ESKOM TARIFF APPLICATION TO NERSA: MINING SECTOR RESPONSE

Transcription

1 ESKOM TARIFF APPLICATION TO NERSA: MINING SECTOR RESPONSE Henk Langenhoven Chief Economist: Chamber of Mines Midrand 17 November 2017 PAGE

2 Content The electricity scenario for the mining sector The CLIFF, commodity prices, costs and profitability Eskom s response and impact on the mining sector Binding constraints and solutions PAGE 2

3 Share of electricity demand Mining Ferrous smelters Non-Ferrous smelters Oil & Chemicals Transport PAGE 3

4 Mining contribution to the economy Direct: Indirect: PAGE 4

5 Mining electricity intensity vs prices PAGE 5

6 Mining electricity spend vs production PAGE 6

7 Electricity over capacity vs economic growth PAGE 7

8 Electricity over capacity vs mining growth PAGE 8

9 Content The electricity scenario for the mining sector The CLIFF, commodity prices, costs and profitability Eskom s response and impact on the mining sector Binding constraints and solutions PAGE 9

10 Project Phakisa: gold mining scenarios PAGE 10

11 Commodity prices & mining production PAGE 11

12 Gold price movements vs costs PAGE 12

13 Platinum price movements vs costs PAGE 13

14 Commodity cycle instability & profitability PAGE 14

15 Mining sector profitability PAGE 15

16 Mine share prices & cost of capital PAGE 16

17 Content The electricity scenario for the mining sector The CLIFF, commodity prices, costs and profitability Eskom s response and impact on the mining sector Binding constraints and solutions PAGE 17

18 Eskom response 1. Price increase(s) of 20% Economic growth: -0.1% on 0,6% points = 17% decline Cumulative Employment -600,000 Mining: -5% to -9% decline Employment: -25,000 to -41, Government support Government debt : GDP up to + 100% Economic decline and hardship PAGE 18

19 Mining composite cost index PAGE 19

20 Mining input component cost trends PAGE 20

21 Impact on the mining sector R3.21bn costs 66% of gold and platinum mines unsustainable 48,000 jobs at risk PAGE 21

22 Mine share prices & cost of capital PAGE 22

23 Mining sector debt to VA & cost of capital PAGE 23

24 Content The electricity scenario for the mining sector The CLIFF, commodity prices, costs and profitability Eskom s response and impact on the mining sector Binding constraints and solutions PAGE 24

25 Eskom debt to Eskom GDP vs Eskom debt to RSA GDP PAGE 25

26 Electricity oversupply vs economic & mining growth PAGE 26

27 Mining electricity spend vs production PAGE 27

28 There is a CLIFF and it is CLOSE PAGE 28

29 There is a CLIFF and it is CLOSE PAGE 29

30 Conclusion Two scenarios (20% increase or government support) are not viable they are catastrophic Without Structural Adjustment in the Electricity Sector there is no solution Three binding constraints; Over capacity in Electricity Generation Virtually exponentially rising ESKOM debt burden Lower electricity intensity of Production THE ideal Opportunity: Begin Structural Adjustment HOLISTICALLY Low tariff adjustment WITH Structural Adjustment PAGE 30

31 PAGE 31

32 Short term & structural adjustment components 1. Find the least damaging solution for the approaching cash crunch 2. Drastic changes needed at Eskom: accelerate the decommissioning of old inefficient power stations bring Eskom operational cost (primarily head count) in line with international standards complete regulated asset base (RAC) re-evaluation as soon as possible so that the return on asset (ROA) absolute value diminishes while weighted average cost of capital (WACC) stays the same accelerate the completion and commissioning of the new more efficient power stations 3. Accelerate the buying of electricity from IPP s and continue the program 4. Revisit the MYPD and RCA regulatory regime PAGE 32

33 Mining sector income/expenses Total Income R million % R million Intermediary Inputs Transport & Logistics Electricity Other Inputs Imported Intermediary Value Added Employees Dividends Profit After Tax Depreciation Net Investment Taxes Company Tax Indirect Taxes Forex Losses Forex Losses Total Expenses PAGE 33

34 Mining value add to the economy PAGE 34

35 Mining intermediate input costs PAGE 35