PETER BRUCE | Eskom’s big day looms to throw ferrochrome furnaces a lifeline

This coming Saturday, February 28, is a big day for Eskom. It’s the day it promised, back in December, to deliver to South Africa’s remaining ferrochrome furnaces a full agreement that would cut by more than half the cost of electricity they have been using to smelt raw chromite ore into a processed, “beneficiated” export.

It’s a big deal. At an industrial level the wider effect is portentous. Some 24 South African furnaces at various smelters would be eligible for the new tariff. At the moment fewer than four are working. Back in the day there were 59.

South Africa has by far the world’s largest reserves of chromite, and without it you cannot make stainless steel. But relentless increases in Eskom’s tariffs, designed to keep the creaking monopoly afloat even as it hired more people and produced less power, have rendered not only the ferrochrome industry but much of our processing and manufacturing uncompetitive. Most of our former ferrochrome processing capacity now sits in China, where power is cheap.

There’s little doubt — and you can tell by the way President Cyril Ramaphosa and various government statements insist constantly now how important it is to lower electricity costs — that the price of power is a constraint on growth and a driver of unemployment.

Still, there’s obviously no way Eskom can cut prices to the rest of us by more than half overnight, but that is its promise to the two remaining ferrochrome producers in the country: Samancor (Chinese-owned) and Glencore. An interim agreement for an 87c per kWh tariff was published a month ago, but it only suits a few furnaces.

Glencore has been adamant that if it does not get the 62c negotiated in December it will proceed with the section 189 retrenchment processes it had begun at its few remaining smelters before government finally sped to the negotiating table. In the absence of Eskom meeting its 62c promise, that process would start next Monday.

Glencore Global CEO Gary Nagle has been fulsome in his praise for Ramaphosa and his government recently, but the praise is really just a form of pressure around the deadline. He and Ramaphosa spoke as the December memorandum of understanding was signed, and they may talk again over the weekend.

Saturday matters, for if Eskom can cut tariffs for the ferrochrome producers then what about other industries? Do they line up for the same treatment? Any industry that melts ore, for a start, would face Eskom’s crippling prices. Steel is one increasingly desperate example, particularly companies that melt scrap metal in arc furnaces, or foundries pouring molten metal into cylinders or tanks or casings. Aluminium is another, and it was telling that Eskom didn’t flinch as South32’s huge Mozal plant in Mozambique begged it for a price cut before announcing earlier this month that it would shut down on March 15.

Saturday matters, for if Eskom can cut tariffs for the ferrochrome producers then what about other industries? Do they line up for the same treatment?

Clearly there’s a fight brewing. Ramaphosa has slapped down Eskom’s efforts to hold on to its transmission lines, which the presidency wants transferred to a new transmission company independent of Eskom, which will also buy power from the private sector. And there is probably also resistance inside Eskom to getting to the 62c for ferrochrome, because management there knows there’ll soon be a queue at the door for more cuts to more industries, starting with manganese.

Eskom CEO Dan Marokane is not unreasonably trying to protect his balance sheet, but he is in a tight corner. The ferrochrome deal was cleverly designed to create a sort of virtual independent power producer, with the processors — the customers — arguing that Eskom has surplus power (some during the day and always at night) and that if coal (a lot of it also surplus because Transnet can’t get it to the ports fast enough) is supplied at market prices the surplus power Eskom has could be wheeled to the smelters at a great price.

Roughly, you get to the 62c/kWh with 31c for the coal, 10c for conversion into power, 20c wheeling and 1c profit to Eskom, which is better than zero. Ramaphosa and his head of Operation Vulindlela, Rudi Dicks, loved it at the time. Eskom not so much.

So, as Saturday approaches there’s tension in the air. Eskom, once a giant, is being tethered. It isn’t quite Gulliver and the Lilliputians, but there’s an element of it there.

Ramaphosa and the ANC have invested a lot of political capital in reversing the deindustrialisation of the country. But industry here is now so close to the edge, and Ramaphosa is so desperate for traction in his success and reform story, that he is unlikely to be kind.

• Bruce is a former editor of Business Day and the Financial Mail.