Eskom Acting Chairman, Mpho Makwana, explains: “The agreement, effective 31 March 2010, removes the impact of embedded derivatives on Eskom’s balance sheet, as well as all onerous conditions.  This amended agreement is also an important step in ensuring that both Eskom and BHP Billiton continue advancing the growth and development of southern Africa. We commend BHP Billiton for this unprecedented step on signing the amended Mozal contract, which shows their commitment to South Africa and the SADC region.”

Whilst discussions relating to the South African smelters are continuing over the coming months, the BHP Billiton smelter contracts at Hillside and Bayside in Richards Bay will remain firm and binding. Eskom will maintain its interruptibility at the smelters in line with the provisions of the contract.

Xolani Mkhwanazi, BHP Billiton Chairman, said: “BHP Billiton remains acutely conscious of the electricity supply challenges facing South Africa and the region and has been exploring innovative and sustainable solutions to these challenges. With the announcement of the amended Mozal agreement, Eskom and BHP Billiton remain confident that, given the necessary time and commitment, innovative and mutually beneficial solutions will be found for the South African smelters. The smelters continue to make an important contribution to the South African economy and at present continue to fulfil a commitment to a 10% power reduction. Eskom’s success is our success and we will continue to work with Eskom to address issues of common concern.”

The new pricing agreement will be submitted to the National Energy Regulator of South Africa for approval.

Credit insurer Coface South Africa says many of the bigger players were assisted by the demand for hundreds of thousands of tons steel required for Eskom’s new power stations. South African companies have been awarded the largest orders for structural steel in South African history and all this steel is being produced locally.

South Africa also has a significant backlog of infrastructural reinvestment that needs to be addressed. Because of this, sustainability of government’s Infrastructure Roll-Out Programme should last well beyond 2010. Therefore, South African steel producers are not looking at the current economic conditions as a threat to the future of the programme, with the recent drop in prices only alleviating some of the pressures associated with funding.

A further decline in the market is not expected, but current conditions should continue in the foreseeable future, with an improvement towards the end of the first quarter of 2010. Cashflow for many steel suppliers will remain the major issue, with the aim now being survival.

The few companies with the cashflow to carry some capital expenditure for a few months may attempt to position themselves to up their market share, if the market should turn in early 2010. Meanwhile the steel construction industry has doubled its production capacity since 2006 by investing heavily in new production facilities, equipment and materials management systems to the extent that South Africa currently has one of the best equipped and most productive steel industries in the world.

All indicators point towards a recovery in the steel price in 2010. This view is based on projected price increases in the raw materials used in the manufacturing of steel, electricity price increases, and an expected increase in demand for steel from the manufacturing sector.

A global iron-ore price settlement, 10% up on current prices, is expected from price negotiations between the major suppliers and consumers in the near future, with the rest of the world following suit. There are already indications of stockpiling taking place by major steel manufacturers, in anticipation of 2010 price increases.

The global demand for steel fell in the last 12 months. This resulted in a subsequent drop in the demand for coking coal. The most significant growth potential for coal lies in steel manufacturing. Some definite positive signs of an increase in demand for steel are already evident through the subsequent demand for coking coal.

The spot prices of coking coal and thermal coal have increased by 33% and 18% respectively in the last few months, with Eskom’s expected increased consumption also adding to the increase in demand. South Africa’s severe power shortages are likely to continue unless there is significant investment in new power stations with the resulting increase in demand for coal, and the demand for steel to build these power stations.
The biggest local consumer of steel products is the manufacturing sector, with structural steel (used mainly in infrastructure development) being the largest subsector, and building and construction; mining; and automotive sectors being the other major consumers.

The South African manufacturing sector bottomed out in April 2009, and although recovery has been painstakingly slow, there is a definite upward trend with year-on-year production decreases shrinking every month.

Given the delay or suspension of mining projects, necessitated by the current global economic slowdown, it is expected that the mining sector’s steel demand will also increase in 2010 as these projects get back on track.

The greatest threat to a recovery in the South African steel industry is the proposed increase of 35% per year for the next three years in the price of electricity. This will not only have a significant effect on the cost of producing steel, but also affect the production costs of manufacturers of fabricated steel products, and impact on the cashflow and steel consumption of the end-user, which effectively drives the whole industry.
Some inventory build-up to take advantage of the rising prices could also lead to a ‘technical recovery’ in the industry. As was the case in 2009, this ‘recovery’ could stimulate the industry and result in increased production by manufac-turers, but ultimately be short-lived. Should wholesalers and retailers become fully stocked, further orders could die down with the resulting cut in prices due to lack of demand. All stocks held will be devalued overnight and force players to reduce their margins or in severe cases even sell at a loss.

The parties anticipate that such agreements could include a package of measures that would reduce the impact of financial derivatives on Eskom’s balance sheet while also ensuring a competitive supply of electricity to the smelters.

Details of the measures under consideration are commercially confidential, but may involve BHP Billiton assuming responsibility for the commodity pricing and currency exchange risks related to the contracts which would in turn reduce the volatility of Eskom’s earnings and improve its balance sheet.

These measures have been developed after lengthy discussions with Eskom that took into account the legal, technical and financial implications of the long term supply contracts.

BHP Billiton said that while the proposed measures would positively influence the electricity supply position over time, the grid would remain under pressure for the foreseeable future. The company would therefore continue to fulfil its commitment to reduce electricity consumption in support of Eskom and the country by maintaining a 10% power reduction in South Africa.

BHP Billiton is grateful to Eskom for its willingness to work with us in the development of mutually beneficial outcomes that are favourable to both parties and the public. We are confident that this will strengthen the foundation for a solid partnership with Eskom and our long term commitment to South Africa.

“Electricity powers mining equipment and the transportation of personnel and materials,” explains Frost & Sullivan metals & mining anlyst Wonder Nyanjowa. “It is also used to pump underground water as well as to provide ventilation and refrigeration in mines.”

Curtailing electricity consumption in the South African mining industry to 95% of normal consumption, combined with other operational problems, has reduced capacity in the mines to approximately 90%. Mineral production has declined whilst the health and safety of employees has been endangered.

To offer decision makers a perspective on the overall impact of the electricity supply crisis on South Africa’s mining industry, Frost & Sullivan will be hosting an online analyst briefing on Thursday 25 March 2010 at 2:00pm GMT/ 4:00pm CAT.

The discussion will benefit equipment manufacturers, industry executives, policy makers, and the investment services industry.

To participate in this briefing, please email Patrick Cairns at patrick.cairns@frost.com with the following information: your full name, company name, title, telephone number, e-mail, address, company website and country. Upon
receipt of the above information, a registration link will be e-mailed to you. You may also register to receive a recorded version of the briefing at anytime by submitting the aforementioned contact details.

Launched at the Council for Scientific and Industrial Research in Pretoria on 1 March 2010, the Technology Localisation Programme of the Department of Science and Technology (DST) supports the Government’s Competitive Supplier Development Programme (CSDP), which is aimed at increasing the competitiveness of local suppliers through a range of demand and supply-side measures. This will assist local companies to leverage procurement opportunities from government’s large-scale infrastructure recapitalisation programme over the next 20 years.

The DST Technology Localisation Programme also supports other high-level government initiatives such as the Industrial Policy Action Programme (IPAP) that are set to help South Africa reduce its trade deficit while improving its long-term manufacturing capacity – a significant step towards scaling up efforts to promote long-term industrialisation and industrial
diversification beyond the current reliance on traditional commodities and non-tradable services.

It is important for local foundries to be globally competitive as they form the backbone upon which the country’s supply chains can be further developed for big infrastructure programmes, such as those of Eskom and Transnet, to support and drive localisation.

The Programme began with the identification of components for localisation in Eskom and Transnet’s CSDPs, and benchmarking of foundries with the technology to manufacture these components. Technology gaps were identified and Technology Assistance Packages developed to support localisation in the foundry industry.

Through this initiative, the foundries will be able to access expertise from DST activities in Advanced Manufacturing and Light Metals. The DST is working in partnership with the Departments of Trade and Industry, and Public Enterprises, the industry, and development agencies such as the United Nations Industrial Development Organization (UNIDO), to drive localisation in the country.

Much has been made about the impact of the recent multi-year tariff hikes which the National Energy Regulator of South Africa (Nersa) has granted to power utility Eskom.

“Power hikes to cost 250000 jobs” and “foreign investors to be scared off by power price increases” scream news headlines on many of South Africa’s leading newspapers and financial news sites.

Without trivialising the impact of a power crisis or the additional strain on the average South African consumers wallet, these headlines and press statements are mis-leading and ill-informed.

The bizarre assumption is that humans will do nothing to change their behaviour and the country as a whole will choose not to innovate to address this challenge. To attach such lemming-like characteristics to one of the most innovative regions in the world is mind-boggling.

Humans as a species evolve and anybody who implies that they will continue behaviour which negatively hits them in the pocket needs to have their head read.

US president Barack Obama recently commented that the US had to focus on the development of nuclear technology at home to meet their power supply. He made a poignant comment saying that if the US didn’t focus on developing these technologies at home, then competitors in foreign countries would and the US would be forced to import these technologies. The end result would be no jobs for Americans in this sector of the economy and his mind that was unacceptable.

This is precisely the attitude we as South Africa need to adopt in the light of the challenges facing the country.

So where are the opportunities?

While independent power production is still not viable in South Africa, it is fast coming to a point where it does become attractive. If you can participate in a market which has guarantees of price increases of 25% per year for the next three years, it is going to start to look attractive.

Innovation around alternative energy sources is going to be given the go-ahead. Green energy, nuclear, solar etcetera is going to come into vogue.

The same could be said for the agriculture sector. We know that resource giants like Vale and BHP Billiton are piling into the fertilizer sector and ratings agency Moodys says it expects this trend to grow as alternative energy sources are sought.

Increasing demand and funding for skilled engineers, researchers and developers to come up with innovative solutions. Already companies such as Sasol and Anglo American have been investing in their own independent supply technology. Educators, lecturers and trainers will be needed to support the demand for these professionals both in educational institutions as well as within corporates.

In conclusion we know that there is a shortage of electricity on the supply side and we recognise that South African consumers and municipalities remain cash-strapped.

However the talk of economic collapse and fall-out is overstated and dangerous when in fact the opportunities far outweigh the threats posed to the country.

Marc Ashton
ManufacturingHub.co.za and Ferronews.com
Respond to this editorial contribution on newsdesk@rival.co.za

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