logo-loader

Power supply crisis in South Africa escalates, putting mining operations and the wider economy at risk

Published: 21:23 13 Dec 2019 AEDT

Petra Diamonds -

It was notable in South Africa this week that along with faulty infrastructure, flooding and wet coal, the idea of sabotage was also invoked as a major cause of the growing crisis at parastatal electricity generator Eskom.

And the accusation of sabotage didn’t come from some wild-eyed conspiracy theorist on the extreme fringes of South Africa’s fractious politics. No, it came right from the top, from Cyril Ramaphosa, the relatively new President, who’s been struggling to right the South African economy ever since he took power in February 2018.

So far, he hasn’t had much success. Indeed, his ongoing failure was highlighted this summer when South Africa won the rugby world cup this year, and players and pundits repeatedly stated that the victory was much needed as a fillip to mitigate from the ongoing difficulties at home.

And central to the performance of the South African economy is the ability of Eskom to provide an adequate and interrupted supply of power to the country’s industry, and in particular the mining industry. With increasing regularity, Eskom has been failing to do this.

The most recent failures have been some of the worst yet.

Stage 6 load-shedding, where 6,000 megawatts of power is removed from the country’s generating capacity was implemented for the first time this week, with Eskom saying that it was now also planning for Stages 7 and 8. Previously, the highest load-shedding rate had been Stage 4.

Petra Diamonds Ltd (LON:PDL) was one company which was seriously effected, being forced to shut down operations at its famous Kimberley mine. Also facing stoppages was Harmony Gold (JSE:HAR), which ceased operations at its nine South African mines for two nights, and Sibanye-Stillwater (JSE:SGL), which closed all its deep-level mines. Anglo American (LON:AAL) said it had been effected but didn’t say how.

Eskom is currently carrying around US$30bn of debt, and has been plagued by incompetence in recent years, as long-standing and experienced managers have been edged out to make way for political appointees. Critics regularly accuse these appointees of looting the company.

And as recently as last week, President Ramaphosa was praising the recent construction of the Medupi power station as a “fitting symbol of the importance of our state-owned enterprises”.

Medupi has come in years late and almost four times over budget, and is currently not performing to expectations. Another new power station, Kusile, is also underperforming. Just as troubling for South African industry though, is that because Eskom is so saddled with debt it is unable to provide efficient servicing and maintenance to its older power stations. That means that there is little likelihood that things will improve any time soon, and all this in the context of a 500% increase in tariffs over the past decade or so.

It all adds up to a teetering parastatal behemoth that is becoming increasingly unreliable, and which is becoming a symbol of South Africa’s wider economic decline. In November Standard & Poors cut the country’s credit outlook to negative. Many observers expect the country to swing into recession as a result of Eskom’s load-shedding programme, and that in turn is having an effect on credit ratings.

The country is currently rated at BB by Standard & Poors, two notches below investment grade. But there’s every expectation that this will drop a further grade at the next readjustment. That will put the country’s borrowing costs up, and put further pressure on Mr Ramaphosa, who is struggling to find the money to allow him to fulfil promises made to his supporters.

In the absence of that available cash, he is having to turn to different narratives, hence the accusation that sabotage was behind more than 2,000MW of the recent load-shedding requirement. Not surprisingly, he has called for the perpetrators to be found and detained by police. But it would be equally unsurprising if no perpetrators were ever found.

It has been a favoured tactic of left-wing governments, from Stalin’s Russia to Maduro’s Venezuela to blame poor economic performance on saboteurs. In Stalin’s case, he used the apparent “sabotage” of the fledgling Soviet economy to perpetrate a genocide on an entire class of people – the kulaks.

The consequences of Ramaphosa’s accusations are likely to be less strong. Nevertheless, there are call for ethnic cleansing on the left of the South African political spectrum as well as on the right.

The precedent set by Zimbabwe to the north looks increasingly instructive. Unfortunately, it offers no one any comfort at all.

Poseidon Nickel signs binding agreement with Mineral Resources to divest...

Departing Poseidon Nickel Ltd (ASX:POS, OTC:PSDNF) CEO Craig Jones and incoming CEO Brendan Shalders join Proactive’s Jonathan Jackson to discuss the divestment of Lake Johnston to Mineral Resources Ltd (ASX:MIN). Jones, who has played a pivotal role in this strategic move, shared insights on...

2 hours, 44 minutes ago