South African power utility Eskom’s proposed tariff hikes could be the death knell for the mining industry, auditing firm BDO warned on Wednesday.
While businesses across all sectors of the South African economy are having to come to terms with proposed tariff hikes, the mining industry “is in effect staring down a looming crisis which could tip it into the abyss”, BDO said.
“If the 45% increase per year for the next three years comes to bear, the simple fact is that mine operators are unsure of the continued viability of their operations,” said Mark Dunn, director of Risk Advisory Services at auditing firm BDO.
He pointed out that mining, especially at the deep levels that characterise gold and platinum extraction in South Africa, is powered by electricity.
“Lighting, pumping systems and plant and machinery all consume volumes of electrical power. It is a fundamental and unavoidable cost centre which, with escalation on the scale proposed by Eskom, completely changes the cost base for these operations,” said Dunn.
While the mining industry accounts for a relatively small contribution to the country’s gross domestic product (some 3%), it remains a major employer, with over 400,000 people directly employed by mining companies.
Dunn added that while mines are among those activities in the front lines of increased risk to business viability, they are by no means the only companies under threat from a dramatically changing cost base.
“The fundamental necessity of electricity to modern civilisation is being laid bare. From primary economic activities such as mining and agriculture, through to secondary activities such as manufacturing and beneficiation of mined material and even through to the tertiary sector, electricity is a common thread. It is a vital commodity,” he said.
As a consequence, Dunn said increases in the price of power on this scale were likely to ratchet up the pressure on a range of other industries.
“There will be a ripple effect throughout the economy,” he noted, adding that the ability of South African companies to compete internationally would also be threatened.
“We have to consider potentially massive increases in electricity pricing this threat in the light globalisation. If local businesses, especially those involved in activities such as manufacturing or textiles, are already under pressure to compete against low-cost producers such as China and India, the scale of the threat of escalating electricity price becomes more apparent,” Dunn stressed.
Given that preferential pricing, negotiated in contracts which are not open to public scrutiny, are also in place with certain elements of industry, Dunn raises the question of whether or not consumers and some businesses will be subsidising others.
“At issue here is that there is no level playing field on which investors and industry can depend as they face up to the reality of higher production costs,” he said.
Dunn said the situation is dire and was fast becoming the focus of risk management committees in the mining and other industries.
“Mitigation strategies have to go way beyond turning the lights off at night. The issue requires the time and attention of boards of directors, who have a growing duty to ensure that they are operating efficiently as possible. Make no mistake, this is an issue which is rising in relevance and which has to be addressed in order to protect the bottom line,” he said. — I-Net Bridge