Johannesburg - South African power utility Eskom's
proposed tariff hikes could be the death knell for the mining industry,
auditing firm BDO warned on Wednesday.
While businesses across all sectors of the South African economy are
having to come to terms with proposed tariff hikes, the mining industry "is
in effect staring down a looming crisis which could tip it into the abyss",
BDO said.
"If the 45% increase per year for the next three years comes to bear,
the simple fact is that mine operators are unsure of the continued viability
of their operations," said Mark Dunn, director of Risk Advisory Services at
auditing firm BDO.
He pointed out that mining, especially at the deep levels that
characterise gold and platinum extraction in South Africa, is powered by
electricity.
"Lighting, pumping systems and plant and machinery all consume volumes
of electrical power. It is a fundamental and unavoidable cost centre which,
with escalation on the scale proposed by Eskom, completely changes the cost
base for these operations," said Dunn.
While the mining industry accounts for a relatively small contribution
to the country's gross domestic product (some 3%), it remains a major
employer, with over 400 000 people directly employed by mining companies.
Dunn added that while mines are among those activities in the front
lines of increased risk to business viability, they are by no means the only
companies under threat from a dramatically changing cost base.
Fundamental necessity
"The fundamental necessity of electricity to modern civilisation is
being laid bare. From primary economic activities such as mining and
agriculture, through to secondary activities such as manufacturing and
beneficiation of mined material and even through to the tertiary sector,
electricity is a common thread. It is a vital commodity," he said.
As a consequence, Dunn said increases in the price of power on this
scale were likely to ratchet up the pressure on a range of other industries.
"There will be a ripple effect throughout the economy," he noted, adding
that the ability of South African companies to compete internationally would
also be threatened.
"We have to consider potentially massive increases in electricity
pricing this threat in the light globalisation. If local businesses,
especially those involved in activities such as manufacturing or textiles,
are already under pressure to compete against low-cost producers such as
China and India, the scale of the threat of escalating electricity price
becomes more apparent," Dunn stressed.
Given that preferential pricing, negotiated in contracts which are not
open to public scrutiny, are also in place with certain elements of
industry, Dunn raises the question of whether or not consumers and some
businesses will be subsidising others.
"At issue here is that there is no level playing field on which
investors and industry can depend as they face up to the reality of higher
production costs," he said.
Dunn said the situation is dire and was fast becoming the focus of risk
management committees in the mining and other industries.
"Mitigation strategies have to go way beyond turning the lights off at
night. The issue requires the time and attention of boards of directors, who
have a growing duty to ensure that they are operating efficiently as
possible. Make no mistake, this is an issue which is rising in relevance and
which has to be addressed in order to protect the bottom line," he said.
- I-Net Bridge