There are three issues that keep Minerals Council SA CEO Roger Baxter awake at night: "the disaster that we call Eskom"; the continuous-consequences and local-content provisions in the mining charter; and the carbon tax, which comes into play on June 1.
The most pressing issue for the mining industry, which, together with the mineral smelting and refining industries, absorbs 30% of Eskom’s output, is the lack of certainty over electricity supply and future pricing.
"It is extremely difficult to make long-term investment decisions in a mine or smelter when you have no visibility on electricity pricing over the next five to 10 years, and no idea what government will do to allow private competition from other sources, including renewables," says Baxter.
PODCAST: The growing power of class action lawsuits
Subscribe: iono.fm | Spotify | Apple Podcasts | Pocket Cast | Player.fm
"If you want to develop new mines or deep-level mining you need guarantees of supply and pricing. We need much greater certainty."
The Minerals Council, which contributed engineering expertise to the Eskom review team of the department of public enterprises, is looking forward to engaging public enterprises minister Pravin Gordhan on the team’s findings on the extent of Eskom’s technical challenges.
In the meantime, Gordhan has assured SA that load-shedding will be limited to stage 1 for the rest of the year.
The Minerals Council, however, remains "extremely concerned".
Baxter says: "We think winter is going to be a fairly tough period despite these assurances."
The prolonged stage 4 load-shedding SA endured in March required a 20% curtailment in demand from large industrial customers, so the effect on mining has been extensive.
In addition, the industry has up to 150,000 miners underground at any time. So, despite being given advance warning of severe load-shedding, "not having a reliable electricity supply is something that keeps CEOs up at night", says Baxter.
A lot of people say we must prevent Eskom from falling over the precipice. Sorry — it already is over the precipice
— Roger Baxter
"A lot of people say we must prevent Eskom from falling over the precipice. Sorry — it already is over the precipice," he adds. "To be sitting with an energy availability factor of 60% is a disaster for the country."
Several mining companies have their own electricity projects and want to bring power on line to secure supply and reduce costs — but they can’t move without regulatory approval.
The Eskom sustainability task team, which President Cyril Ramaphosa established in late 2018 under University of Cape Town energy expert Anton Eberhard, has recommended that the government tap into the burgeoning pipeline of private sector investment by making it easier for smaller plants generating less than 100MW to obtain generation licences.
It has also recommended that the government split Eskom into three entities responsible for generation, transmission and distribution, and accelerate the independent power producer (IPP) process to supplement Eskom’s power generation.
The ostensible aim of Eskom’s unbundling is to open the electricity market to IPPs, which can be granted access to the transmission infrastructure through contracting arrangements in the same way as telecommunication companies share networks.
But apart from agreeing to split Eskom and restructure its business model, the government has been largely silent on exactly how it intends to proceed, presumably to avoid a showdown with trade unions prior to the election.
But it cannot delay indefinitely.
Baxter believes the government has run out of options and that, political obstacles aside, an independent, state-owned transmission company that charges cost-related tariffs to allow business to access private sources of supply should be a crucial part of SA’s energy sector reforms.
The mining industry has absorbed a 523% increase in electricity prices over the past 10 years, compared with 350%-400% for the average SA user. Eskom is now charging R1.06/kWh compared with R1/kWh in several major industrial states in the US, and 65c/kWh in Quebec, Canada.
"We have become uncompetitive in an area where we used to have a major advantage," says Baxter.
Eskom’s new three-year tariff increase amounts to a compounded increase of 9.8% a year, 29.5% higher than the current electricity tariff.
According to the Minerals Council, 71% of gold mining operations were marginal or loss-making at the end of 2018. The new tariff will render 95% of gold operations loss-making or marginal at the end of the three-year period, threatening 95,723 jobs. It will also jeopardise 75% of platinum group metal operations, threatening 111,766 jobs.
Given the mining sector’s 1:10 dependency ratio, the potential socioeconomic implications are dire.
The carbon tax will impose an additional cost on mining companies at a time when the industry is already facing immense sustainability challenges.
Despite the allowances envisaged in phase 1 of the roll-out up to 2022, the introduction of a 10c/l carbon tax on liquid fuels will still be "extremely onerous", threaten the viability of many operations and result in about 6,836 net mining job losses, according to the Minerals Council.
In addition, in 2022 phase 2 will be implemented, allowing a flow-through of the tax on electricity generation. At that point, the mining sector will face a much larger carbon tax bill.
"We’re not climate-change denialists, but [we] must ask practically: is this the time, given the stress the gold and platinum industries are under?" Baxter asks.
The council’s modelling shows that, in any event, SA will likely meet its greenhouse gas emissions targets without a carbon tax, given the country’s current trajectory of low growth, declining electricity usage and falling carbon intensity per unit of GDP created.
The third issue under contention is the latest version of the mining charter, released by mineral resources minister Gwede Mantashe in September.
At the time, the council said it supported most elements, but expressed reservations around the treatment of the continued consequences of past empowerment deals, as well as the viability of local procurement targets.
The government’s interpretation of the charter is that when a mining right expires and is renewed by the minister, it should be treated as a new right and so require a fresh round of BEE.
The government still hasn’t learnt that providing regulatory clarity, market competition and an enabling environment is key to growth
— what it means
The council disagrees, citing section 24 of the original Mineral & Petroleum Resources Development Act, which does not impose this re-empowerment condition on firms.
"The point is that if you can’t provide security of tenure to existing miners, how can you convince future investors?" asks Baxter.
"The minister is saying that in taking the government to court we’re increasing investment uncertainty in the sector, but this issue around continuing consequences is the main uncertainty that has to be resolved — one way or the other."
When it comes to local-content requirements, SA’s automotive industry has agreed to achieve a 60% target by 2035, with the help of automotive production & development programme incentives. But the mining industry must achieve a 60% target in five years, without incentives.
"We have no problem with stretch targets," says Tebello Chabana, senior executive for public affairs and transformation at the council, "but they have to be workable and achievable."
The bottom line is that the government still has not internalised the message from business that regulatory clarity and the creation of an enabling environment are essential to getting growth going. Moreover, that the lack of competition in key sectors, including in electricity generation, is hobbling the economy.
Until the government addresses these issues, and really starts listening to business, jobs and growth will remain elusive.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.