to get through to the facts.
Critics have argued for years that BHP Billiton (LON:BLT)’s power deal with Eskom is a sweet deal for the firm and a disaster for the country. Brokered by Mick Davis (subsequently of Xstrata fame, but then Eskom’s treasurer), and later by Derek Keys, the National Party’s finance minister, Gencor (later in its guise as BHP) built the Richards Bay smelters to take advantage of a surplus of electricity back in the 90s that the firm was willing to sell cheap.
Since the middle of the last decade, though, Eskom has been in a near-permanent state of crisis over electricity supply, suffering widespread blackouts in 2008 and continual horse-trading with big industrial users, some of whom are paid to reduce consumption in order to keep the lights on.
In such a situation, BHP Billiton’s power rate, reported by one source at R0.09/Kwhr (US$0.01/Kwhr), appears untenably low compared to residential users at R1.00/Kwhr (US$0.09/Kwhr) – still cheap by rest-of-world standards, but not when compared to the country’s average income levels.
Questions are being asked, not by politicians, unfortunately, but by South Africa’s press among others as to why BHP is being subsidized when the rest of the raw material processing industry is not, or not to the same extent.
Consecutive senior government ministers have gone on to plum jobs at BHP after leaving office, raising the question as to their motivation in perpetuating such low power rates over the years.
BHP has recently announced it is reviewing the future of its 97,000-ton Bayside smelter and some consumers such as Hulamin, which takes a third of its slab from Bayside, has been in talks to ensure adequate raw material will be available. But while the massive 720,000-ton Hillside smelter continues to receive highly preferential power costs, there is no real risk to domestic supply.
But other questions are beginning to be asked, such as, “should a country like South Africa really be producing an energy-intensive product like aluminum when the country’s power supply is so constrained?” The same question, of course, could be imposed on other power-intensive industries like ferro-chrome, where electricity also accounts for 35-40% of the cost, according to a technical paper from last year.
Arguably, though, South Africa is adding value to its indigenous chrome ores – but that’s not the case with aluminum.