SA mining industry resilience to Eskom crisis will buckle if rolling blackouts intensify

A REPORT by RMB Morgan Stanley in the final weeks of 2019 suggested that, contrary to popular thought, Eskom’s rolling blackouts since about 2008 had had a limited impact on South Africa’s mineral production.

This, it said, was down to the fact South Africa’s mining sector had showed some extraordinary resilience and had been able to adapt.

In the lower stages of load-shedding, open-cast mining is able to continue which is the basis on which a fair portion of the country’s iron ore, platinum group metal (PGM) and coal mine production is performed. Stage six load-shedding, however, means not even open-cast mines can escape the restriction.

There’s also the impact of repeated electricity interruptions on the integrity of furnace and smelters that make finished product out of PGM concentrate. Increased load-shedding also means maintenance on smelters (as permanent damage can often materialise) resulting in increased downtime.

Severe blackouts as demonstrated in the closing weeks of 2019 however, in which some 6,000MW was rationed across the national grid, would he harder to manage, said RMB Morgan Stanley’s South African analysts, Brian Morgan, Christopher Nicholson and Jared Hoover.

There have been three key load-shedding periods with the first in 2008. This was the time in which South Africa’s mines virtually shut down for about a week. Then came the load-shedding events between 2014 and 2015 with a third stint last year which may become the worse. Eskom announced stage six load-shedding in which up to 6,000MW was cut from the system: the country had never before since this extent of power rationing and suggested to both industry and citizenry alike that Eskom’s problems were worsening.

“The duration and intensity of the blackouts worries us,” said the RMB Morgan Stanley analysts. Unfortunately, 2020 hasn’t started particularly well.

On January 4, before the majority of South Africa’s population returned to work from the summer holidays, Eskom announced a resumption of stage two load-shedding owing to the breakdown of the conveyor supplying coal to Medupi power station in the Limpopo province – the malfunction that helped put South Africa into stage six load-shedding last year.

Worryingly, Medupi is one of South Africa’s new power stations: its final unit was commissioned last year, but there are serious doubts that the station will ever hit its 4,800MW design capacity owing to defects in its boiler architecture that cannot be repaired, according to RMB Morgan Stanley.

And whilst Medupi continues to be unreliable, the expected decommissioning of the Grootvlei and Komati power stations, which provide a total of 2,100MW of power to the national grid, in 2021 and 2022 respectively is likely to add further pressure to the system.

There are, of course, long-term consequences to ponder for the South African mining sector. Ultimately, unreliable power supply impacts on the ability of investors to put money into the sector. New investment is already a paucity, but re-investment would also be threatened, according to the bank.

“Over the longer term, the Eskom risk provides a disincentive for producers to invest in replacement supply in SA,” said RMB Morgan Stanley. It also results in a structural cost inflation push equal to 10% to 15% of SA mining cash costs.

Finally, unreliable power supply provides an incentive for fabricators and original equipment manufacturers to thrift or substitute away from the metals where possible.

There may be a material uptick in the prices of metals as a result of supply interruption where South Africa is a dominant supplier – such as PGMs for instance – but the impact on the country’s mining sector as a whole is to add another negative in an increasingly bleak looking investment scenario.