Important South African industry under threat

Eskom’s high electricity prices significantly affect the local mining industry’s competitiveness and profitability and, therefore, its sustainability.

Minerals Council of South Africa economist André Lourens told Daily Investor that electricity is already a significant input cost driver for the mining sector. 

He explained that smelting operations and gold and platinum group metals (PGMs) mining operations bear the brunt, as they are the most energy-intensive sectors. 

This is because these operations are underground and require constant cooling, water pumping and ventilation. 

Electricity currently accounts for more than 20% of operating expenditures in gold mining and roughly 11% in PGMs. 

“Eskom’s proposed electricity tariff hikes would increase this portion spent on electricity, strain costs, and potentially undermine mining investment, production, and profitability,” he said.

South Africa’s electricity prices have consistently increased above the inflation rate since 2008.

According to calculations from Momentum Investments, electricity prices have risen by over 600% since January 2008, compared to a headline inflation rate of 139% over the same period. 

Prices are set to rise even higher this year, as Eskom has requested hikes of between 36% and 44% for its 2025/26 financial year.

Eskom is requesting total revenues of R446 billion for the 2026 financial year, R495 billion for 2027, and R537 billion for 2028.

The proposed average price hikes for Eskom’s direct customers are 36.15% from 1 April 2025 to 31 March 2026.

“No company, including mining, can absorb a 36.15% increase in electricity tariffs,” Lourens said. “NERSA will likely grant something in the 20%, but still, this is more than four times CPI in 2024.” 

He explained that this would see mining companies reduce their consumption of Eskom electricity, substitute towards cheaper renewables and improve the efficiency of their equipment.

Some companies may also assess whether operations still make sense in this high electricity cost environment. 

“And as government champions beneficiation, they must know that this is highly unlikely given high and ever-increasing electricity tariffs,” Lourens said.

Electricity prices in South Africa

In South Africa, the price of electricity and Eskom’s tariff hike requests are cost-reflective, meaning it is based on the utility’s costs to produce electricity.

For Eskom’s latest request, the utility argued that big price increases are needed to improve its financial sustainability by moving to cost-reflective prices.

Lourens said it’s important to be cautious when comparing electricity costs between countries.

However, looking at the cost per kilowatt hour (kWh) can offer a useful starting point, provided the comparison is adjusted for real, rather than nominal, values. 

“Interestingly, Eskom has stopped doing this in their annual presentations to customers because it does not make the increases any more palatable,” he said. 

“Even if our electricity ranks cheaply compared to other countries, the problem is that Eskom’s standard average tariffs have increased by over 900% since 2007.” 

“So, what you have is an exceptionally steep tariff increase over a short period – this will strain any domestic operation that was previously geared to a substantially lower cost of electricity.”

Lourens explained that electricity costs have a direct impact by increasing costs and making mines less profitable. 

This then leads to an indirect effect: higher electricity prices will discourage the mining of lower-grade deposits, which are less profitable due to rising fixed costs such as ventilation, pumping, and cooling. 

“This would shorten the life-of-mine (LoM) for many operations, as reserves deemed economically viable would shrink,” he said. 

“Over time, this could lead to earlier mine closures, job losses, and a reduction in the industry’s contribution to the economy.”

This could have a significant effect on investment in the local mining industry.

Mines that can spend valuable capex on alternative sources of electricity will do so. 

“This capex is being spent to reduce the costs of Eskom electricity and ensure decarbonisation of operations,” Lourens said. 

“But this capex is not going into exploration or expansion projects, and that does not bode well for the industry.”

“Simply put, mines are being forced to spend billions to sustain current operations as opposed to investing to expand capacity.”

Negative impact of high electricity prices

The negative impact of Eskom’s high electricity prices coincides with several other challenges facing the local mining industry.

South Africa’s mining sector is under severe pressure, driven by declining commodity prices and challenges from struggling state-owned enterprises.

These issues have led to reduced revenue and profitability, forcing many companies to cut jobs to survive.

Once the backbone of the economy, the mining industry’s output has significantly declined over the past three decades. Despite this, it remains crucial for job creation and foreign exchange earnings.

The Reserve Bank’s latest Quarterly Bulletin revealed that the sector still employs 470,900 South Africans but that the number of South Africans the sector employs declined by 1.9% in the past three months.

The bank further reported that job losses are no longer limited to gold mining, which has suffered as reserves dwindle, but are spreading to areas with ample resources like chrome and PGMs.

While employment briefly rebounded after the pandemic due to high commodity prices, falling prices since mid-2022, coupled with rising costs and logistical constraints, have renewed pressures on the industry.

Mining’s cyclical nature means employment fluctuates with commodity prices. When prices rise, companies ramp up production and hiring.

However, as prices fall or markets become oversupplied, job cuts follow. The sector’s current downturn reflects this cycle, with prices remaining flat since their sharp decline in 2022.

Beyond commodity prices, South Africa’s declining appeal as a mining investment destination exacerbates the industry’s woes.

Once a global leader, the country now suffers from regulatory instability, the threat of nationalisation, and legislative hurdles. These challenges have discouraged new investments, leaving 6,152 abandoned mines and stalling exploration efforts.

Local miners also face challenges like labour disputes, rampant illegal mining, and infrastructure bottlenecks.

According to the Fraser Institute, the country now ranks among the ten least attractive mining jurisdictions worldwide.