Released April 05, 2013 | JOHANNESBURG
en
Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--BHP Billiton's (NYSE:BHP) South African aluminum smelters consume about 9% of state-owned power utility Eskom's power generation. The national power scenario has industrial and domestic users on edge about the possibility of blackouts during the coming South African winter months, reminiscent of the "dark" days of the country's 2008 power supply crisis.
This consumption statistic alone is enough to create questions about the utility's power marketing policy, but added to this is that contracts made between BHP and Eskom in 1995 and 2001 give power to the melting and mining major at slightly more than 50% of the actual current cost of production. Eskom is now searching for ways to re-negotiate the contracts, which were made when power was cheaper to produce and the national supply seemed to be secure. NERSA, the country's power regulator, which was formed in 1995, also will have a tough time finding the eye of the needle to push BHP through.
"BHP expects our contracts to be honored," said BHP South Africa chairman Xolani Mkhwanazi. "We believe absolutely in the sanctity of all contracts. We also understand that as a business, we have responsibility to fulfill our obligations to our employees, customers, suppliers and shareholders, and the broader community of Richard Bay and KwaZulu-Natal.
"The Eskom contracts were negotiated on a risk-sharing basis and in terms of a recognized international model. First, this was important to ensure the financial viability of the smelters over the long term, which is necessary to provide a reasonable return on the substantial investment. Without that we would not have made the investment. We have invested more than $7 billion in our aluminum business in Southern Africa during this time."
South African energy analyst Chris Yelland reports that the pricing arrangement, including several variables, means that BHP is currently entitled to pay between RSA 20 cents and 26 cents per kilowatt hour (kWh) at its smelters. But for other large industrial and mining customers, Eskom has an operating cost of RSA 47 cents and supplies them at an average of 56/58 cents per kWh.
The pressure on both sides may well escalate as the South African winter arrives in May.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.
This consumption statistic alone is enough to create questions about the utility's power marketing policy, but added to this is that contracts made between BHP and Eskom in 1995 and 2001 give power to the melting and mining major at slightly more than 50% of the actual current cost of production. Eskom is now searching for ways to re-negotiate the contracts, which were made when power was cheaper to produce and the national supply seemed to be secure. NERSA, the country's power regulator, which was formed in 1995, also will have a tough time finding the eye of the needle to push BHP through.
"BHP expects our contracts to be honored," said BHP South Africa chairman Xolani Mkhwanazi. "We believe absolutely in the sanctity of all contracts. We also understand that as a business, we have responsibility to fulfill our obligations to our employees, customers, suppliers and shareholders, and the broader community of Richard Bay and KwaZulu-Natal.
"The Eskom contracts were negotiated on a risk-sharing basis and in terms of a recognized international model. First, this was important to ensure the financial viability of the smelters over the long term, which is necessary to provide a reasonable return on the substantial investment. Without that we would not have made the investment. We have invested more than $7 billion in our aluminum business in Southern Africa during this time."
South African energy analyst Chris Yelland reports that the pricing arrangement, including several variables, means that BHP is currently entitled to pay between RSA 20 cents and 26 cents per kilowatt hour (kWh) at its smelters. But for other large industrial and mining customers, Eskom has an operating cost of RSA 47 cents and supplies them at an average of 56/58 cents per kWh.
The pressure on both sides may well escalate as the South African winter arrives in May.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.
