South32 rejects claims that shutting its Hillside smelter would halve the cost of electricity in SA

https://www.moneyweb.co.za/mineweb/south32-rejects-claims-that-shutting-its-hillside-smelter-would-halve-the-cost-of-electricity-in-sa/?bid=120_12105_9462916

The aluminium operation consumes about 5% of Eskom’s output.

Eskom and South32 have hit back at claims that the power guzzling Hillside aluminium smelter in Richards Bay – owned by South32 – has a sweetheart deal that gives it power at a fraction of the cost paid by most South Africans.Hillside consumes about 5% of Eskom’s electricity, about 1 205MW a year. United Democratic Movement (UDM) leader Bantu Holomisa last week tagged Eskom in a tweet asking whether it was true that Hillside was paying 17 cents per kilowatt hour (kWh) while the rest of the country will have to shoulder R3.15/kWh.

Electricity typically accounts for 25-35% of operational costs in aluminium production, which explains why plants are generally located in areas with cheap, abundant power.It was also claimed on social media that if South32 were to shut its Hillside and Mozal (in Mozambique) smelters – which together were reckoned to consume about 9% of Eskom’s output at highly preferential tariffs – this would end load shedding and reduce by half the cost of electricity paid by most South Africans.Read: President Ramaphosa tables the ‘new’ plan to lessen load shedding“It is correct that the South32 Hillside Aluminium smelter consumes (roughly) 5% of Eskom electricity,” replied Eskom to questions from Moneyweb.“The stated price (of 17c/kWh) is grossly understated and appears devoid of any fact. A new pricing arrangement was approved by the National Energy Regulator of SA (Nersa) and complies with all of the provisions of the Interim Long-term Framework issued by the Department of Mineral Resouces and Energy (DMRE). It is incorrect to state that the electricity is sold at a loss and that other customers would be better off with the smelter closed.“The opposite is true as in the absence of the smelter, contributions made by them to fixed costs would have to be borne by other consumers resulting in an increase to other consumer prices.“The Mozal smelter situated in Mozambique, and operated by South32, is supplied by Eskom in terms of an appropriate agreement with power from the Hydro Cahorra Bassa plant in Mozambique, (i.e. power from Mozambique to Mozambique).”

Mozal sources its electricity from hydro-power company HCB in Mozambique under contract with Motraco and Eskom.

In response to Moneyweb questions, a spokesperson for South32 added that: “Hillside’s steady consumption rate helps keep the electricity grid stable and it is critical in supporting the network in times of system emergencies.”

The agreement with Eskom means the power utility can interrupt power supply to the smelters when there’s strain on the national grid, which means less load shedding for other customers, adds South32.“The (two) smelters consume 2 155MW which is (roughly) 5% of Eskom’s installed capacity or (about) 7% of its average daily peak.”South32 says the quoted tariff of 17c/kWh is incorrect, though it cannot say how much it pays for power as this forms part of a confidentiality agreement. However, it does say that the tariffs paid were approved by Nersa, in line with government policy, which requires the price level to be above Eskom’s cost of supply.Closing the smelters would not resolve South Africa’s load shedding challenges, says South32.Eskom says its current capacity shortfall is 4 000-6 000 MW, while Nersa says there is a net benefit to the country for putting in place a negotiated pricing agreement (NPA) with Hillside.Times have changed …The Hillside smelter, the largest of its kind in the southern hemisphere, was launched in the 1990s when Eskom had plenty of cheap, surplus power.

An agreement was struck at the time to supply power to the smelter at a price linked to the London Metal Exchange price of aluminium.

Eskom has steadily run out of surplus power, and that has thrown a spotlight on customers with long-standing pricing agreements.

In its 2022 annual report, South32 CEO Graham Kerr announced the completion of a feasibility study to power the smelter using renewables. “We continue to work closely with the South African Government and other stakeholders to identify, develop and implement options to procure low-carbon electricity to power the smelter.”Revenues not sufferingBoth Hillside and Mozal delivered record margins in 2022, despite load shedding.The financial performance was helped by steadily rising aluminium prices.

Hillside increased revenue by nearly 50% to $2.25 billion in the 2022 financial year, with Mozal’s revenue up nearly 60% to $924 million.

Earnings before interest and tax more than doubled at Hillside, and nearly trebled at Mozal. Hillside produces about 714 000 tons of metal a year, while 63.7% owned Mozal last year produced 278 000 tons.South32 says its smelters in South Africa and Mozambique are significant contributors to the national economies, as well as major employers.In its NPA submission to Nersa, Eskom said the Hillside smelter “provides flexible interruptibility (size and is instantaneous) which is utilised by the National System Operator (NSO), within predetermined contractual limits, to maintain grid stability and meet peak demand requirements”.“It further plays a key role in Eskom’s response plan to a national blackout disaster and provides large base load demand at low demand times that satisfies a large portion of the minimum generation issue at critical off-peak periods and reduces the risk of the curtailment of independent power producers (IPPs).”Coal allegations ‘also untrue’Eskom also hit back at social media claims that South32 was supplying coal to Eskom at R416 a ton, despite Nersa’s recommended price of R350/t, and this was contributing to the high cost of Eskom electricity.

South32 exited coal mining in SA when it sold its coal interests to Seriti Resources in 2021.

“It is Eskom’s understanding that South 32 used to own Khutala and Duvha collieries before they sold them to Seriti. South 32 (previously Billiton) also owned Optimum mine at some stage.“Khutala is a cost plus mine, so the R/ton depends on the cost and volume. For various reasons over the past years, including the disallowance by Nersa for such revenue, Eskom has not been able to fund the cost plus mines capital expenditure as required, which has impacted both costs and volumes.“Eskom has a fixed price coal agreement with Duvha colliery. In accordance with the relevant Nersa methodology, Eskom negotiates the best cost and value prior to finalising the coal contracts. It should be noted that the price of coal from this colliery has been lower than many other sources.”