Manufacturing Sector - Impact of rising input costs & electricity prices: hearings

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Trade and Industry

01 November 2012
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Meeting Summary

The Portfolio Committee on Trade and Industry heard submissions from industry stakeholders as well as affected parties on Eskom’s proposed national electricity tariff increase. Transnet National Ports Authority said in administering ports it had a port development framework for each port. The entity determined tariffs as per its Act. Directives provided guidelines as to how tariffs should be set. To date Transnet National Ports Authority had had three tariff determinations, the first was at 4.42%, the second at 4.49% and the third was 2.76%. The Transnet National Ports Authority applied and was granted the opportunity to give a R1 billion discount for exports. Just over R3 billion had been spent on the container and automotive industries. The Committee was informed that average tariff increase had been below inflation and this was not sustainable. Transnet National Ports Authority had made an application for a 5.4% tariff adjustment with the understanding that a multiyear tariff application going forward would be a necessity however the regulatory framework did not allow for this. A multiyear tariff adjustment would bring certainty and a constant methodology for determining prices. A Consumer Price Index plus 3% for the following years would sustain Transnet National Ports Authority and allow for the delivery on the R46.9 billion debt capital programme. This would also bring revenue and investor confidence and it was good from a planning perspective.

Eskom said it had managed to keep the lights on since the blackouts of 2006. The state of Eskom’s assets was 15-25 years old and required upgrades. The backlog of maintenance had been reduced. There were ongoing negotiations with various coal mines for supply to power stations. The first unit of the Medupi power plant was planned for synchronisation onto the grid next year. In addressing some of the shortfalls Eskom had committed to purchase as much of the power and generating capacity that was available from municipalities, from across the border and from the private sector. The rollout of the solar water heating programme would continue. Localisation and industrialisation would be rolled out as well as the Accelerated Residential Programme. About 180MW had been acquired through the rollouts. The maintenance backlog would continue however consumption would have to go down. The price application was based on economic growth and job creation. The new pricing would allow for the provision of electricity, maintenance as well as upgrades on equipment and the building of new power stations. The current electricity prices did not cover the cost of production. Eskom was aware of the impact that the new proposed price plan would have on the economy. Eskom had a duty to ensure that it ran as efficiently as possible. Ideally there should be stability where prices were linked to inflation however Eskom was not there yet. The application did include the introduction of independent power producers. Eskom was asking for 13% per annum for the next five years as well as 3% per annum for five years for the introduction of independent power producers.

The Electricity Regulation Act allowed the National Energy Regulator of South Africa to regulate electricity prices. NERSA held regular public meetings, hearings and workshops with all stakeholders to ensure transparency and fairness. The industry had to be regulated in terms of principles that were internationally acceptable such as the rule of law, transparency, neutrality, consistency, independence and accountability. There were problems with the structure of tariffs for municipalities. They did not have specialist tariff managers. NERSA was busy with a tariff rationalisation process. One of the problems with the municipalities was that each was unique in terms of its residential customers. If there was no strong residential base, then municipalities loaded tariffs on shopping centres and business. This meant that businesses would be in trouble.

The Energy Intensive Users Group of Southern Africa opined that South Africa should be focusing on job growth. South Africa’s Gross Domestic Product had been coming from non-tradable sectors. The effect of this on the current account was the widening of the deficit. South Africa had to go back to basics. The costs and subsidies from Eskom and the municipalities were too high. The sales were too low and they were pushing the price too high. The pricing of electricity was driving the economy down and investors were pulling out resulting in job losses. Electricity prices were not affordable to domestic, industrial and business consumers. The tariff increase for industry was 21% and the reason was to subsidise for consumers who would then be losing their jobs anyway, this made no sense. If prices rose to extreme levels than industries would be wiped out. No company could survive the latest increases. Inefficient costs should be cut and electricity sales had to be increased. Eskom used to be the most efficient electricity producer in the world, they had to go back to that standard and South Africa had to get behind them. Planning was important as it saved costs in the long run. The consumption was not efficient, the residential and domestic sectors were demanding 35% more and the need for new power stations yet they were consuming only 17% of the energy.

The joint submission from Nutripharm highlighted that the mining community in Mochabeng in Free State had been hampered due to the high prices charged by municipalities. The water supply was cut earlier this year due to the municipality not paying its levies and a 51.7% increase in prices was passed onto the local business in the Machabeng region. Nutripharm said that the business was established in 2006 and this was followed by a struggle for two years to get electricity supplied to it. There was an investment by Nutripharm of R250 000 in order to ensure electricity supply. 28 jobs were created after the start of the businesses. Two employees had already been re-trenched and closure was a definite option. That the future of small businesses in this area was highlighted as being in jeopardy. The Committee was informed that the systemic issues had been in existence for years. Businesses in the area had been raising these issues with the municipality for years and this had yielded a one page response from them. Investors were taking their business elsewhere

The Committee expressed concern over the lack of competitiveness of South African ports and questioned whether the R49.6 billion debt capital programme would benefit smaller previously disadvantaged entities. The Committee asked Transnet National Ports Authority about the progress of the old Durban airport which was being converted into a port. The Committee asked whether the TNPA real estate was in terms of factory and cargo facilities and whether there were partnerships with real estate experts. The Committee pointed out to Eskom that the submission did not give a complete picture of the impact of the tariff increases on the economy. There had been a massive increase in cash flow with more than 700% profitability on assets. It was pointed out that Eskom had made R7.5 billion profit. The focus was not enough on debt and was instead more on profit. A Member said that he was angry with Eskom and asked why the monopoly of Eskom had not been broken down as this was the only solution. He asked why international companies were prevented from building their own power plants to ensure competition. There was a proposal for other sources of energy such as gas.

The impact of the electricity crisis in South Africa on foundries was noted by the National Foundry Technology Network. The organisation was a Department of Trade and Industry initiative and the objective was to develop a competitive foundry industry in South Africa. There were just above 180 foundry plants in SA. The big plants constituted 20% of all companies and 80% was constituted by the smaller players. There had been a drastic drop since 2007 of foundries due to the energy crisis of 2008. Some of the customers of foundries were the automotive, mining, industrial and agricultural industries. The rising costs of production were not being covered by the parent international companies that had footprints in these industries. SA’s competitors in Europe and from some of the other developing nations posed a huge threat due to lower costs. Employment had dropped between 15-20% since 2008. The tariff increases over the last three years had eroded the industry via closures and scaling downs. Between 2000 and 2015 one would be looking at seven increases in electricity tariffs and this was from Eskom only, not the municipalities. The industry was no longer internationally competitive. Municipalities were problem No 1 and secondly the problem lay with the Eskom increases. Most foundries procured electricity via municipalities.

The Committee received submission from Silicon Technology and SCAW Metals Group on the impact of increasing input costs on manufacturing and beneficiation.

Silicon Technology spoke about its products and cost drivers; the impact of electricity tariff increases and the events of 2012 which included the stopping of operations and the retrenchment of employees. SilTech had 270 employees and it produced 50 000 tons of ferrosilicon per annum. It provided electricity cost comparisons with Western World silicon smelters and average electricity rates by country showed that South Africa had the highest rates and costs in 2011. Due to the high costs of production and the increasing electricity tariff, SilTech was going to stop its operations thereby retrenching all its employees.

With regards to the cost drivers, a breakdown of the cost drivers for the production of ferrosilicon by SilTech placed electricity at 43.4%, raw materials at 29.8%, labour at 11.5%, consumables at 5.3% and fixed costs at 10.0%. On cost increases, there had been a 114.4% increase in the cumulative production cost since 2007. The cumulative electricity cost, as at 2012, had increased by 224.1%.

In the discussions that followed, Members asked questions about the suspension and closing of Silicon Technology’s operations, the possibility of revival, the options for funding from government and a levy rebate from Eskom.

Scaw Metals Group gave a briefing on municipal electricity pricing and its effects on manufacturing and the opportunities for the Industrial Policy Action Plan (IPAP) to stimulate local manufacturing. Scaw Metals said the high electricity tariffs by municipalities were damaging the steel manufacturing industry. Scaw called for the normalization of municipality tariffs to fall in line with Eskom’s prices.

Scaw also said it would be significantly affected by procurement efforts to leverage localization. Increase in employment would be possible through local sourcing. Cheaper local steel scrap pricing would be a stimulus to the economy. The South African steel industry would benefit massively from the imposition of tariffs on the export of scrap steel.

Members asked why the Department of Trade and Industry had not yet imposed a charge on the exportation of scrap metal. The Committee also said that the suggestions and recommendations by Scaw were welcomed and were going to be considered.

Meeting report

The Chairperson said that the issues facing South Africa about industrialisation were critical and the government would not take a step back as it was committed to creating jobs through this sector.

Transnet National Ports Authority and Authority’s Administered Tariffs
Mr Tau Morwe, Transnet National Ports Authority (TNPA) CEO, said the main function of TNPA was to own, manage, control and administer ports. A port development framework had to be developed for each port. TNPA had landlord ownership of ports where it could lease land out. The bulk of the budget was due to go to expansion as opposed to maintenance of ports equipment. The largest chunk was going to go to Durban. TNPA was attempting to put in place a beneficiation programme that would be aligned with national objectives. Global competitiveness, enhancement of exports and the attraction of local and foreign investments were key objectives.

Mr Morwe stated that the TNPA had been criticised for its tariff structures in terms of high costs. There was a lack of clear principles and rules for individual tariffs. In the past, it was the more expensive the cargo, the more expensive the tariffs. There was a lack of clarity as to why tariffs were differentiated with different prices for different products. The consequences of this was that there were high tariffs for cargo dues, high differentiation for cargo dues, low tariff levels for maritime services and low levels of revenue for the real estate business. In terms of the tariff structure that was embedded in the new pricing strategy, terminal operators would pay a higher rental, cargo dues would be lower and export tariffs would be lower than import tariffs.

Mr Mohammed Abdoul, TNPA CFO, said that the entity determined tariffs as per the Ports Act. The Directives provided guidelines as to how tariffs should be set. To date TNPA had had three tariff determinations, the first was at 4.42%, the second at 4.49% and the third was 2.76%. The TNPA applied and was granted the opportunity to give a R1 billion discount for exports. Just over R3 billion had been spent on the container and automotive industries. Capacity had been created and the container capacity had been increased from 5.8 million to 6.1 million. Volume growth had increased by 9.4% in the container industry. Average tariff increases had been below inflation and this was not sustainable. TNPA had made an application for a 5.4% tariff adjustment with the understanding that a multiyear tariff application going forward would be a necessity however the Regulatory framework does not allow for this. A multiyear tariff adjustment would bring certainty and a constant methodology for determining prices. A Consumer Price Index (CPI) plus 3% for the following years would sustain TNPA and allow for delivery on the R46.9 billion debt capital programme. This would also bring revenue and investor confidence and it was good from a planning perspective. 20% of revenue came from maritime services, 61% came from cargo dues and 19% from rentals. Assets had been allocated accordingly thus maritime should contribute 21%, cargo must contribute 46% and the rentals would have to contribute 33% of the revenue. This model was compatible with the landlord model that was employed in SA. A tariff proposal for 2013/14 was R614 for a 6 metre box and R1228 for a 12 metre box. This would translate into a 43% reduction for 6 metre and 12 metre boxes. The pricing strategy had been developed to reduce the tariffs for import boxes as well. The automobile industry had had a volume incentive programme.

Discussion
Mr B Radebe (ANC) said that state assets such as TNPA had to unlock the potential of the economy. It was important to ensure that tariff prices were reduced over the long term. How did SA ports compare with ports in Mombasa and Maputo? Was SA losing its edge since it seemed like more and more cargo was going to these other ports? Was there a way of localising cranes so that too many were not exported? How long did it take to convey cargo in comparison with other international ports?

Mr N Gcwabaza (ANC) asked how far the development at the old Durban airport was. There were rumours that the old Durban airport would be used for cargo flights, was this true instead of it being developed into a port, was this true? How far was the upgrading of existing ports?

Mr G McIntosch (ANC) said that the submission was encouraging. SA ports were geographically well located. Was the dig out port in Durban a ring fenced cost? What was the nature of the ‘recovering investment’ initiative? Had TNPA looked at the Walvis Bay and Maputo models? Was the real estate in terms of factory and cargo facilities and were there partnerships with real estate experts?

Mr G Hill-Lewis (DA) said that SA had to be internationally competitive. SA ports when compared to Asian and other international ports had tariff costs that were double the average international price. However SA ports processed half of the average internationally. Bottom line SA ports were not internationally competitive. What was TNPA doing about this? If one looked at the numbers, TNPA was making R3.56 billion profit on a turnover of R7.5 billion, this was a profit ratio of 50% Now TNPA was advocating for further increases and had said that tariff prices below CPI would be unsustainable. In what sense would this be unsustainable given the profit margins?

Ms S van der Merwe (ANC) asked how far down the line was the finalisation of the tariff prices? Was the Transnet study on port cargo charges finished and what were the next steps?

Dr M Oriani-Amborisni (IFP) asked why the differentiated price structure was not seen as an export subsidy. TNPA was doing a lousy job wasting money and making enormous profits, why should more money be given to them? What was the justification for the increase that would be 3% above CPI?

The Chairperson said that the problem was the perverse incentives. For example, manufactured products were exported by TNPA and yet the charges were higher than that of the unprocessed products whose value had to be increased. What was the meaning of ‘significant value-add’?

Mr Morwe replied that TNPA was losing its competitive edge. TNPA was working together with other ports regionally; therefore TNPA did not compete with the ports of Mombasa or Maputo. The competitive edge of a region as opposed to a country had to be considered. TNPA did not buy cranes, most of its spend was in real estate. Ports were very different, the port of Singapore handled mainly trans-shipment cargo and was highly mechanised. Cranes operated via a computer, if SA was to create jobs and also wanted to follow the Singapore model then it would end up with more people on the streets as jobs would be lost to the machines. A number of ports had been upgraded in order to address inefficiencies. The Durban port was not included in the market demand strategy.

Mr Anoj Singa, Group CFO of Transnet, said that the CPI plus 3% was premised on the idea that the principles encapsulated in the Regulations had been used. There was a need to focus on invested capital. TNPA was investing in assets over a very long period, the profits were thus for replacing these assets.
 
The Chairperson said that the rest of the responses should be in writing including the next round of questions. The Committee wanted clear answers; the challenge was that improvement was too slow. To what extent had TNPA supported localisation?

Mr Hill-Lewis said that the international standard for handling a container was 36 hours yet in SA it was 72 hours. What was being done to improve this.

Mr Radebe asked how much of the R46.9 billion that would be rolled out for capital expenditure was going to be used to support historically disadvantaged entities?

Eskom submission
Mr Dan Marokane, Executive at Eskom, said that as a business Eskom had managed to keep the lights on since the blackouts of 2006. The adverse weather as well as the summer season present new challenges. The state of Eskom’s assets was 15-25 years old and required upgrades. The backlog of maintenance had been reduced. There were ongoing negotiations with various coal mines for supply to power stations. The first unit of the Medupi power plant was planned for synchronisation onto the grid next year. In addressing some of the shortfalls, Eskom had committed to purchase as much of the power and generating capacity that was available from municipalities, from across the border and from the private sector. The rollout of the solar water heating programme would continue. Localisation and industrialisation would be rolled out as well as the Accelerated Residential Programme (ARP). About 180 mega watts had been acquired through the rollouts. The maintenance backlog would continue however consumption would have to go down.

Mr Mohammed Adam, Executive at Eskom, said that the current three year determination for electricity was due to end in March 2013. All stakeholders should make an input on the application. The application was based on economic growth and job creation. The new pricing would allow for the provision of electricity, maintenance as well as upgrades on equipment and the building of new power stations. The current electricity prices did not cover the cost of production. Eskom was aware of the impact that the new proposed price plan would have on the economy. Eskom had a duty to ensure that it ran as efficiently as possible. Ideally there should be stability where prices were linked to inflation however Eskom was not there yet. The application did include the introduction of independent power producers. Eskom was asking for 13% per annum for the next five years as well as 3% per annum for five years for the introduction of independent power producers. Eskom’s studies had shown that the support for vulnerable sectors was more effective through targeted subsidies with transparent cross-subsidies. The right price signals were needed for the generation of electricity. The rules of the National Energy Regulator of South Africa (NERSA) only allowed for efficient and prudent costs to be passed on to the customer. In no way were South Africans going to pay for Eskom’s inefficiency hence the R30 billion worth of savings target.

Eskom had assumed a 1.9% sales growth assumption. Coal provided a significant input cost for Eskom. Over the last period coal costs had been in the region of about 18%. Any additional power that had to be supplied would be much more expensive. A legislative framework was needed as a safety net should all of these strategies fail. Such a legislative framework would demand constraints on a mandatory basis. Investors and the rating agencies had to be addressed; some of the ratios that should have been achieved were extended from two to three years resulting in a five as opposed to three year price application. A third of the costs were for primary energy and another quarter was for operating costs. Eskom had 4.5 million household customers and the others were business and mining. Eskom had one of the world’s largest energy saving programmes. Eskom was proposing that for the lowest consuming customers which was the poor there should be a fixed tariff. The middle customers should have a 5% increase and the more affluent residential customers would have a 14% increase. In terms of the regulatory formula, at no stage did NERSA include Eskom’s capital costs for its construction programme. All that NERSA allowed was a return on the assets and depreciation. The exception to this was that NERSA had a category called Works Under Construction which was included in the regulatory asset base to calculate the return.

National Energy Regulator of South Africa (NERSA) submission
Mr Charles Geldhard, NERSA Regulatory Specialist, said that the entity supported any attempts for better employment. The mandate of NERSA was derived from the National Energy Regulator Act. Decisions of NERSA were based on reason, evidence and facts. Its board comprised four full time and five part time members. NERSA held regular public meetings, hearings and workshops with all stakeholders to ensure transparency and fairness. The industry had to be regulated in terms of principles that were internationally acceptable. The principles accepted by NERSA were the rule of law, transparency, neutrality, consistency, independence and accountability. The Electricity Regulation Act allowed NERSA to regulate prices for electricity costs. There were problems with the structure of tariffs for municipalities. They did not have specialist tariff managers. NERSA was busy with the tariff rationalisation process. One of the problems with the municipalities was that each was unique in terms of residential customers. If there was not a strong residential base then they loaded tariffs on shopping centres, for example. This meant that the businesses would be in trouble. There was a new risk for municipal revenue – this was the net metering and installation of solar panels on the roofs of houses. NERSA was concerned about the pricing of electricity on the economy as well as job creation. The issue of budgetary constraints had to be addressed with National Treasury, the South African Local Government Association (SALGA) as well as the Department of Cooperative Governance and Traditional Affairs (COGTA).

Discussion
Mr Hill-Lewis said that the figures were complex. Eskom did not give a complete picture of the impact of the tariff increases on the economy. There had been a massive increase in cash flow such as more than 700% profitability on assets. Eskom had made R7.5 billion profit. The focus was not enough on debt. The electricity business was low risk due to the monopoly; the problem was that the focus was more on revenue and less on debt. Eskom did not pay taxes nor did it nor did it declare a dividend on its profitability. Eskom should raise this money on the debt market.

Mr Oriani-Ambrosini said that he was angry with Eskom and NERSA. Why was the monopoly of Eskom not been broken down? This was the solution. There was no national interest in the manufacturing of electricity, why were international companies prevented from building their own power plants to ensure competition? For there to be economic growth there had to be cheap, reliable electricity. Cheap reliable electricity could easily be provided via gas.

Mr McIntosch said that SA had huge reserves of coal, which was cheap electricity. This resource had to be exploited and protected. Would Eskom or NERSA be open for electricity to be sourced directly as opposed to sourcing it via municipalities?

Ms van der Merwe asked if electricity supply would be able to keep up with the growth of the economy. Why had it taken so long to realise that municipalities were charging over 700% more than Eskom? Was the Kabora Basa running at full strength, if so how much electricity was being bought from there?

Mr Adam said that Eskom still borrowed R200 billion over the period shown on the slide. The total funding need was over R300 billion. The targeted return of 8.1% from NERSA was still not achieved. Eskom was using the revenue to substantiate the balance sheet in order to borrow more; this was at the crux of the tariff increase. The tariff did not fund the capital expenditure programme. Eskom was already benefiting from infrastructure that was already there funded by private customers. The option of private producers had been considered however one had to be mindful of the fact that a private investor would look at a much higher return – which would not benefit the reduction of electricity in the long run.

Mr Marokane added that the price of electricity in SA had been low; it was this move from the base that had resulted in steep increases. Investors were invited to partake in the Khusile project – however a return on investment was the main issue. Private investors always looked for higher returns. Eskom was looking at using gas as a future solution however SA did not have many reserves.

Mr Adam said that the introduction of independent power producers was welcomed. The 1.9% electricity curve translated into 4% growth of Gross Domestic Product (GDP)

Mr Geldhard said that the Department of Energy had done a determination in consultation with NERSA however this was still work in progress. It was not clear why municipalities were only now being scrutinised on their tariffs perhaps it was because of the new electricity increases. The problem was the structure of their tariffs.

The Chairperson said that the rest of the answers would be in writing including for the next round of questions.

Mr Hill-Lewis asked how was the 8.16% return calculated? Had Eskom investigated whether Treasury could guarantee its debt? The balance sheet was healthy; there had been a 200% increase in cash flow as well as 700% return on assets.There should be no problems in raising debt.

Dr Oriani-Ambrosini said that his questions had not been answered save for a partial answer on the use of gas. There was plenty of gas in SA. Why were municipalities making a profit on the sale of electricity, nobody could afford this.

Energy Intensive Users Group of Southern Africa
Mr Mike Rossouw, EIUGSA Chairman, said that he fully supported that this was about industrialisation. SA had to compete its industrialisation. There were a lot of similarities between South Korea and SA. SA should be focusing on job growth. SA’s GDP had been coming from non-tradable sectors. The effect of this on the current account was the widening of the deficit. SA had to go back to basics. The costs and subsidies from Eskom and the municipalities were too high. The sales were too low and they were pushing the price too high. The pricing of electricity was driving the economy down and investors were pulling out resulting in job losses. Electricity prices were not affordable to domestic, industrial and business consumers. The tariff increase for industry was 21% and the reason was to subsidise for consumers who would then be losing their jobs anyway, this made no sense. If prices rise to extreme levels than industries would be closed down. The bulk of the pricing was driven by wholesale purchases from industry. If sales dropped prices would escalate and this was a problem. One should remember that if industries were closed down than that translated into job losses to China, Brazil and India. The cost of mining was out of control and SA was being priced out of the market. No company could survive the latest increases.

Inefficient costs should be cut and electricity sales had to be increased. Eskom used to be the most efficient electricity producer in the world, they had to go back to that standard and SA had to get behind them. Planning was important as it saved costs in the long run. EIUGSA fully supported independent power producers as they would ensure accountability and efficiency. The consumption was not efficient, the residential and domestic sectors were demanding 35% more and the need for new power stations yet they were consuming only 17% of the energy. This problem could be solved via roof solar panels. If sales fell prices would rise, SA should be pushing to have more electricity sales as was the case in the 80’s. The margins of safety that Eskom was building into all these factors were too high. Municipalities were charging more, business were moving out and closing down and this meant less revenue, this was a crazy situation. In conclusion we had to be tough on costs, tough on subsidies, tough on sales but soft on sales.

Discussion
Dr Oriani-Ambrosini said that all stakeholders had to listen, these were crucial issues. Only through the growth of the economy would there sustainability in terms of employment generation. Cheap electricity was economic growth and economic growth needed cheap electricity.

The Chairperson said that the smaller producers were a worry to the Committee and they did not provide discounts, could there be a comment on this.

Mr Rossouw said that all the sectors had been considered i.e. Domestic, industrial and commercial and prices could not be compared in absolute terms. The reality was that if the industrial sector left than the other two would have a dramatic increase in prices. The inefficiencies particularly at municipal level would not be sustainable in the long run.

Mr McIntosch asked if EIUGSA were aware of buyers of large wholesale electricity.

Mr Rossouw said that in the immediate term there would be no capacity to take on investors of that nature. This problem would be solved when Medupi and Khusile became operational however by then the electricity prices would be too high.

Nutripharm
Ms Mina de Hart, President of the Free State Goldfields Chamber of Commerce (FGC), said that the mining community had been hampered due to the high prices charged by municipalities. The water supply was cut earlier this year due to the municipality not paying its levies and a 51.7% increase in prices was passed onto the local business in the Machabeng region. FGC had tried to engage with the municipality and had had a one paragraph reply where they shrugged their shoulders. Nobody there was worried about the price increases which were random and did not allow businesses to plan properly. There was a need for immediate financial rebates as well as assistance from the municipality.

Mr Clark O’Donavan, a Member of Nutripharm said that the business was established in 2006 and this was followed by a struggle for two years to get electricity supplied to it. There was an investment by Nutripharm of R250 000 in order to ensure electricity supply. 28 jobs were created after the start of the businesses. Two employees had already been retrenched and closure was a definite option. Electricity consumption jumped from R30 000 a month to R48 000. For a small business this was unsustainable, one could not plan or budget properly at all because of a municipality that could not plan properly.

Mr Schalk van der Merwe, Free State Goldfields Executive Committee member, said that the systemic issues had been in existence for years. Businesses in the area had been raising these issues with the municipality for years and this had yielded a one page response from them. Investors were taking their business elsewhere and this resulted in job losses simply because there were high electricity increases that were randomly applied by the Mochabeng electricity. The plea to the Committee was for assistance as the Free State Goldfields area was ready to implode.

Mr Charl O’Donavan, a member of Nutripharm, concluded by stating that the future of small businesses was in jeopardy. Electricity charges were a great contribution in the failure of small business, and Nutripharm spoke on behalf of existing and new businesses.

Discussion
Mr McIntosch said that the submission highlighted the difficulty of small to medium businesses trying to operate under dysfunctional municipalities. This was disheartening as they were the creators of jobs for the poor. This was a tragedy.

Ms van der Merwe said that the information was useful. It seemed like nobody was speaking to anybody in this country.

Mr van der Merwe said that the industry players had tried to engage with the municipality and Nutripharm had also tried to complain to NERSA. The situation had been escalating to critical levels and the Committee was requested to intervene in order to save jobs.

National Foundry Technology Network (NFTN) submission
Ms Adrie Mahomadie, NFTN Project Leader, said that the organisation was a Department of Trade and Industry (DTI) initiative and the objective was to develop a competitive foundry industry in SA. There were just above 180 foundry plants in SA. The big plants constituted 20% of all companies and 80% was constituted by the smaller players. There had been a drastic drop in foundries since 2007 due to the energy crisis of 2008. Some of the customers of foundries were the automotive, mining, industrial and agricultural industries. The rising costs of production were not being covered by the parent international companies that had footprints in these industries. SA’s competitors in Europe and from some of the other developing nations posed a huge threat due to lower costs. Employment had dropped between 15-20% since 2008. The labour aspect of the foundries was suffering. High volume foundries in SA relied on exports which were expensive due to unfavourable exchange rates. NFTN had developed working groups that had various programmes in order to improve things.

Mr David Mehrtens, NFTN Representative, added that NFTN had engaged with far too many stakeholders and the time for action had come. The situation was bad especially due to the energy hikes; we were beyond the tipping point. The tariff increases over the last three years had eroded the industry via closures and scaling down. Between 2000 and 2015 one would be looking at seven increases in electricity tariffs and this was from Eskom only not the municipalities. The industry was no longer internationally competitive. Municipalities were problem number one and secondly the problem lay with the Eskom increases. Most foundries procured electricity via municipalities.

Discussion
The Chairperson said that nobody in the industry should try to apportion blame.

Mr McIntosch said that the Committee was hearing the same song however the submissions were interesting because Members were at the coal face. The Committee was very worried and it was behind industry.
 
Afternoon session
Silicon Technology (SilTech) submission
The submission was done by the Managing Director of Silicon Technology (SilTech), Mr Theo Morkel. The submission comprised of an overview of SilTech and Ferrosilicon outlining the products, the process, the customers and the cost drivers; the impact of electricity tariff increases and the events of 2012 which included the stopping of operations and the retrenchment of employees.

Mr Morkel said SilTech had 270 employees and it produced 50 000 tons of ferrosilicon per annum. The plant had two submerged arc furnaces, baghouses, silica fume plant, small brick making plant and a small recovery plant. The Committee was presented with photographs showing the various sections of the SilTech plant. SilTech was owned by Glencore International PLC which was an integrated producer and marketer of commodities. Its marketing operations had 2 700 employees in 50 offices in 40 countries while it industrial operations had 54 800 employees in 13 countries.

SilTech produced Ferrosilicon (FeSi) which contained 70 - 75% of Silicon metal and 22 - 23% of Iron. The Committee was presented with a simplified version of the process and the consumption rates in the production of FeSi. A fundamental difference between FeSi and other metals was that it was driven by electricity rather than raw materials. Mr Morkel displayed the difference in electricity consumption in MWh per ton by FeSi and other metals. SilTech’s customers included Europe, Australia, Japan, Middle East, ArcelorMittal, Columbus, Exxaro, CapeGate, DMS Powders and RBM.

With regards to the FeSi market compared to other alloys, competitors and trends, FeSi accounted for 20% of the ferroalloy sector with projected global revenues of 11 billion USD in 2010. The FeSi business had been consistently less profitable than the manganese and chrome business. Europe now only represented 12% of world FeSi consumption and 8% of production. South Africa was said to be a leading player in the chrome and manganese sectors but only a minor player in the Silicon and FeSi sectors.

A breakdown of the cost drivers for the production of ferrosilicon by SilTech placed electricity at 43.4%, raw materials at 29.8%, labour at 11.5%, consumables at 5.3% and fixed costs at 10.0%.

With regards to the cost increases, there had been a 114.4% increase in the cumulative production cost since 2007. The cumulative electricity cost, as at 2012, had increased by 224.1%. An electricity cost comparison of Western World silicon smelters and average electricity rates by country showed that South Africa had the highest rates and costs in 2011. Due to the high costs of production and the increasing electricity tariff, SilTech was going to stop its operations, thereby retrenching all its employees.

Discussion
The Chairperson asked if the operations of SilTech were going to be suspended entirely at the end of the year.

Mr Morkel replied that operations had already been suspended. The suspension took place in February 2012 and the decision had been confirmed and everybody was already being retrenched.

Mr G McIntosch (COPE) said that the submission was depressing as 260 people were going to lose their jobs. How much electricity did it require to produce solid blocks of aluminum?

Mr Morkel replied that the MWh per ton of electricity required for the production of aluminum was higher than that of FeSi but he did not have the exact amount required.

Ms S Van der Merwe (ANC) asked from whom SilTech’s customers were going to buy after the closing of its operations. Was there any hope that the plant could be revived if the electricity prices were reduced?

Mr Morkel replied that SilTech’s customers were going to be supplied by another local producer which was based in Witbank and others were going to be importing their supplies. SilTech had intentions to revive the plant if there was a miraculous decrease in the input and electricity costs.

The Chairperson asked for a breakdown of the input costs of the company prior to its closing down. What discussions had SilTech had with the Department of Economic Development with regards to funding applications and what were the results? How many furnaces did SilTech have and was there no chance of continuing their operation? Had there been any steps taken to prevent the suspension and eventual closing of the company? The Chairperson said that Mr Morkel could respond to her questions in writing.

Mr Morkel replied that he had written letters to various government departments such as the Department of Trade and Industry, the Department of Public Enterprises and Eskom explaining the situation. A delegation from Eskom came to the site about the proposal for a rebate on levies but the reply was in the negative. SilTech’s decision to stop operations was not because it was in debt. The company was debt-free but if it was to continue operations, it would be destroying value for the shareholders and it was not profitable. SilTech had two furnaces. Continuing the operation of both furnaces was unprofitable.

The Acting Deputy Director General at the DTI, Mr Garth Strachan, said that the IDC had set aside R7 billion and of this amount R4.8 billion had been disbursed to 108 companies. It was loan funding and not grant funding. The IDC was however reluctant to grant such a loan to a company whose cost structure was unsustainable.

The Chairperson asked Mr Morkel to put the levy and rebate arrangement which was proposed to Eskom in writing so that the Committee could have a clear understanding of what the proposal contained.

SCAW Metals Group submission
Scaw Metals Group Development Manager, Mr Damon Symondson, gave an overview of the Scaw Metal Group, and then spoke about municipal electricity pricing and its effects on manufacturing and the opportunities for the Industrial Policy Action Plan (IPAP) to stimulate local manufacturing.

Scaw was organized along four main business lines producing a range of specialized high quality steel products. These main business lines included grinding media, wire rod products, cast products and rolled products. Scaw had a vertically integrated supply chain and was a significant beneficiator of raw materials. The company was aligned with government’s policy objectives and it was a success story when looking at government’s beneficiation strategies. Scaw had made significant achievements in terms of the government policy instruments of the beneficiation framework, IPAP2, the Mineral Petroleum and Resources Development Act and also in terms of the steel industry task team. Scaw had an international footprint across a number of key mining and infrastructure geographies. It had operations in Europe, Middle East, West Africa, Southern Africa and Australia.

Mr Symondson told the Committee that Scaw’s key manufacturing facilities in Gauteng sourced electricity from, amongst others, municipalities. Scaw, like other industrial customers who were supplied electricity by municipalities were at a significant disadvantage. Large municipalities in Gauteng had the highest tariffs despite the fact that they were enjoying economies of scale. This placed municipal supplied manufacturing facilities at a significant disadvantage against Eskom-supplied facilities and international competitors. The high municipal maximum-demand charges were damaging the industry as it had to pay high electrical bills even during periods of low consumption. More so, the maintenance of electrical distribution infrastructure remained a concern. Scaw was of the opinion that increases in municipal demand charges should be capped until they were more in line with Eskom and that revenue flowing from demand charges must be ring-fenced and used for capital infrastructure refurbishment by municipalities.

Mr Symondson said that the proposed Eskom Multi Year Price Determination (MYPD3) increases could destroy energy-intensive industry fed by municipalities. He displayed a chart which illustrated that if the City Power Electrical Tariff was frozen, it was going to take until late 2015 before the Eskom megaflex tariff was equal to the City Power industrial tariff. This was going to discourage industrial investment in areas supplied by electricity by municipalities.

Mr Symondson outlined three suggestions for bringing municipal industrial tariffs in line with Eskom megaflex tariffs. These included the following: revenue collection must be improved; cross-subsidisation needed to be addressed; and cost of supply to municipalities from Eskom needed to be lowered. If the problem of high municipal industrial tariffs was not addressed, there were only two alternatives for factories to obtain electricity at a competitive price. These alternatives included giving businesses the opportunity to be supplied directly by Eskom or giving opportunities for wheeling electricity that currently exist for Eskom customers to be made available to municipal customers.

Mr Symondson said Scaw would be significantly affected by procurement efforts to leverage localization. Increase in employment would be possible through local sourcing. Cheaper local steel scrap pricing would be a stimulus to the economy. The South African steel industry would benefit massively from the imposition of tariffs on the export of scrap steel. Since 2006, the exportation of scrap steel had increased by 22% whilst local beneficiation had decreased by 3%.

Recommendations
Mr Symondson recommended the normalization of municipal tariff. He said that government must, in parallel with the Eskom MYPD3 proposal, establish a plan to bring the municipal industrial tariffs in line with the Eskom megaflex tariff.

He also recommended localization. The good work already done by government to increase localization needed to continue which would help stabilize and then grow the South African manufacturing base.

In terms of a steel scrap export tariff, consideration had to be given to steel scrap export tariffs to increase local beneficiation and manufacturing.

Discussion
The Chairperson said that the suggestions which were made by Scaw were welcomed.

Ms van der Merwe said that the issue of scrap metal was an issue which had been brought to the attention of the Committee and work needed to be done in that regard. The suggestion regarding the normalization of municipal tariff was quite useful.

Mr McIntosch said that the scrap metal network was very active and they were involved in many illegal activities. He thought that nothing had happened on the issue of placing a charge on the exportation of scrap metal but it was important to note that other countries placed charges on the exportation of scrap metal. Why had South African not imposed the tariff?

Mr Strachan replied that the function for an export tax lay with the National Treasury. The DTI had motivated for the scrap export tax but it was turned down. The DTI was however working on an alternative measure which was going to be presented before Cabinet shortly. The export of scrap metal was not only associated with crime but with the masking of the export of precious metals and radioactive material.

Mr Symondson said that he was not an expert on the area of scrap metal but there was a team at Scaw which could brief the Committee in writing on the issues related to scrap metal exportation.

The Chairperson said that the sharing of the challenges by the various companies was a good initiative. The Committee would study all the inputs which had been presented. The Committee would conduct IPAP hearings and all the companies were invited to participate in those hearings.

The meeting was adjourned.

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