Critical businesses shutting down one by one in South Africa

South Africa’s soaring electricity prices have chased smelters out of the country, with these businesses no longer able to leverage cheap, reliable power as a competitive advantage.

This largely stems from Eskom’s mismanagement over the past 15 years, with South African households and businesses footing the bill for the utility’s mistakes. 

The current situation, of skyrocketing prices and heavy industry shutting down, stands in stark contrast to the Eskom of the past, energy expert and EE Business Intelligence managing director Chris Yelland said. 

Yelland explained that there was a time when Eskom was the cheapest producer of electricity in the world, with its prices half those of the next-cheapest utility. 

This created a significant competitive advantage for any company operating a smelter in South Africa, as electricity is the primary input in the production process. 

“In the smelting business, the competition is fundamentally international, and the advantage South Africa used to have was the price of electricity,” Yelland said. 

“Eskom would put out the message that they are so efficient and so good at operating a utility, as the reason why they could offer these very low prices for electricity.” 

This attracted a significant number of smelters to set up shop in South Africa, operated by mining companies and heavy-industry giants. 

These smelters were not only highly lucrative for Eskom, but provided thousands of jobs for South Africans and ensured the country could process its minerals locally to export more valuable products. 

This boosted foreign exchange earnings, supported the rand, and was a key driver of South Africa’s economic growth story in the late 1990s and early 2000s. 

The growth of smelting and heavy industry in South Africa was the result of significant investment in Eskom’s generation capacity in the 1970s and 1980s. This was coupled with sound management in the 1990s and 2000s. 

By 1990, Eskom had completed a huge buildout programme over three decades to ensure South Africa’s energy self-sufficiency. 

However, this period would also see the seeds sown that would result in Eskom’s present situation, with the government not heeding a warning in 1998 that the utility’s generation capacity would be fully utilised by 2007. 

Eskom made a request to the government for additional budget allocations to expand its generation capacity. However, it was rejected by the Mbeki administration, which sought to run a tight fiscal ship.

As the White Paper predicted, Eskom was unable to meet electricity demand in late 2007, which resulted in the first national power outage in South Africa’s history.

This resulted in Eskom being commissioned to build Medupi and Kusile to increase its generation capacity. The design of these plans was rushed, resulting in design flaws, which were coupled with rampant corruption. 

These two power plants cost Eskom R464 billion to build. Despite this investment, the utility produces less electricity after building these stations than it did before. 

Prices skyrocket and smelters shut down

The long-term impact of Eskom’s significant overspending on Medupi and Kusile, coupled with a decline in its overall performance, has put South Africa in a vastly different situation now than it was 20 years ago. 

Electricity prices have skyrocketed over the past decade, and South Africa has just come out of several years of intense load-shedding that crushed the economy. 

“The situation now is very different. As I noted, since 2008, the price shock has hit us, and we no longer have a competitive advantage in the price of electricity,” Yelland said. 

“In fact, if you follow the news, smelters are asking for a 70% discount on the price of electricity that they pay currently to remain viable.”

Yelland explained that the regulator has agreed to a 35% discount on the price of electricity for two of the remaining ferrochrome smelters in South Africa. 

This discount will apply for only one year to give the government time to find a longer-term solution to ensure smelters remain viable.

“It is clear that what they have to do to make South African smelters competitive on the global stage is not a 35% discount, but a 70% discount,” Yelland said. 

“That will then, supposedly, make our smelters competitive again, and they will open up shop again.” 

However, even this is in doubt, with Modern Corporate Solutions mining analyst Peter Major saying that mining companies will not reopen their furnaces if they close down. 

“Glencore pointed out that the government’s really trying, and they are talking to us. But it is still talking. Behind the scenes, the companies are desperate for action,” Major said.

“South32 said that once that closes, it will not reopen. Glencore told us that if their furnaces close, they will not reopen.” 

“Almost all the furnaces that have closed in this country will never open again. Never. Impossible economically to even think of reopening those furnaces.”

Yelland explained that even if the smelters get what they want and reopen, the question will become who pays to make up the lost revenue for the utility. 

“The question is who pays? Because Eskom is not going to just give them that price, it is effectively a subsidy. Someone will have to pay the subsidy,” Yelland said. 

“Will it be other electricity users? Will it be the taxpayer, with the money coming out of the fiscus to subsidise the industry? And why just that industry?” 

“What about the other smelters? What about mines? What about factories and other businesses? There are big question marks as to whether this is the right industrial policy.”