South Africa’s mining industry, backbone of the continent’s biggest economy, is heading for its worst electricity shortage in five years in a threat to platinum and gold production and to the rand currency.
State-owned Eskom Holdings SOC Ltd. is straining to meet demand from a growing economy as consumption is set to swell when the Southern Hemisphere winter drives the need for heat. Faults at a nuclear power plant near Cape Town are crimping supply, while imports are cut because of flooding in Mozambique.
“We do see a significant risk of power shortages,” said Shaun Nel, director at the Energy Intensive User Group of Southern Africa, whose 32 members include local units of BHP Billiton Ltd. and ArcelorMittal. “We are seeing a significant number of factors that point to a system in distress.”
A repeat of the January 2008 blackouts that halted Anglo American Plc mines for five days and paralyzed factories would imperil South Africa’s 2013 growth forecast of 2.7 percent. The rand dropped to a four-year low this week, partly on concern that disruptions to mining will cut exports from the holder of the biggest-known reserves of platinum and chrome and fifth-largest gold producer.
Eskom, generator of about 95 percent of the nation’s power, estimated surplus capacity over peak demand for March 18 at 1.5 percent. That’s as thin as the margin was when the power cuts struck five years ago, pushing gold and platinum prices to records as Anglo, Impala Platinum Holdings Ltd. and Harmony Gold Mining Co. halted operations.
While Eskom later revised that March 18 margin to 3.3 percent, it’s razor-thin compared with a level of as much as 17 percent in mid-December.
An average of about 10,800 megawatts, or 25 percent of Eskom’s total capacity including imports from Mozambique, has been unavailable this year because of maintenance, both planned and unforeseen, according to data from the Johannesburg-based utility.
Eskom targets spare capacity of 15 percent. Peak power demand of about 31,000 megawatts this week compares with the more than 36,000 megawatts consumed at the height of last winter. One megawatt is enough to power 500 to 1,000 U.S. homes.
“This winter will be a particular challenge,” Eskom Chief Executive Officer Brian Dames said in an interview on Johannesburg-based Talk Radio 702 on March 18. “I am concerned about the increased unreliability.” Eskom said in a status bulletin yesterday that “the system remains tight.”
Power failures may weigh on metals producers’ stocks. On Jan. 21, 2008, as Eskom reported that the electricity shortfall had reached 2,500 megawatts, Harmony Gold fell 4.9 percent, Impala dropped 6.2 percent and Kumba Iron Ore Ltd. 6.3 percent.
The power producer is spending $55 billion to replace old equipment and expand capacity. Faults at the Koeberg nuclear plant north of Cape Town will keep it partly shut until April, while imports from Mozambique have been cut by 50 percent.
The Medupi project, a 4,800-megawatt, 91.2 billion-rand ($9.8 billion) plant that was due to start output in September 2011, will be the world’s fourth-biggest coal-fired station once complete. Medupi has been beset by delays, with labor unrest resulting in a two-month construction shutdown this year.
“We’re going to remain in a significantly strained power system until Medupi comes online,” said Nel of the Energy Intensive User Group.
Alstom SA, Europe’s second-biggest power-equipment maker, on March 18 said it had asked for more time to complete work on the project, adding to concerns that Medupi’s first unit won’t start by its year-end deadline. Eskom said March 20 it had written assurances from contractors that Medupi’s target date will be met.
Labor unrest at Eskom fuel suppliers has added to concerns that generation may be disrupted.
Strikes have halted output at six of 11 coal mines owned by Exxaro Resources Ltd., South Africa’s second-biggest producer of the fuel, and curbed supply to some of Eskom’s power stations. The utility burns coal for 80 percent of its generation, and gets one fifth of its supplies from Exxaro.
“We are concerned about the impact which a sustained strike could have on security of supply,” Hilary Joffe, an Eskom spokeswoman, said in an e-mail on March 20. “We have more than 48 days of coal stocks across the system.” That’s more than the 39-day average at the end of March 2012 that Eskom published in its annual report. In early March 2008, stockpiles at Eskom’s 12 coal-fired plants ranged between 5.4 days and more than 20 days.
Unplanned shutdowns at Eskom plants mean the utility will have to delay some maintenance to the winter months, when demand from South African households is highest. There’s no avoiding the maintenance work, Eskom’s Joffe said.
“We can’t not do it,” Joffe said. “We are approaching the users. We have existing arrangements with big users to reduce demand during peak periods and we are trying to augment that.” Eskom has asked all South Africans to reduce their power usage by 10 percent.
The company spent about 1.8 billion rand from mid-December 2011 to the end of May last year buying back more than 1,000 megawatts of power from industrial customers, especially in the ferrochrome industry. Current agreements end between March and May, Joffe said earlier this month.
Most of the Energy Intensive Users Group’s members have maintained cutbacks to 90 percent of demand, as they were asked to do in 2008, Nel said. “A lot of members have even declined from there, based on increased electricity costs and weaker global demand.”
Impala Platinum, the world’s second-biggest producer of the metal, said the utility has approached it about reducing demand for electricity. “We’re cutting power where we can,” Bob Gilmour, a spokesman, said by phone on March 19.
BHP Billiton in January 2008 mothballed two lines at the Bayside aluminum smelter in Richards Bay on South Africa’s northeastern coast to help stabilize power demand, and these remain shut, spokeswoman Lulu Letlape said this week.
Eskom sells 9 percent of the country’s power at rates below the cost of production to BHP’s Hillside smelter, also in Richards Bay, and the Mozal smelter in Mozambique, Beeld newspaper reported today, citing documents by the companies. While the average South African consumer pays 1.40 rand per kilowatt hour, Hillside is charged 0.27 rand, it said.
Eskom’s efforts to raise funds to pay for its expansion program were curbed when the energy regulator on Feb. 28 gave the utility permission to raise power prices by 8 percent in each of the next five years starting April 1, half the annual increase the company requested.
South Africans were confronted by average power-price increases of 25 percent in each of the past six years to help Eskom finance its spending.
Africa’s largest economy expanded 2.5 percent in 2012, the slowest pace since a 2009 recession, after a series of mining strikes curbed output. That’s less than half the rate the government says is needed to meet a goal to slash a 24.9 percent unemployment rate. Mining’s contribution to gross domestic product is about 5 percent. The National Treasury has forecast GDP growth of 2.7 percent for this year.
The lack of certainty over power supplies may weigh on mining companies’ ability to contribute to that growth by adding new production sites.
“We are in a very energy-constrained environment at the moment and there should be a lot of consultation between the mines and Eskom,” Clinton Duncan, an analyst at Avior Research (Pty) Ltd., said by phone from Johannesburg on March 20. “It is very difficult for mining companies to envisage any growth or expansion projects when you are severely limited in terms of energy supply into your operations.”