Thomas White Global Investing
South Africa
South Africa Stamp
March 20, 2009
A Postcard from Africa
South Africa: Power Outages Remain a Risk for the Mining Industry

Kimberly Big Hole diamond mine

Kimberly Big Hole diamond mine, South Africa. The mining industry accounts for nearly 10% of the country’s GDP and employs close to half a million people. Many miners are migrants from underdeveloped countries bordering South Africa, and the industry’s health is crucial for the entire region.

Driefontein, 43 miles west of Johannesburg, has one of the deepest gold mines in the world. But, output at the more than 2-mile deep mine, which produces close to 30 tons of gold annually, declined 9% last year. This was not because there was not enough gold to be mined, but because the mine didn’t get enough power and had to be partly shut down for many days.

Last year’s near breakdown of the country’s power grid forced most mining companies to suspend operations. It was the first time the country’s gold mines were closed since the Anglo-Boer war more than a century ago. Gold exports from South Africa declined 13.6% in 2008, mostly because of the power outages, the country’s Chamber of Mines said last month. With this, South Africa has slipped behind China as the top gold exporter in the world, a position it held for more than a century until 2006.

Though power supplies have improved in recent months, the situation is far from comfortable. Eskom, the state-owned utility, still has a load shedding status dial on its website. Like a fuel gauge, its needle moves between green and red areas to warn customers about the possibility of load shedding or a scheduled power outage. Decades of underinvestment in generation and distribution infrastructure has made it difficult to meet the growing demands of the biggest economy in Africa and one of the largest emerging economies in the world.

Mines like Driefontein are playing it safe and are installing stand-by generators to provide backup power if supplies are disrupted again. However, the generators can meet only 10% of the mine’s requirement and will allow only the most critical services to be run during a power outage. So, despite the additional investments, the mining industry will again face shutdowns if power supplies fall short this year. Not quite what the industry would want, when gold prices are at a record high!

It is not only the mining industry that is bearing the brunt of power shortages. Nearly 2.5 million households in South Africa still do not have electricity and 70% of rural households rely on wood and other fuels, according to a recent study by Citizens United for Renewable Energy and Sustainability.

The government is waking up to the challenge and is speeding up a major restructuring of the distribution network, under the national agency EDI Holdings. The country is considering more nuclear plants to generate 20,000 megawatts of electricity. Eskom is expanding some of its power stations and has plans to revive many defunct plants, besides setting up new distribution networks. The government has also increased the incentives to encourage investments to develop alternate energy sources and improve energy efficiency.

Raising finances for large projects may be difficult in the current global economic environment. Yet, South Africa cannot let up and should enhance the efforts to get these new projects off the ground quickly. Debilitating power outages are the last thing South Africa, a country that should be a model for the rest of the continent, can afford now.

 

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