Eskom Grilled as Rio Tinto's South African Smelter Project Stalled

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Reported by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas). At the end of May, a few days before the conclusion of the public hearings held by the National Energy Regulator of South Africa (Nersa) on state power utility Eskom's (Johannesburg) application for a 58% tariff hike, national statistics showed that the country's economic growth rate fell to the lowest level in 6.5 years. The GDP growth rate hit 2.1% in the first quarter of 2008, going down from 5.3% in the last quarter of 2007.

Power shortages and rationing cuts of 10% to mining companies in the first few months of the year were instrumental in mining output diving by 22.1%. Although mining makes up only 5.4% of total GDP the sector accounts for over half South Africa's exports. Added to this negative outcome from the power shortages caused by postponement by Eskom of new power station construction, exhaustion of coal feedstock and chronic power supply maintenance problems, was the announcement that Rio Tinto Alcan's (NYSE:RST) (London, United Kingdom) aluminum smelter project at the Coega industrial zone on the India Ocean coast had been postponed because of power supply issues.

The $3.2 billion project has been on and off since it was first mooted in 2001, but this year preparatory work at the site had started, following a 2006 agreement with Eskom for a 25-year supply of competitively priced power. Two-hundred personnel had been committed to the project, of which 60 were already working at the site with the remainder due to arrive shortly. Rio had already invested a major part of $200 million on the design of the 720,000 ton per year smelter and pre-construction work. Now, the majority of the personnel have been re-assigned to the company's projects in Canada, Oman and Malaysia, leaving a forlorn seven to maintain a presence at Coega until power supplies can be guaranteed and a decision made on the possible reinstatement of the project in three to four years time.

The Eskom management, which has been pilloried by the public for taking 'performance' bonuses after committing a litany of misjudgments and actions, which did not focus on the utility's core power provision mandate, were told by Nersa at the hearing to stop 'spinning' about their need for a massive tariff hike, which would batter an economy already under threat from inflationary pressure with the oil based fuel price out of government control.

Nersa's verdict and recommendations will be given in mid-June and they will now be considering strong petitions at the hearing that the taxpayer should not foot the bill (for a second time) for a state owned utility and that the purchase of future crucial power supply from industry and independent producers should be taken away from Eskom's ambit. There were also strong objections in the 340 oral and written submissions to the hearing that the bill for future power supply expansion should be smoothed out over a five year period as the promised additions to capacity were put in place, and not front loaded to give Eskom management an easy ride.

Eskom's drive to build up coal stocks from the danger-margin levels of four days held at the beginning of the year has not progressed as quickly as expected and as winter starts to hit power stations hold an average of 18-day coal stockpiles, below the 20 days of stocks targeted. Nersa criticized Eskom's 'inadequate primary energy procurement' adding that coal stockpiles had been allowed to decline to unacceptable low levels. To fill the procurement expertise breach the CEO of Kumba Iron Ore (KIO), Ras Myburgh, will be seconded to Eskom for two years. Myburgh was employed by Eskom's generation division before moving to Kumba Resources (now split into KIO and Exxaro resources) as coal division managing director. He will be working in a market asking high prices for export coal and will be trying to rationalize the local supply of coal feeds for Eskom's power stations to avoid supply chain and transport infrastructure crises.

Meanwhile, there has been no load shedding (blackouts) for a few weeks but Eskom management is till hooked on the habit of dire warnings to the paying consumers that they might be hit by no power hours if the utility 's capacity fails to meet demand. This is not taken well as the idea persists that the management ran coal stocks down and cut corners to present a black bottom line and the concomitant entitlement to bonuses. It is not surprising that the role of power utilities is being brought into question, both in South Africa and worldwide, as the meaning and function of a utility appears to be partly dysfunctional.

The immediate and specific nature of Rio Tinto's statement that personnel were being re-assigned to other projects reflects the scarcity of skills for new projects worldwide. In Malaysia, the 550,000 ton per year smelter project in Similjau, Sarawak has been granted a manufacturing license by the government agency. The $2 billion project has the potential to expand to 1.5 million ton per year and could generate 4,700 jobs. In Oman the 350,000 ton per year Sohar Aluminum smelter, in which Rio Tinto has 20%, will come on stream this month and could expand to a 1.05 million ton per year project.

In Canada, Rio Tinto Alcan is going ahead with an accelerated pre-feasibility study for the pilot plant at Saguenay, Quebec. A $2 billion project to add 140,000 ton per year to the AP50 technology hydropower fed plant could see expansions up to a total of 400,000 ton per year in the future. This with the 150,000/190,000 ton per year, $1 billion expansion to the Alma plant in Quebec to a total capacity of over 400,000 ton per year and the $2.5 billion modernization and expansion to the Kitimat, British Columbia smelter to 400,000 ton per year present $5.5 billion reasons for a welcome to the skills shed by the Coega project in South Africa.

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