A big bad bet on aluminium

One of the first high-profile victims of the global economic meltdown late last year was Iceland, which revealed itself to be an island trading as a giant hedge fund.

Now we see that Eskom is a monster aluminium trader—and not a particularly good one at that. The power utility has recorded a near R10-billion loss mainly through its exposure to the aluminium market.

How could Eskom lose R10-billion in aluminium trading? Does it not know that its job is to provide electricity, not take speculative bets in the world’s commodity markets?

To get a sense of the scale of the loss consider that the electricity utility, with sales of R53-billion and costs of about R55-billion, would have been closer to breaking even but for the R9.5-billion loss it suffered through its exposure to international commodity markets, chiefly aluminium.

The loss is unrealised at this stage, meaning that Eskom is hoping the value of the contracts it holds will improve. So do all of us.

The near R10-billion loss represents more or less R1 000 on average per household a year. Given the choice, if I wanted exposure to aluminium, I would have put the R1 000 into buying BHP Billiton shares.

Eskom is in aluminium and other energy-intensive markets because government wanted it to be there. An excess in power generating capacity led government to offer cheap energy to attract energyintensive users.

Aluminium smelters use energy voraciously and are among the top 10 of electricity consumers, alongside our giant metropoles, such as Johannesburg.

Eskom is understood to have just five contracts that are linked to the price of a commodity, suggesting losses per contract of a little less than R2-billion a pop.

The contracts are confidential to government, Eskom and these customers. It has been well understood that pricing has been based on the utility sharing in some of the upside when aluminium and ferrochrome prices rise.

Now this week we learn that Eskom has had a significant exposure should prices fall. Eskom’s Andrew Etzinger has said that demand for electricity is back to where it was a year ago.

The utility is better positioned than it was in January 2008, when it cut power to the country’s mines, having built its coal stocks to a relatively healthy 41 days of supply.

But the reserve margin is tight at just 5% to 8%—well below the prudent international benchmark of 15%. Some observers say the margin is, in fact, even tighter, as the cash-strapped Eskom has not been running its diesel-driven turbines, which add 5% to capacity.

Summer pricing kicked in this week, leading observers to say the margin is likely to be under greater pressure. Yet Eskom is not flashing any warning signs to continue to save electricity.

But then the utility can hardly lead a campaign for prudence when it has just admitted to giving away a fortune of electricity at a near R10-billion loss, can it?

Kevin Davie

Kevin Davie

Kevin Davie is M&G's business editor. A journalist for more than 30 years, he has worked in senior positions at most major titles in the country. Davie is a Nieman Fellow (1995-1996) and cyberspace innovator, having co-founded SA's first online-only news portal, Woza, and the first online stockbroking operation. He is a lecturer at Wits Journalism. In his spare time he can be found riding a bicycle, usually somewhere remote. Read more from Kevin Davie

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