South32 reviews future of smelter amid higher power prices
Though no final decision has been made, the review could result in South32’s divestment from its manganese alloys smelter or even its closure
Diversified miner South32, which was unbundled from BHP in 2015, is reviewing its manganese alloy smelter, which employs 300 people, as analysts warn that SA’s soaring power prices are making the sector uncompetitive.
“We continue to review options for our manganese alloy smelters as changes in market dynamics have reduced the attractiveness of our exposure,” the Australia-based miner said in a report for the three months ended June.
The Metalloys smelter in Meyerton is one of the largest in the world and has the capacity to process up to 1-million tons of product a year. Though no final decision has been made on the way forward, the review process could potentially result in South32’s divestment from the smelter or even its closure.
Its difficult to compete with China Inc, where at this point power prices are not likely to be under as much pressure and where China has the economies of scale in their industry to be more efficientGrant Sporre
The company’s report did not provide further detail on the market dynamics, but analysts said SA's rising power prices are unattractive to energy-intensive businesses.
“The high electricity costs in SA (and expected escalations) have made these smelters globally uncompetitive,” said Matthew Shields, mining and metals analyst at Avior Capital Markets. “African Rainbow Minerals developed a manganese smelter in Malaysia a couple of years back for that exact reason. This is the sad story of metals beneficiation in SA.”
The miner is also reviewing its manganese alloy smelter in Australia where, as in SA, power costs are likely to increase, said Macquarie’s Grant Sporre.
“Its difficult to compete with China Inc, where at this point power prices are not likely to be under as much pressure and where China has the economies of scale in their industry to be more efficient,” said Sporre. “For South32 the value that these smelters add is limited and they can simplify the business.”
The costs of electricity will also be a key determinant for the future of South32’s Hillside Aluminium smelter in Richards Bay. Hillside’s power contract with Eskom is up for negotiation and the company has warned it needs a good contract if the operation is to be sustainable.
Historically, the smelter’s power deal with the utility has been controversial because it is linked to the aluminium price. It is seen as favourable for the company but detrimental to Eskom, which is in financial crisis. Hillside has, however, faced financial difficulty and just last month completed a restructuring of its workforce.
In the quarterly report South32 said Hillside had achieved record production for the year “despite an increase in the frequency of load-shedding events”. Even so, lower aluminium prices and elevated raw material input costs are expected to result in the smelter recording a loss in the 2019 financial year, the company warned ahead of the release of its annual results next month.
As far as the disposal of its SA Energy Coal business in Mpumalanga is concerned, South32 said it is engaging with bidders around the finalisation of their offers and aims to provide a further update to the market in the December 2019 half year.
The company would not disclose how many bids have been received, but earlier this year CEO Graham Kerr said the list of preferred bidders would be narrowed to six or less.
Exactly who has placed bids for SA Energy Coal is yet to be disclosed, though Reuters last month reported that Mike Teke’s Seriti Resources as well as Sibambene Coal — a consortium backed by global energy trader Mercuria — were said to be in the mix.