Graham Kerr. Picture: BUSINESS DAY
Graham Kerr. Picture: BUSINESS DAY

This is the best time to engage Eskom on a disputed electricity contract at South32’s Hillside aluminium smelter because the pressure around supply has tapered off due to an economic slump and improved efficiencies at the power utility, says the miner’s CEO, Graham Kerr.

Eskom and South32 are locked in argument about the duration of an electricity supply agreement that largely insulates the aluminium producer from price hikes as Eskom seeks approval from the National Energy Regulator of SA for a 20% hike in tariffs.

The aluminium, alumina and bauxite business was one of the star performers in the 2017 financial year, earning $2.8bn in revenue and contributing 35% of the group’s earnings before interest, tax, depreciation and amortisation.

The load shedding from Eskom as its electricity generation battled to keep pace with demand had become a "thing of the past", Kerr said. But there was one remaining problem with Eskom and that was the contract for Hillside, which was complicated by the introduction of a third line of smelting pots in 2001. The electricity supply agreement for the first two potlines at Hillside in Richards Bay was signed in 1992 between Eskom and then owner BHP Billiton. The 25-year contract, which kicked in in 1995 and has terms favourable to South32 and not at all connected to Eskom’s cost base, is due to expire in 2020. Eskom has railed against the contracts as it supplies electricity to the smelters at a fraction of the price it does to other customers at a time when it is pouring tens of billions of rand into new power plants.

The dispute now is on the expiry date of the contract, since the third potline came into production under a deal that started electricity supply no later than June 2004, with expiry in 2028. Again, the pricing formula is highly favourable for the smelter, being linked to the inflation rate, and far less so for Eskom, which has needed several above-inflation hikes.

"We’d prefer to get that resolved sooner rather than later," Kerr said.

The resolution of the dispute was one of the “most material” issues South32 needed to resolve, said Mike Fraser, head of South32’s South African operations, adding this “is probably the right time for us to be talking to find a resolution when you have the pressure off on power supply.

"We have started that discussion with Eskom and we are trying to find a solution that would be a more sustainable solution for all large power users in SA. It’s early days in that conversation.”

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