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South Africa’s industrial giants, which spend billions a year on electricity, are seeking tariff relief to stay afloat as high energy costs crowd out spending on key growth initiatives.The country’s astronomical energy costs, which have increased more than 700% since 2007, have been singled out as a major impediment to competitiveness and reindustrialisation in the country.With Eskom’s sales having also taken a beating due to industrial players cutting back on spending and some closing, the power producer has become more amenable to providing short-term relief as authorities scramble to find a permanent solution to the energy cost conundrum.The country’s only producer of high-grade electrolytic manganese metal, Manganese Metal Company (MMC), is the latest to have its relief application received favourably by Eskom.To this end, Eskom has asked national energy regulator Nersa to grant the company two years of tariff relief. In its application, Eskom acknowledged that the competitive position of the South African manganese industry in the global market has declined, resulting in reduced production capacity despite South Africa possessing natural manganese ore in abundance.The power producer has told Nersa that the rationale behind the two-year negotiated price agreement (NPA) application was to provide a globally competitive electricity price to MMC.Eskom’s view is that the proposed NPA is intended to support the MMC’s global competitiveness from an electricity-cost perspective, while mitigating the potential loss of baseload electricity sales and the associated negative impact on other customers and the broader economy.As things stand, electricity accounts for about 41% of MMC’s total production costs. Of every R10 the company spends, R4 is spent on electricity.Nersa, in its public consultation document calling for comment on Eskom’s application, laid bare the impact South Africa’s energy costs are having on industry and on Eskom’s own sales.The document said Eskom sales data show that the utility’s key industrial customers’ annual electricity purchases have dropped by about 23TWh to the current level of about 67TWh since 2008.“Electricity demand has declined since 2008, with the biggest drop occurring in the industrial sector,” the document reads. “This has become a major expense to the consumer because Eskom still must recover its fixed costs from a reduced customer base, which has resulted in the sale-revenue variance being a major portion of Eskom’s regulatory clearing account (RCA) applications.“The increasing cost of electricity in South Africa in recent years is indicated as a key reason for industries’ lack of competitiveness, resulting in closures and local corporates even moving capacity offshore.”MMC, whose plant is in Mpumalanga, has more than 120 customers in 20 countries, exporting about 95% of its production for industry and energy transition applications, including lithium-ion battery manufacturing, alloying and welding, and electronics.However, like many companies operating in the industrial, manufacturing and mining industries, MMC has had to contend with runaway electricity costs, forcing it to seek relief. Its application, of which Eskom has taken ownership, has also received support from the department of trade, industry & competition.The two-year relief, the price details of which are confidential, will buy MMC time to bring its renewable-energy projects online. Some of the detail revealed in the discussion document shows that MMC will share with Eskom any annual gross profits above the projection level, limited to the rebate provided against the Megaflex tariff.“The exact price is considered to be confidential [because] knowledge of this would enable international competitors to establish MMC’s break-even price,” Nersa’s document reads, explaining why the agreed prices will not be made public.“The price of their product is set in the international market, and international competitors, which are state-backed, could undercut them in the short term to gain long-term market dominance.”Nersa recently granted 54% tariff relief to the Glencore-Merafe joint venture and Samancor to help them reopen their smelters and save jobs in the chrome industry. China has emerged as the biggest producer of ferrochrome, largely due to its well-priced electricity.ArcelorMittal SA, which spends about R3.5bn a year on electricity, is also engaged in high-level discussions with Eskom to secure a favourable tariff, as is South32’s Hillside Aluminium smelter in Richards Bay.Eskom has already asked Nersa to grant Transalloys, the country’s last remaining manganese smelter, temporary tariff relief.Transalloys’ R5bn plant in Mpumalanga is in peril, weighed down by electricity prices. The jobs of hundreds of employees and subcontractors are on the line, with similar difficulties playing out in the ferrochrome and other industries.Eskom has since asked the regulator for a temporary amendment to the NPA take-or-pay (TOP) terms applicable to Transalloys’ manganese ferroalloy smelter for six months.The amendment Eskom wants relates to the requirement that Transalloys consumes a minimum amount of electricity per quarter. If its consumption falls below that threshold, it remains liable to Eskom for payment based on the minimum, regardless of market conditions.In effect, Eskom wants the TOP requirement of 70% to be temporarily relaxed to give the company a chance to survive.The challenges facing Transalloys illustrate how far the sector has fallen behind. In the early 2000s, South Africa was home to several smelters with the capacity to churn out about 850,000t of manganese alloys a year.Now, Transalloys is the only player still standing, with the capacity to produce about 160,000t annually. This is despite South Africa being home to more than 75% of the world’s identified manganese ore reserves. The country is ceding the advantage to other players, which is hurting the industry’s beneficiation efforts.
