BHP Billiton's loss may be Eskom's gain

Jan de Lange | Thu, 09 Feb 2012 17:46

[miningmx.com] -- SOUTH AFRICA'S electricity crisis could be a thing of the past if BHP Billiton decides to close its two power-hungry aluminium smelters, Hillside at Richards Bay and Mozal in Maputo.

In the half-year to end-December, the mining giant’s aluminium division recorded a loss of $67m, or about R530m, and all indications are that these losses are set to increase.

If the losses do in fact lead to the closure of the smelting plants, the country-wide demand for electricity would fall by more than 5% – which would considerably ease the pressure on Eskom’s generating capacity.

The losses were sustained at an average price of $2,391/tonne in these six months, but the price of the metal fell to a low of $1,945 in December of last year.

Since the beginning of the year, the metal has been maintaining price levels of around $2,100/tonne. At Billiton’s production rate of 1.2 million tonnes per year, this would mean a fall of about $500m in income in the half-year to end-June.

It’s especially significant to note that the two smelters are running at a loss, despite the preferred rates at which Billiton is buying electricity from Eskom.

These rates, which are kept strictly confidential, are according to all indications far lower than domestic rates and even lower than what the rest of the country’s industrial consumers pay.

This implies that SA’s electricity consumers are subsidising Billiton’s aluminium production, but that even this subsidy is no longer enough to keep the two smelters profitable.

The smelters consume between 1,700 MW and 2,000 MW – which is about 5.7% of Eskom’s generating capacity.

Eskom CEO Brian Dames warned two weeks ago that electricity consumption savings of 10% were required to avoid drastic measures like power cuts this winter. Large- scale consumers, like mines and industries, have already saved about 4% in the past few years.

Since the second half of last year, the aluminium global market has been hampered by surplus production in China.

When Billiton CEO Marius Kloppers was asked about the life expectancy of the smelters, he said Billiton had realised about five years ago that the aluminium industry “was reaching a structural downturn in productivity rather than a cyclical downturn”.

Since then Billiton had decided not to spend any capital on aluminium production.

“Our rules are fairly simple as far as this is concerned: if you make no cash contribution and your clients no longer want your product, in other words their stockyards are full, we will rationalise production capacity.

“I don’t want to predict anything about South Africa because I don’t know what the prices could do tomorrow. However, I have to point out that we acted rapidly when this happened in nickel and manganese.

“If it happens in our aluminium smelters, we will unfortunately have to take steps in line with the asset’s ability to generate cash,” Kloppers said.

In the past 20 years, China built 119 of the 133 new aluminium smelters in the world. This emerging giant became a net exporter of aluminium in 2006 for the first time.

Some analysts, such as NatIxis Commodity Markets, predict price lows down to $1,500/tonne for the next two years.