Publication: Business Day Issued: Date: 2009-09-15 Reporter: Reuters

Eskom to renegotiate long-term smelter contracts

 

Publication 

Business Day
Date 2009-09-15
Reporter Reuters
Web Link www.bday.co.za


 
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Power Lines


Power utility Eskom will have to renegotiate long-term aluminium contracts, the main factor behind the utility’s record annual loss, Public Enterprises Minister Barbara Hogan said today. Eskom reported a loss of R9,7bn August *1, arising mainly from fair value losses from derivative contracts linked to the price of aluminium and called “embedded derivatives”.

Eskom had signed multi-decade aluminium smelter contracts with BHP Billiton , one of the world’s top mining companies. BHP defended the price it had negotiated as ”internationally competitive *2”. “The embedded derivatives is a big problem. We will have to renegotiate that contract for embedded derivatives,” Hogan told parliament’s public enterprises portfolio committee. “It is a complete misnomer to say that the embedded derivative contract was actually a hedging risk, that is completely wrong.”

Eskom, which is struggling to meet growing demand in Africa’s biggest economy, has a funding shortfall to pay for its 385 billion rand power expansion programme. In the 1970s *3, when Eskom had surplus power, it sought deals with companies such as BHP to pay for electricity based on tariffs linked to the price of metals. BHP had based a decision to invest $6 billion to build its aluminium smelters in South Africa because of the availability of long-term power supply contracts.

According to Eskom, some of these commodity-price linked contracts had more than 20 years to run. The contracts are based on commodity prices, the exchange rate and the standard electricity price. “The embedded derivative was a contract that was entered into when there was surplus energy with smelters,” said Hogan. “We have already been in discussion with some of the companies with smelter interests and we will have to renegotiate that contract,” she said.

With acknowledgements to Reuters and Business Day.


*1      Alusaf makes about R4 billion nett profit.

Yet it and Eskom are prepared that this utterly ridiculous situation should result in Eskom making a R10 billion per year loss.

But, as I have said before, this is nothing.

Continuing to supply Alusaf the massive amounts of energy that it did during the loadshedding criminality, cost the citizens, taxpayers and normal Eskom customers hundreds of billions of Rands in direct losses, indirect losses, unnecessary capital expenditure and opportunity costs.

Entire development projects from residential and commercial property to industrial facilities have been delayed and put on ice because of insufficient energy capacity.

The value of these is enormous.

When incapacity and loadshedding became inevitable, Eskom should have switched off power to the guzzlers. This is allowed in the national interest - which surely it was. It compensation was due then it should have been paid - this would have been less expensive that the fiscal insult endured by the rest of the nation.


The boards of Eskom, the cabinets and Pinnoccio Erwin should have been standing in Greenmarket Square every Saturday from 07:00 CAT to 13:00 CAT absorbing the full brunt of ripe tomato sharia.


*2      Corporate talk for the cheapest available in the world.

They would be quite happy for the rest of the country to essentially make their business and profit.

Remember, the double insulting whammy of this sick business is that the aluminium ore gets imported from the owner's own bauxite mines in Australia.

That's where value should be added, like in Canada where there is both ore and hydroelectric power.

But Australia, has neither hydroelectric power or much other electric power.

So they export bauxite to South Africa and South Africa exports raw aluminium at very, very low prices back to Australia and the rest of the world.

A very modest amount is retained in the country for making aluminium foil for Pinnoccio's mother to wrap her precious little fibber's jam and peanut butter sandwiches.

Arseholes.


*3      Now the modern Eskom and other assorted dingbats are going to blame apartheid.

Yet firstly it was explicitly known in the middle 90s that a power crunch was definitely coming.

There was plenty of time to firstly renegotiate smelter contracts then and now allow loadshedding to ever occur and secondly to build more primary generation capacity.

But criminal negligence was the response.

Big questions to ask :

As I said before on the record, the electricity debacle in this country makes the Arms Deal looking like a regular Sunday School picnic in Bobbejaanskloof.

It could probably keep all 1 000 plus investigators of the Priority Crimes Unit busy for the rest of the natural lives.