Miners count the cost of electricity tariffs squeeze

Two of SA’s largest gold producers, Harmony Gold and Gold Fields, have seen billions of rand added to their electricity bills in recent years, underpinning the sizeable burden that tariff increases place on the mining sector. 

In the past three years, the total electricity bill for Gold Fields’ South Deep mine — one of the deepest mines in the world — has gone up by nearly two-thirds. 

To drive the point home, South Deep’s solar operation, commissioned in 2022, has since saved the mine an estimated R150m a year in electricity costs, reflecting the disproportionate cost of Eskom’s power supply. 

“Since electricity tariff increases have been well above inflation over the past five years, they have boosted our electricity costs to a projected R950m this year, making it one of the top five items contributing to the mine’s operating costs,” said Gold Fields spokesperson Sven Lunsche.

Harmony Gold, SA’s largest gold producer by output, has seen R2.1bn added to its electricity burden in the past five years. With the addition of the group’s Mponeng mine and other assets acquired since 2019, Harmony’s total electricity cost has risen by R4.2bn in the period. Mponeng, the world’s deepest gold mine, has seen its own electricity costs climb 37%. 

Gold mining operations — particularly deep-level mines — are among the most energy-intensive areas of mining, making them especially vulnerable to electricity tariff increases, according to Minerals Council SA chief economist Hugo Pienaar. 

“In volume terms, gold mining output in 2023 was about 55% lower than in 2008,” Pienaar told Business Day. “This is not solely the result of higher tariffs as many other adverse factors contributed, but rapidly escalating electricity tariffs were a contributing factor to the decline in local gold production.” 

Pienaar warned that the mounting tariff burden has the potential to constrain the local mining industry, threatening SA’s comparative advantage on the global stage. 

“Ferrochrome is a good example,” he said. “Amid fast-rising tariffs and concerns about reliable energy supply in SA, ferrochrome refining now largely takes place in China, whereas before there was sizeable domestic capacity. 

“In addition, data from Stats SA shows that in real terms the manufacturing of non-ferrous metals, including aluminium, was 15% lower in 2023 than in 2008 when the electricity crisis started.” 

Peter Major, mining director at Modern Corporate Solutions, said electricity has been the fastest-rising component of SA mining companies’ costs since the start of the millennium, with no signs of slowing down. 

“Electricity [tariff] increases have been over three times higher than inflation since 2007, meaning electricity is taking a bigger chunk of mining companies’ revenue,” Major told Business Day. 

“After labour, electricity is the second-biggest component in [mining companies’] total costs, generally comprising over 23%. So, when we see these massive increases in power costs, we see profits being demolished.” 

Additionally, with electricity’s share of total costs increasing, Major warned that “even the massive rise in gold prices to $2,500/oz cannot prevent margin erosion for SA’s producers”. “That means marginal mines are now losing money and good mines are becoming marginal mines.”

Mounting pressure

The past two months have seen an acceleration in electricity costs amid escalating winter tariffs, which began in June and are set to last until September. 

According to the Minerals Council’s latest index, SA miners saw electricity costs rising by 37% and 10.3% on a month-by-month basis in June and July, respectively. 

“Electricity costs have emerged as the primary driver of input cost inflation, accelerating by 11.9% year on year,” Minerals Council economist André Lourens said in the index for July. “This increase, nearly three times the PPI figure for July, continues to exert significant pressure on the mining sector, which consumes about a third of SA’s electricity when smelting operations are included.” 

The rising cost of electricity comes at a time when SA’s mining sector is already under pressure, Anchor Capital investment analyst Seleho Tsatsi told Business Day. 

“The market seems to be increasingly concerned about economic growth globally. That concern is being reflected in commodity prices, so overall it’s a tough moment for the sector,” he said.

“We’re generally seeing commodity prices declining across base metals, precious metals and bulks. On top of that, several companies in the industry have volume challenges. Throwing cost inflation — via higher tariffs, for example — on top of that really puts pressure on revenue and then on operating profits.” 

Policy review

Business Day reported last month that SA’s largest steel producer, ArcelorMittal SA (Amsa), has called for a reduction in electricity tariffs, warning that electricity costs in manufacturing have surged despite an ongoing decline in consumption. 

Amsa CEO Kobus Verster said the increase in electricity tariffs in recent years was a “major concern”, as energy costs make up a substantial component of the manufacturer’s operating expenses. “We use about 1.6-million megawatt hours per year. Five years ago, we paid R2bn per year and now we are paying R3.2bn,” said Verster. “So we are paying R1.2bn more and we consume 9% less electricity now. That is not sustainable.” 

In July, electricity & energy minister Kgosientsho Ramokgopa announced plans to conduct a “tariff policy review” to address the ongoing concerns about electricity affordability. Ramokgopa said the ministry’s review would investigate the tariff structures of Eskom’s distribution business and national transmission company, as well as the methodology used by Eskom and the National Energy Regulator of SA to set annual tariff increases. 

websterj@businesslive.co.za