Eskom Tariffs

South32 progressing negotiations with Eskom for Hillside

https://www.engineeringnews.co.za/article/south32-progressing-negotiations-with-eskom-for-hillside-2020-08-20

South32 progressing negotiations with Eskom for Hillside

Graham Kerr

20TH AUGUST 2020

BY: TASNEEM BULBULIA
CREAMER MEDIA REPORTER

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Dual-listed South32 is making good progress in its negotiations with State-owned power utility Eskom on electricity prices for its Hillside aluminium smelter in Richards Bay, the group said during a media call on August 20.

COO Mike Fraser said the group had reached an agreement with Eskom on a new agreement that would ensure the provision of power to Hillside for a ten-year period.

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The group is, however, waiting for the National Energy Regulator of South Africa's (Nersa's) approval.

Nersa has, in turn, asked Mineral Resources and Energy Minister Gwede Mantashe to update the long-term framework for the industrial tariff structure.

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While that is under way, South32 has concluded an interim agreement with Eskom. From August 1, South32 will start accruing for the new contract, which will come into effect once Nersa approval is received.

Fraser indicated that the new contract would be similar to the contract in place at Mozal Aluminium, which is a rand-based contract, and would not have any aluminium price linkage to it.

He said that while the group would lose some of the benefits of downside protection when prices were weak, if prices recovered, tariffs would be closer to what it paid under the current agreement.

The group believes this new contract is the right outcome to achieve, leaving it with a solid base going forward.

South32 achieved record production at Hillside for the 2020 financial year, as the smelter continued to test its technical capacity.

Full-year costs decreased by 25% year-on-year as the smelter benefitted from lower raw material input prices and a workforce structure concluded in June 2019.

Meanwhile, South32 is also progressing the divestment of South Africa Energy Coal. The successful disinvestment is expected to meaningfully reduce the group’s capital intensity.

CEO Graham Kerr said the disinvestment of South African Energy Coal was on track for completion in the six months to December 31, subject to a number of material conditions, with both international and local approvals required.

He said local approvals, which included that of Eskom and the Department of Mineral Resources and Energy, were progressing well, with no indication that the transaction would not be allowed to go ahead as planned.

Further, South32 last week announced that the Samancor manganese joint venture (JV), in which it holds a 60% stake, had inked a deal with GFG Alliance to divest of its shareholding in the Tasmanian Electro Metallurgical Company (Temco).

The group on August 20 said the transaction would ensure that workers at the smelter would retain their jobs, while the operation would continue to benefit the community.

South32 in July placed the Metalloys manganese alloys smelter in Meyerton, Gauteng, on temporary care and maintenance.

Kerr said the group had gone through the process of trying to find a workable solution for Metalloys but that this had been impeded by the impact of Covid-19 on prices.  

He said that, while not an ideal outcome, a Section 189 process was completed in July, with only about 30 employees staying on to provide care-and-maintenance services.

As lockdown restrictions were relaxed and if prices improved, the group would continue to look for opportunities for the smelter, Kerr said.  

In terms of the group’s response to the London Metal Exchange launching low-carbon aluminium products that would sell at a price premium from the start of next year, the group said there was not yet sufficient supply of low-carbon aluminium that could satisfy that market at this stage; therefore, the group still saw a market for aluminium with a relatively high carbon fraction.

South32 said that it did not foresee a major impact in this regard, purely because supply was unlikely to meet the demand.

Moreover, owing to its portfolio, Mozal Aluminium had the potential to supply “green” aluminium products, so there could be an opportunity for this in the long term. 

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