Investments by SA’s mining companies in renewable energy projects to reduce exposure to embattled power monopoly Eskom will worsen a growing lag in response to rising commodity prices.
It is taking SA’s mining companies longer and longer to respond to upticks in commodity prices by building and extending their assets because of a range of extraneous constraints of which Eskom is one.
SA’s mining industry has more than 1.5GW of energy projects worth billions of rand waiting in solar, wind and other power sources it has asked the government over years for permission to build. Executives have spoken of their frustration at endless delays in securing approvals.
The latest data from the Minerals Council SA, which represents companies generating 90% of the country’s minerals output, shows production is increasingly slow to respond to improved commodity prices, boding ill for the future.
The biggest constraint on production and feeding into board decisions on new projects or expansions was Eskom’s unreliable electricity supply and a six-fold increase in prices since 2006, with higher increases in the works, Henk Langenhoven, the council’s chief economist, told Business Day.
"If you look at SA mineral production and global commodity prices, it looks as if companies can’t respond to these prices because of structural issues like Eskom, Transnet and regulatory issues," he said, pointing to constraints in railing chrome and coal.
At the Investing in African Mining Indaba, mineral resources & energy minister Gwede Mantashe said mines could produce as much renewable energy as they liked behind mine fences for their own operations. Using the Eskom transmission grid to send electricity to other assets would come under much tighter restrictions and cost implications.
We are not spending money on increasing capacity to produce. There are very few new projects. The decline in fixed investments in mines started in 2011
— Henk Langenhoven
"The money mining companies will spend on alternative energy solutions is money they can’t use in their own expansion and investments in their mines," Langenhoven said.
"That’s the opportunity cost. Mining companies are so desperate to cushion electricity availability and price. If they can generate 30% or 40% of their own electricity needs, they can cushion the impact of Eskom."
Eskom is the biggest concern because of tariffs that have increased 523% since 2006 and the erratic nature of supply as rolling blackouts become the norm for the country.
Eskom is motivating for a 15% tariff increase and the council is arguing strongly against the hike after the national energy regulator granted the utility approval for a 9.4% increase in 2019/2020 and 8.1% in the following year.
The council has warned that the tariffs Eskom is seeking will all but destroy SA’s fading gold industry, which operates the deepest mines in the world, and result in the closure of more smelters in the alloys business.
The Glencore-Merafe Resources joint venture in chrome has started restructuring its Rustenburg smelter, with low chrome prices and high Eskom tariffs cited as the reason. Mining companies are investing in machinery and equipment, but the expansion of mine capacity remains subdued.
"We are not spending money on increasing capacity to produce. There are very few new projects. The decline in fixed investments in mines started in 2011," Langenhoven said.
"Companies are concerned that the risks are too high because of the uncertainties to make investments and getting these decisions through their committees and boards is very difficult. It’s worrying because then it becomes even more difficult to respond to commodity prices, taking even longer."
The third iteration of the Mining Charter gazetted by Mantashe was supposed to have brought regulatory certainty to the industry in 2018.
The council and its members have lodged documents in court opposing certain clauses, the most critical of which pertain to the need to renew BEE ownership deals on expired or sold mining rights to 30% from 26%, replacing all historic deals that have lapsed.
Unhappiness about this clause and uncertainty stemming from the industry’s legal challenge has been one of the major constraints when it comes to deal flows and investments.
"Commodity prices should be the leader for mining companies to respond. The real story is that it takes them 12 to 18 months before they can respond to," Langenhoven said.
"The lag in responding to prices is getting longer and longer," he said.
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