Faced with a rapidly growing list of closures of ferro-alloy smelters, the government and Eskom have offered ferrochrome producers Glencore-Merafe and Samancor a heavily discounted electricity price of 62c per kilowatt hour (kWh).
The offer, while still subject to agreement on conditions, potentially takes this troubled heavy industry sector back to electricity prices last seen about a decade ago. The deal signals the intent of the government to act decisively, but it remains to be seen if there is the appetite to drive deeper industrial reforms in the face of growing global market and climate pressures.
The context is undoubtedly a challenging one for South African manufacturing. Weak growth in value-added and stagnating productivity in an anaemic domestic economy have been the order of the day for more than a decade. This has been further affected by geopolitical shifts and market access pressures arising from global compacts on carbon emissions. It is thus no surprise that the political pressure to strike industry-saving deals such as this has been immense.
The approach of using electricity price concessions is nothing new in South Africa. Many a grey-haired company executive or state bureaucrat will recall how the 1980s De Villiers Commission proposed special pricing agreements with energy intensive industries. These were used to support “beneficiation” and help the utility out of its electricity overproduction crisis.
Those arrangements, including developing the aluminium smelters in Richards Bay, had a deep impact on cementing a heavy-industry, capital-intensive focus in the South African economy. Not only did the resulting structural features lock Eskom into a particular operational model, but the biases also impinged on other development paths, with burdens shifted to other electricity users.
Researchers have also pointed out that many firms, given years of subsidies, tended to underinvest in their plant, operations and skills, thus limiting the longer-term sustainability of their operations.
Last year industrial policy researcher and Business Day columnist Neva Makgetla warned that the government has to be cognisant of the fact that the call on public sector support from heavy industry might well also limit prospects for much needed labour-intensive growth (“How to effect the structural change to fix SA’s jobs deficit”, October 28).
Should the intended deals succeed in buying some time for industry recovery, stakeholders must also give serious attention to developing the kind of generalised production platform investors and the labour force will need in the coming decades. Privileging one competitiveness factor is unlikely to offer a sustainable route to securing a substantial role for manufacturing in South Africa’s future.
When announcing the smelter deal electricity minister Kgosientsho Ramokgopa certainly signalled his ambition to yield enormous impacts beyond the deal. Not only would the number of operational smelters rise from 11 to 49, with a desire to recover more than 100,000 direct and indirect jobs, but also the arrangement would also boost exports, grow Eskom’s income and increase tax revenue.
Privileging one competitiveness factor is unlikely to offer a sustainable route to securing a substantial role for manufacturing in South Africa’s future.
Yet for these plans to be as transformative as the minister has suggested, there is certainly a lot of work to be done. After all, these deals are happening in a context of highly modernised plant expansions elsewhere in the world, many of which have included investments to decarbonise. In comparison, most South African producers continue to occupy a somewhat crowded margin of struggling high-emissions producers.
On top of this, years of decline in the quality of domestic infrastructure have also meant many of these local plants face multiple challenges of poor local services, unreliable transport networks and a lack of coherence in government policy. While Operation Vulindlela has yielded some modest gains in areas such as freight rail, the infrastructure and policy context remain fraught with challenges.
Ramokgopa also recently suggested that the country suspend its modest carbon tax. However, layering on yet another heavy industry concession is unlikely to assist in any process of deeper structural change.
Instead, the country needs to be using both taxes and industrial policy to meaningfully incentivise the deepening of competitive capabilities in lower-emissions production, instead of taking South Africa further away from the government’s objective to build an economy with less reliance on fossil fuels. Suspension of the carbon tax would also lessen the scope for supporting more just environmental outcomes and increase South Africa’s climate risk.
It is essential that some of the government’s boldness in seeking to rescue heavy industries is also directed to the hitherto hesitant domestic policies to grow the so-called “green economy”. Downstream manufacturing demand in fields such as electric mobility/transport systems, including their battery and energy generation needs, as well as in fields such as greener construction and renewable energy, could help sustain demand from a transformed heavy industry sector.
These emerging industries can contribute directly to a productivity-enhancing business environment, for example, by helping tackle massive urban and freight transportation challenges and in helping to meet renewable energy technology requirements. These sectors not only offer some chance of improving the lives of millions of people but can also serve to lessen the burdens that mining and heavy industry have caused to our natural systems.
South Africa needs more in the way of commitments to deep structural changes, rather than an ever-increasing list of quick fixes that risk stripping resources and attention away from factors that will count well beyond the next headline-grabbing crisis.
• Robbins is a visiting researcher at Wits University’s Southern Centre for Inequality Studies.
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