R24bn Rio Tinto smelter scrapped

16 October 2009

The $3.25 billion (R24bn) aluminium smelter planned by Rio Tinto for the Coega industrial development zone (IDZ) has been scrapped due to the shortage of electricity.

Rob Davies, the Minister of Trade and Industry, said yesterday that the reality was that the energy system in the country did not make it viable to move ahead with the smelter.

A joint statement by Rio Tinto, Alcan, the Department of Trade and Industry, Eskom, and the Industrial Development Corporation said they "acknowledge that although some progress was made in discussions regarding the supply of electricity to the Coega aluminium smelter project, it was insufficient to proceed. This has led to the termination of the electricity supply agreement in accordance with its terms and conditions."

The Coega smelter has been dogged by uncertainty for years. Doubt was first raised in 2003 over Pechiney's plans to build a smelter at Coega when the French firm was bought by Canada's Alcan. These concerns were laid to rest when Alcan and Eskom signed a power supply agreement in 2006, only to resurface when Rio Tinto bought Alcan in 2007.

The scrapped smelter is not the first casualty of South Africa's power supply crisis.

Bronwyn Wilkinson, the spokeswoman for BHP Billiton, said yesterday: "We will only expand the southern African smelters if there is stable, available long-term power at globally competitive prices."

BHP Billiton's aluminium smelters were still operating with a 10 percent reduction in power usage that was introduced in January last year for major industrial users.

In addition to the 10 percent reduction, the three smelters continue to load shed when Eskom needs assistance to meet peak demand.

Senzeni Ndebele, the marketing and communications manager for the Coega Development Corporation (CDC) that manages the IDZ, said: "We are still waiting for Rio Tinto to confirm with us that the project has been cancelled."

But she said: "It won't be a blow as we have other projects in the pipeline."

Already CDC is working on projects valued at R150bn that include the PetroSA oil refinery and a power unit that will provide energy in peak demand.

When Eskom and Alcan signed a 25-year power supply agreement in November 2006, both made commitments that would incur penalties if reneged on. Eskom could not be reached for comment yesterday, so it is unclear what penalties it will pay for not being able to supply adequate power.

But one insider said the utility would not pay penalties and the cancellation was a blessing in disguise, as from a sustainability point of view it would mean that coal power station investments could be pushed out in favour of nuclear.

The Rio Tinto smelter was likely to have drawn about 1 350 megawatts. In a country that has a slim reserve margin between available supply and demand, it would have been difficult for Eskom to guarantee constant supply.

Some have suggested that the timing of Rio Tinto's decision to scrap the project was also due to Eskom's intention to renegotiate the very favourable terms that big industrial users have with Eskom for their power supply.

It was reported in August that Eskom executives had said the discounting of electricity prices to aluminium producers was unsustainable and needed to be either curbed or axed.

The scrapping of the project comes as the National Energy Regulator of SA considers Eskom's proposed 45 percent tariff increases for the next three years, effective from April next year.

Announcing the proposal, Eskom chief executive Jacob Moroga this week said the utility's capacity expansion would involve "pain" for the local economy, but "providing power to South Africa is fundamental. Power is like oxygen to the economy."

He said the increases would reduce the utility's funding shortfall for the four years to March 2013 from R80bn to R28.5bn out of a four-year budget of R413bn.

Over the six years to March 2015 the utility planned to spend R708bn in capital expenditure. Maroga said Eskom planned to spend R242bn on energy costs excluding road maintenance, non-Eskom generation, power imports and environmental levies.

Trade union Solidarity has warned that Eskom's proposed electricity tariff increases could result in more retrenchments in the mining industry, where close on 40 000 people had already lost their jobs.

Original Article Link:

http://www.busrep.co.za/index.php?fArticleId=5204780