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BHP Billiton bites the Eskom bullet Posted: Thu, 20 Mar 2008 [miningmx.com] -- The Eskom power crisis is going to cost BHP Billiton some $343m (about R2,7bn) in lost annual revenues because of forced production cuts at its three aluminium smelters in Richards Bay and Maputo. The bulk of the production cuts will be made at the group’s smallest smelter - Bayside in Richards Bay - which is the highest cost producer of the three. The jobs of some 400 employees and 500 contractors may be affected as a result but BHP Billiton spokesperson Bronwyn Wilkinson said the group would do everything it could to minimise the impact. The Bayside plant supplies mainly the SA domestic market with a range of aluminium products but it is understood metal will be diverted from the Hillside smelter to Bayside to avoid domestic supply shortfalls. BHP Billiton has been forced to make the cuts in line with Eskom’s demands that it reduce power consumption by 10% across the three smelters because it can no longer supply the power. Wilkinson said that, following the previously announced consultations with employees and their representatives, there were no feasible alternatives to the closure of the B and C potlines at the Bayside Smelter. She added the “ramp-down” process at Bayside would begin on March 25 and take about two months to complete. The three smelters, in total, have the capacity to produce about 1.2 million tonnes (mt) of aluminium annually. Latest production figures for the six months to end- December put Hillside’s output at 358,000t while Bayside produced 95,000t and Mozal 134,000t. According to Wilkinson the total annual production loss will be 120,000t across all three smelters of which 92,000t will come from Bayside. Aluminium is currently trading around US$2,861/t on the London Metal Exchange so the value of the lost production is some $343m equivalent to about R2,7bn. It’s not clear at this stage how much of that will translate into lost foreign exchange earnings for the country as the Bayside smelter produces mainly for the SA domestic market while output from Hillside and Mozal is exported. It’s also not clear whether BHP Billiton may attempt to claim compensation from Eskom for its financial losses. A release issued on March 11 by the group noted that, “ BHP Billiton’s contracts with Eskom specify that the power supply to our aluminium smelters can only be interrupted approximately one per cent of the time per calendar year. Despite this, and respecting the emergency situation faced by the country, BHP Billiton has reduced its demand by the requested 10%.” The guaranteed availability of large quantities of cheap power is the most important factor in running an aluminium smelter. Click Here to subscribe to our daily newsletter Eskom’s power crunch is also bad news for Rio Tinto’s proposed $3,25bn Coega aluminium smelter which was supposed to start production in 2010 ramping up to output of 360,000t/year during 2011 at which point the smelter would draw 670MW of power. Construction of the second phase of Coega would take production to full output of 720,000t/year by 2013 at which point the smelter would need 1,350MW of power. Both Rio Tinto and the SA government have been making optimistic comments in public since the power crisis started in December. Feeling in the mining sector is that Coega is a “non starter” given the real doubts over Eskom’s ability to guarantee the power supply. Latest official statement from Rio Tinto, issued on March 13, indicated the project is going to be delayed until the group is satisfied that Eskom will be able to deliver the promised power. According to Rio Tinto, the Coega project was; “moving into an interim phase pending the outcome of ongoing discussions regarding the timing of the project.” The mining house said the objective was to “preserve the feasibility of the project and its underlying benefits for both Rio Tinto and South Africa, having the long-term picture in mind.” Delaying Coega will be a blow to SA’s investment image as well as the country’s growth prospects. It will also represent an embarrassing setback for the ruling ANC party which has been trying to attract a major industrial project like this to its political heartland – the Eastern Cape – for more than a decade.
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