Eskom will continue providing subsidised electricity to BHP Billiton

Eskom will allow BHP Billiton to produce aluminium using subsidised electricity, even if winter conditions necessitate load-shedding.

“We have a contract with Billiton and we will fulfill that contract,” said chief executive Brian Dames in response to the question whether he, like his predecessor, would allow Billiton’s two aluminium smelters to go ahead with production even if the pressure on the national power grid became so critical that he was obliged to revert to load-shedding.

During the previous load-shedding sessions and the three days that Eskom brought the mining industry to a stop in January 2008, Billiton continued producing aluminium unabated.

All the raw materials for doing so are imported and more than 95% of its production is exported.

The National Energy Regulator (Nersa) later calculated that that year’s interruptions cost the country around R50bn in lost economic activity.

Billiton’s two smelters, Hillside in Richards Bay and Mozal in Maputo, consume 1 945MW of Eskom’s total 39 000MW base load generation capacity.

In terms of its supply contract they may be turned off only a couple of hours a week when there are electricity shortages on the network. Sources say this would be at most two hours a week.

The aluminium that Billiton currently produces at the two plants is moreover smelted at a loss. The two smelters produce around 1m tonnes of aluminium a year, but in the past two years their profitability has declined sharply owing to surplus production in China.

In the half-year to end-December the two smelters experienced a $67m loss.

During this period the average aluminium price was $2 391 a tonne, and since the beginning of 2012 the average price on the London Metal Exchange has been $246/t less, at $2 145/t. On Friday it fell to $1 954/t - its lowest level since July 2010. This leaves little doubt that the losses for this full year will be even bigger.

The best indication of the price is in Eskom's operating report leaked in 2010 to Pieter van Dalen, the then DA spokesperson on public enterprises. According to the report Hillside paid 15c per kilowatt hour (kWh) for electricity in 2009, and Mozal 13c/kWh.

Eskom’s average tariff is currently 50.3c/kWh and its operating cost 41.3c/kWh.

What is more, in the first five months of this year Eskom spent R1.8bn buying electricity back from chrome smelters, which are as electricity-intensive as aluminium smelters. This afforded Eskom the opportunity to catch up on maintenance work before the winter fully took hold.