South Africa aluminum industry in crisis with Eskon deal

Critics have argued BHP Billiton’s power deal with Eskom might be a great deal for the firm but turn out to be a disaster for South Africa. Brokered initially by Mick Davis and then by Derek Keys, the finance minister of the National Party, Gencor (later as BHP) built the Richards Bay smelters. This was done to take advantage of additional electricity supply that the firm was selling at a cheap price in the 90s.

Since the middle of last decade, though, Eskom has faced electricity supply crisis with widespread blackouts in the year 2008 as well as continual horse-trading with the big industrial users and few of the users even had to cut down on their consumption to keep the lights on.

The power rate of BHP Billiton, in such a situation,was reported at R0.09/Kwhr (US$0.01/Kwhr), appears very low compared to the residential users at R1.00/Kwhr (US$0.09/Kwhr).

Consecutive senior government ministers have gone on to plum jobs at BHP after leaving office, raising the question as to their motivation in perpetuating such low power rates over the years.

BHP has announced recently about reviewing the future of the 97,000-ton Bayside smelter and some consumers such as Hulamin, which takes a third of its slab from Bayside, has been in talks to make sure the availability of adequate raw material. But while the huge 720,000-ton Hillside smelter still gets highly preferential power costs, domestic supply does not have any risk.

But other questions are beginning to be asked, such as, “Should a country like South Africa really be producing an energy-intensive product like aluminum when the country’s power supply is so constrained?” The same question, of course, could be imposed on other power-intensive industries like ferro-chrome, where electricity also accounts for 35-40% of the cost, according to a technical paper from last year.