Companies such as steel producer ArcelorMittal SA, mining group South32 and industrial users including Consol Glass and Nampak face a more than threefold rise in natural gas prices in July.
As a result, the National Energy Regulator of SA (Nersa) is being taken to court by industry body the Industrial Gas Users-SA (Igua-SA) over the methodology used to set gas prices, which are poised to rise by as much as 220% this year.
Nersa approves the maximum tariff that can be charged by the gas industry.
Igua-SA said the methodology used to set maximum natural gas prices is based on a weighted formula of prices of foreign indices in the US, Europe and the UK. This means a rise in global prices is bound to affect SA, increasing costs for local manufacturers.
This comes as trade, industry & competition minister Ebrahim Patel continues his push for policies that promote the local manufacturing sector, whose contribution to GDP has been on a downward spiral over the past two decades.
"Such exponentially escalating costs will not only substantially prejudice downstream gas users but will also harm the manufacturing industry, which is vital to the future growth and development of SA’s fragile economy," said Jaco Human, Igua-SA’s executive officer.
The rising costs could add to operating costs of companies such as steelmaker ArcelorMittal in an industry that employs thousands of people.
Igua-SA describes its members as the "backbone" of SA’s manufacturing industry.
Conflict
While natural gas prices have risen dramatically abroad, leading to protests, unrest and inflationary increases in many countries, local supplier Sasol extracts natural gas from Mozambique, removing it from overseas supply chain issues and cost pressures.
Natural gas is growing in popularity as a cleaner alternative to energy produced by burning coal.
Gas costs about R68 a gigajoule at present, but Human told Business Day this is set to more than triple.
The method used to price natural gas has been part of a long-running conflict between large industrial users and Nersa. The first methodology used to determine the maximum gas price in 2013 was based on a basket of other energy prices such as coal, diesel, electricity, heavy fuel oil and liquefied petroleum gas.
The method was challenged by industrial gas users in 2013 and overturned by the Supreme Court in 2018 and two years later in the Constitutional Court, which found it to have no direct relation to Sasol’s costs.
Now the new method — based on a weighted average of three international gas price indices — is being challenged.
In court documents, Igua-SA compares using an international basket of prices to work out the price of beer in SA based on prices in European countries, where it is far more expensive. It says the methodology used by Nersa is not transparent, predictable or objective.
Human argues in court documents that the competitive conditions of the international natural gas hubs — including supply and demand conditions; suppliers’ costs; and the risks faced by investors — are substantially different from SA.
The industrial gas users want Nersa to use the "cost plus method" in determining price, which would take into account the cost of extracting the gas and add a reasonable profit based on Sasol’s risk and investment.
The gas users have also argued, based on a previous Constitutional Court judgment, that the benefits of natural gas should be shared between Sasol, which should make a profit, and the users, who could benefit from reasonable prices of energy. Gas users claim that they do not benefit.
Igua-SA says in court papers the price of gas is now higher than when Sasol "had an unconstrained monopoly [in] the first 10 years of bringing gas from Mozambique" from 2003 to 2013, when the government had given it discretion in setting the price of gas.
Court papers were filed in December and court rules allow further time for Sasol and Nersa to respond.
Nersa is no stranger to court action as it has been taken to court by Eskom over the way it sets electricity prices.
Sasol said it was reviewing the legal application and still had time to respond in terms of the court rules.
It said: "In the event that Sasol does decide to oppose the matter, the appropriate court papers will be filed in terms of the applicable court rules."
Nersa did not respond to requests for comment.
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