Eskom took a big bet on the aluminium price and lost. The parastatal announced results on Thursday that showed it falling deep into the red, recording a group loss from continued operations of R9,7-billion for 2008-09.
While costs rose dramatically, including those of primary energy sources such as coal and liquid fuels, the company recorded a net fair-value loss on embedded derivatives of R9,5-billion.
These derivative losses were mainly the result of commodity-linked prices that Eskom offers some of its largest customers, such as aluminium smelters belonging to the industrial giant BHP Billiton.
While Eskom stated that they represent unrealised, or paper losses, chief executive Jacob Maroga said that, with the inclusion of the embedded derivatives, this may be the biggest loss in Eskom’s history.
”Embedded derivatives is a big issue,” he said. ”These are based on the commodity-linked pricing; the biggest is aluminium and the price is based on the price of aluminium and it is priced in dollars. This year the biggest impact has been the fall in the price of aluminium.” Eskom was seeking to limit or remove this exposure in future, he said.
The company said in its results statement that it had entered into a number of agreements to supply electricity to power-hungry industries where the revenue from those contracts was linked to the commodity prices and foreign currency rates (mainly the dollar) or foreign production price indices that gave rise to embedded derivatives.
BHP Billiton alone appears to have received an additional $170-million (R1,3-billion) thanks to the embedded derivatives contract for the first half of 2009.
Eskom chairperson Bobby Godsell was at pains to emphasise that the company ”values all of our customers, including customers with commodity-linked contracts” as both customers and ”citizens” of the country that boost business. But Eskom is looking to solve the problems that the contracts pose.
”They are problematic not only in price, they impose an accounting uncertainty on this organisation that makes proper strategic management of its resources very difficult. So we are looking at the form and the content of the contract.”
Bronwyn Wilkinson, spokesperson for BHP Billiton, declined to say whether Eskom and BHP Billiton were in discussion over the contracts.
But she did note that the contracts in place for operations such as the Hillside aluminium expansion project in KwaZulu-Natal were ”decade-long” contracts.
Historically South Africa had surplus electricity, which led to a government policy of attracting foreign investment by offering very cheap rates to large industrial customers. But since the electricity shortage of 2008, this thinking has been called into question.
Eskom’s operating loss for the year, without accounting for the embedded derivatives, was R3.1-billion. Eskom also saw the cost of coal rise from R18,3-billion in 2008 to R25,3-billion in 2009, a 38% increase.
The company’s stockpiles are up to 41 days, but the grid’s reserve margin has shrunk to what it was a year ago. Maroga said, however, that the prognosis ”looks comfortable” and the company was confident that it could continue to supply power despite some ”risk in the system”.
A number of smelters, including BHP Billiton’s Bayside smelter, are still running at decreased capacity.
With the last tariff increase granted recently of 31,3% Eskom is facing an R80-billion funding gap in the next two years. It has as yet not approached government for more funding. Government has already extended a loan of R60-billion, as well as R177-billion in guarantees.
