Glencore, the diversified miner headed by SA-born billionaire Ivan Glasenberg, has said Eskom’s price increases are a threat
to the future of its smelting business, which employs thousands in the country.
“For us as a smelting division that is quite a huge cost,” Japie Fullard, the head of the group’s ferro-alloys assets, said. “If these type of increases are going to push through, we are going to struggle even further and I can’t see that we will be able to operate our smelters in that type of price environment.”
The company, which released interim results on Thursday, disclosed a $116m (R2bn) impairment on its Lydenburg (Mashishing) smelter, which will remain on care and maintenance — a temporary closure in which the site is managed to ensure it is safe for work to resume at a later stage.
Power prices in SA have escalated more than 500% in the past decade, Fullard said. SA’s inflation averaged 5.1% in the 10 years to end-June.
Eskom’s price increases, together with blackouts that have crippled parts of industry, forcing mining companies to shut underground operations when the country moved to its most severe stage of load-shedding in December, have been cited among the biggest risks to the SA economy. This has now been compounded by the Covid-19 pandemic and damaging lockdowns.
Fullard’s comments follow last week’s high court judgment ordering the National Energy Regulator of SA to add R69bn to SA’s electricity tariffs over three years, leading to an outcry from business over the adverse affect on the economy. The regulator is planning to appeal.
Through its majority shareholding in a joint venture with Merafe Resources, Glencore operates five ferrochrome smelters and seven chrome mines in SA, which together employ more than 11,400.
The smelters were placed on care and maintenance when the strict was instituted at the end of March.
Glencore said it decided to keep the Lydenburg smelter on extended care and maintenance, reflecting a “challenging operating and market environment across the SA ferrochrome industry, including unsustainably increasing electricity tariffs, supply interruption and other sources of real cost inflation”.
As such, a $116m impairment for the entire carrying value of the smelter was realised, contributing to the group’s total $3.2bn in impairments for the half year. Smelters are energy-intensive operations that heat ore at ultra-high temperatures
to extract metals, in this case ferrochrome.
In June, the joint venture announced upcoming job cuts at most of its smelters.
Glasenberg said that while the outlook for ferrochrome demand is still solid, most production is moving to China and “SA is not competitive in respect to electricity prices”.
Fullard said Eskom is looking at a short- and long-term framework that could give relief to energy-intensive users such as Glencore. “Once those come through, we’ll put it into our figures and will re-evaluate. But surely, with the higher electricity prices, we are definitely under pressure.”
Glencore reported a net loss attributable to shareholders of $2.6bn in the first half of the year, swinging from a $226m profit in the same period in 2019. Adjusted earnings before interest, taxes, depreciation and amortisation (ebitda) were 13% lower at $4.83bn, but still higher than the market consensus of $4.28bn.
Glencore’s marketing division benefited from exceptional trading conditions in oil and posted earnings growth of 108%.
The group’s board concluded that it would be inappropriate to pay dividends to shareholders in 2020. Instead Glencore will prioritise the reduction of its $19.69bn net debt to bring it back under $16bn by the end of the year.
Correction: August 7 2020
This article story has been corrected to reflect that electricity prices have increased more than 500% in the past decade, not 1,200% as originally reported.
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