Higher commodity prices have given SA’s mining sector a fragile window to accommodate electricity utility Eskom’s latest price increase, but the chances of meaningful growth in the industry are slipping further away.
A more than sevenfold increase in electricity prices in the past 12 years and uncertainty about the reliability of supply from state-owned monopoly Eskom makes the SA mining sector a difficult proposition for potential investors, Minerals Council SA’s chief economist, Henk Langenhoven, told Business Day.
Electricity prices for mining companies, which pay higher tariffs than households, have increased 656% since 2008 and Eskom wants a 15% increase for 2022 on top of the 15% it has just received.
“The problem with these increases is that they become a staircase that just keeps going up and it becomes part of the cost structure of mining companies, which have massive fluctuations in the prices of their products,” Langenhoven said.
“When it comes to new projects or expansion, when companies make these decisions, what margin do they need to accommodate the commodity price fluctuations and to take care of the ramping up of costs,” he asked.
The council, an industry lobby group that promotes and protects the interests of its members that generate 90% of the country’s mineral output, warned in January 2019 that annual increases of 15% over three years would destroy SA’s gold sector and erase up to 150,000 jobs in the industry.
The recent surge in commodity prices, most notably platinum group metals and gold, particularly in rand terms, gives mining companies temporary financial capacity to accommodate Eskom’s tariff hikes, which means large-scale job cuts are unlikely, said Langenhoven.
Electricity accounts for 24% of gold production costs in SA, 22% for iron ore and 13% for PGMs for which companies have pursued shallow or open pit mines, which use less power than deep-level mines.
The longer-term outlook is bleak, with more price hikes on the cards for Eskom, which must cut debt of more than R450bn and start its strategy of using green energy as old coal-fired plants come to the end of their lives. If commodity prices fall, this accumulation of electricity tariff increases will have severe consequences for jobs in an industry that employs 450,000 people, said Langenhoven.
While the threat to existing mines is all too real, the most damaging consequence of the rapid price increases coupled with uncertain long-term supply and short-term reliability in Eskom’s electricity generation is that it makes board approvals of new mining projects difficult, if not impossible.
Sibanye-Stillwater, the world’s largest source of mine-to-market platinum group metals (PGMs) and SA’s second-biggest gold miner, has launched three projects worth R6.8bn in the country.
The only reason these projects were given the go-ahead is because two of them were nearly completed deep-level mines, with shafts and horizontal developments started by previous owners, while the third is a small open-pit PGM mine, said Sibanye CEO Neal Froneman.
Sibanye has a large pipeline of potential projects in SA that are unlikely to secure investment from the company because of the parlous state of electricity supply, regulatory uncertainty, economic difficulties and failing municipalities, Froneman has said.
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