Eskom’s tightrope: Jobs vs chrome revenue

Eskom has opted for less revenue from South Africa’s struggling ferrochrome producers than no revenue at all. For a company that now generates more electricity than it can sell, that makes sense, even if it entails a huge compromise for the energy utility. 

The backdrop to this is a standoff between Eskom, which has been hiking costs rapidly over the past decade, and the country’s ferrochrome producers, which have warned that steep power prices make their industry unsustainable and put 2,400 jobs at risk. While South Africa accounts for 72% of global chrome reserves, its output fell 50% last year, in part thanks to growing competition from China. 

Now, Eskom has offered the country’s ferrochrome producers – the largest of which are the Merafe-Glencore joint venture and Samancor Chrome – a five-year deal of 62c/kWh. This would at least allow the producers to break even, put retrenchments on hold and even reopen previously shuttered smelters. 

Intensive energy users

The smelters are massive users of power, so they are vital to Eskom’s bottom line; they’re also the most vulnerable to electricity price hikes. Over the past decade, Eskom has hiked prices for consumers far in excess of inflation as it battles its own demons, including ballooning unpaid debt from municipalities, which sits at R110bn.

The ferrochrome producers consume 1,600MW-2,000MW of power – equal to about 12 terawatt hours, which provides Eskom with revenue of about R7.4bn. That’s money Eskom stands to lose if the 62c/kWh tariff isn’t finalised and approved by the National Energy Regulator of South Africa (Nersa), which will hold public hearings on this discount price proposal. 

There is much at stake. Speaking at a forum on platinum group metals last month, Japie Fullard, head of Glencore’s South African ferroalloys operations, said if this offer of 62c falls through, “I promise you, within a week or two, I am going to retrench another 1,500 people – and that is heartbreaking.”

But, if the terms and conditions are agreed, and that 62c is implemented, Fullard said this could herald the revival of beneficiation in South Africa. 

In Merafe’s annual report, published last week, CEO Zanele Matlala said the deal with Eskom is “critical”, given that rising power costs “pose an existential risk to the South African ferrochrome industry”.

The 62c offer is down from the current amended price agreement of 87c/kWh, and the cost is likely to be borne on Eskom’s balance sheet; debt, in other words. But for Eskom, the ferrochrome producers are too important and too existential for it not to cut a deal.

Electricity minister Kgosientsho Ramokgopa has warned, however, that the cost of providing discounted power to the ferrochrome producers must not be “socialised” – meaning households must not bear the cost of subsidising these companies. 

Saving jobs

The deal has found political support too, since the ANC’s alliance partner, trade union federation Cosatu, has lauded it as a solution to the “imminent threat” of retrenchments. But it says there need to be further interventions to ensure municipalities pay for power so that Eskom stops hiking prices. “Eskom cannot be sustained nor end its dependence upon unaffordable, above-inflation tariff hikes unless all consumers pay for electricity consumed,” Cosatu said.

This deal is ringfenced to ferrochrome producers, however, and won’t be offered to other intensive energy users, including the smelters producing other ferroalloys or platinum group metals. That will do doubt be a major frustration to the rest of the mining industry, which also has the same cost pressures.

The plan is for Eskom to quickly migrate to power price agreements (PPAs) with independent power producers (IPPs). Nersa will deliberate over whether this will be a three- to five-year deal – and whether a shorter tenor might be better to accommodate cheaper power supply from an IPP-PPA as soon as it becomes available.

It’s not a perfect deal, but it’s a deal that can work, provided Nersa supports it. If that happens, at least 1,500 jobs will be saved at the Glencore-Merafe Chrome Venture, and potentially hundreds or thousands in other direct and indirect jobs. That’s worth making compromises for.

A version of this story was first published on Miningmx. Miningmx and Currency are both part of the Financial Mail Group.

ALSO READ:

• Mozal goes dark as power prices crush beneficiation ambitions
• The cost of Eskom’s secret pricing deals
• Eskom says it’ll stop bleeding South Africa dry

_{Top image: Pierre Crom/Getty Images.}