Key businesses shutting down one by one across South Africa and taking 35,000 jobs with them

Smelters across South Africa have steadily shut down over the past 15 years as rising electricity prices, coupled with unreliable supply has made them economically unviable. 

The government and Eskom have managed to keep two of South Africa’s remaining smelters, operated by Samancor and Glencore-Merafe, operational through a significant discount on electricity prices. 

Eskom agreed to a 62 cents/kWh tariff for these two smelters to keep them open, which is a further 29% discount on an already-discounted temporary tariff of 87.74 cents/kWh agreed to in January. 

However, this intervention is too late for the majority of South Africa’s smelters, which were built decades ago when Eskom was one of the best power utilities in the world and was selling electricity at some of the lowest tariff rates globally. 

This picture has completely flipped, with South Africa having suffered severe load-shedding over the past 15 years and electricity prices skyrocketing. 

As a result, many smelters have closed, and mining experts, such as Modern Corporate Solutions’ Peter Major, think it is unlikely that any smelters will be reopened in South Africa even if things improve. 

Electricity Minister Kgosientsho Ramokgopa explained to the SABC that the situation is now approaching dire straits for South African heavy industry. 

“The number of jobs on the line is much higher than the 10,000 put about in the public. Those are the direct jobs, with the indirect impact being significantly higher,” Ramokgopa said.

“The indirect impact is in the range of around 35,000 jobs. That is huge, and that is why we have made provisions for a new negotiated price agreement.” 

Ramokgopa explained that the current interventions may not yet be enough to keep these industrial giants economically viable, as they are still not globally competitive. 

“If you look at their rivals in Indonesia and China, they have been supported by the state through lower electricity prices,” Ramokgopa said. 

“They are coming in at lower electricity prices than us and, with that, our smelters cannot compete sustainably irrespective of where the minerals are mined first.” 

Ramokgopa said that even with South Africa’s mineral advantage, as long as the cost of electricity is not resolved, its smelters cannot compete. 

This is because the primary input cost for a smelter is electricity, which constitutes over 50% of all operational costs. With high prices in South Africa, it is more viable to ship minerals overseas for processing. 

South African smelters go from hero to zero

The current situation that South African smelters find themselves in stands in stark contrast to where they were just 20 years ago. 

South Africa, in the late 1990s and early 2000s, had the cheapest electricity in the world, with Eskom’s prices being half that of the next-cheapest global utility. 

This was largely due to the country’s immense infrastructure buildout in the 1970s and 1980s, which saw electricity supply skyrocket. 

The new power stations were also extremely efficient, operating on high-grade coal from mines located next to generating units. 

This buildout also created a substantial surplus of electricity, energy expert Chris Yelland explained. This made South Africa highly attractive for large industrial investments. 

“When it had this surplus, Eskom was just desperate to sell electricity, because they had all these costs associated with the buildout but no sales,” Yelland explained. 

“In that situation, if they give a special pricing agreement, it is better than nothing. You could sell at a heavily discounted price because it is better than not having any revenue at all.” 

In effect, Eskom was trying to sell electricity at whatever price it could, resulting in smelters and heavy industry investing in South Africa to make use of the low electricity prices.

This boosted South Africa’s economic growth and helped Eskom sell excess electricity. It appeared to be a match made in heaven. 

However, it was not to last as the government had fallen into a false sense of security regarding energy supply, as it thought the surplus would continue indefinitely. 

This was not the case, and the rushed buildout of Kusile and Medupi was plagued by corruption and design flaws. Costs ballooned to R464 billion, while Eskom produced less electricity after these plants were built than before. 

“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 70% discount is the minimum required to make local smelters competitive on the global stage. However, the policy could be unsustainable. 

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