Between them, Hillside, Bayside and Mozal produce more than onemillion tons of aluminium a year.
Thanks to Hillside and Bayside, South Africa is today the eighth largest producer of aluminium in the world, even though all the alumina consumed by these smelters (and by Mozal) has to be imported.
Indeed, it is this need to import alumina and export the bulk of their production which required that all three smelters – and the proposed fourth, at Coega – be located at ports capable of handling large bulk carriers.
These smelters have also made aluminium South Africa’s largest nonferrous metals industry.
Hillside, Bayside and Mozal all supply primary aluminium – that is, aluminium metal in ingot form – to customers across the world.
Hillside also produces remelt merchant products and aluminium in t-bar form, while Bayside specialises in value-added products for downstream manufacturers, namely wire rod, extrusion billet, foundry alloy and rolling slab.
Hillside on its own can produce 670 000 t of aluminium a year, from two-and-a-half potlines, making it the largest aluminium smelter in the southern hemisphere.
Mozal produces more than 500 000 t of aluminium a year.
And global demand for aluminium, which is the world’s second most-used metal, continues to rise.
In 2001, global primary aluminium production stood, according to the International Aluminium Institute, at 20 551 000 t; in 2002, it was 21 199 000 t; in 2003, 21 935 000 t; in 2004, 22 592 000 t; and in 2005, 23 410 000 t.
In other words, the 2005 production was almost 14% higher than the 2001 production.
(By way of historical contrast, in 1900 the total global production of primary aluminium was one thousand tons – industrial production of the metal only started in 1886.) This increase is being driven by growth in all major markets – North America, Europe, and Japan, and, of course, particularly by China.
Australia’s Sydney-based independent economists company, AME Mineral Economics, late last year forecast that global aluminium consumption should grow at 4,8% a year for the next five years (that is, to 2011).
Apart from China, the Australians also identified India and Eastern Europe as fast-growing markets for the metal.
As for China, that country’s aluminium consumption stood at 2 000 000 t in 1995; in 2000 it was just over 3 000 000 t; in 2004 it had reached 6 000 000 t; and, last year (2005), it hit 7 000 000 t.
This was an increase of 16,66% year-on-year (2004/05) and of some 250% in ten years.
China’s share of global aluminium consumption was just over 10% in 1995; about 12,5% in 2000; 20% in 2004; and some 22,5% last year.
Little wonder then, that BHP Billiton group president for non- ferrous materials, Marius Kloppers, asserts “we like the aluminium bus-iness!”.
Primary aluminium is produced on every continent, and most regions, of the world – Africa (Southern, West and North), America (both North and South), Asia, Europe, and Oceania (Australia and New Zealand).
African production of aluminium totalled 1 369 000 t in 2001; 1 372 000 t in 2002; 1 428 000 t in 2003; 1 711 000 t in 2004; and 1 739 000 t in 2005.
The bulk of this came from South Africa and Mozambique, with the rest coming from Cameroon, Egypt, Ghana, and Nigeria.
(Nigeria’s production capacity is believed to be around 190 000 t/y of aluminium, although actual production seems to be about 150 000 t/y; Egypt should achieve a capacity of 300 000 t this year with the conclusion of a major expansion programme; Cameroon’s production is about 90 000 t/y; Ghanaian production resumed in October last year after a three-year break caused by disputes over power supply rates.) Thus the ‘aluminium coast’ of south-east Africa contributed (in 2005) at least 60% of total African primary aluminium production and roughly 5% of the global production.
The world’s largest diversified mining group, BHP Billiton, is also the fifth-largest producer of primary aluminium, and owns 100% of Hillside and of Bayside, and 47% of Mozal.
It also holds 46% of the Alumar and 45,5% of the Valesul smelters, both of which are in Brazil.
Upstream, the group has equity in three alumina refineries – Worsley in Australia (86%-owned by BHP Billiton), Paranam in Surinam (45%) and Alumar in Brazil (36%).
Further upstream, it has shareholdings in three bauxite mines: 14,8% in MRN Trombetas in Brazil, 76% in Lelydorp III in Surinam, and 86% in Boddington in Australia.
“We think of our Southern African smelters as the heart of our aluminium business, especially Hillside and Mozal,” says Kloppers “These are large, low-cost, attractive smelters and, unlike smelters elsewhere, they don’t have to buy their power on a day-to-day basis,” he highlights.
This is very important, for primary aluminium smelting is a very energy- intensive and -dependent business.
“Aluminium is the ultimate proxy for energy,” he says.
Or, to phrase it in terms of the industry joke, aluminium is congealed electricity.
Smelters need electricity 24/7/365, for about 30 years – uninterrupted- ly.
Should a smelter suffer a sustained power loss over a significant period of time, the aluminium will congeal in the pots on the potline; the only solution is to scrap the pots and replace them with new ones, at a cost of millions of dollars a pot.
Controlled, short, power losses are manageable, although never ideal.
“With energy prices moving higher, if you have good smelters with good feedstock supply, it’s an attractive business to be in,” Kloppers states.
This all suggests a glittering future for the aluminium coast.
Indeed, South Africa’s Industrial Development Corporation (IDC) recently announced that it was likely that construction of a $2,7-billion aluminium smelter would start at Coega some time next year.
This smelter would, it is hoped, be built in conjunction with giant Canadian aluminium group Alcan, which is the world’s second-largest producer of primary aluminium and a technology leader in the industry.
The IDC, which already owns 24% of Mozal (the other shareholders being Japan’s Mitsubishi Corpor-ation with 25% and the government of Mozambique with 4%), plans also to be a shareholder in the proposed Coega smelter.
The Coega Development Corpor-ation already has a 120 ha site in the Coega Industrial Development Zone prepared for an aluminium smelter.
All the geotechnical studies have been done, and all the access roads built; it is expected that the actual smelter and its associated buildings and installations will occupy about 50 ha of the site.
Meanwhile, BHP Billiton has two expansion projects which are effect-ively “ready to go”, as Kloppers phrases it.
These are Hillside III + and Mozal III.
Hillside III + would add half a potline to the existing two-and-a-half potlines, while Mozal III would add a third complete potline to the existing two.
But there is a problem.
“If we had the energy, we could go ahead with Mozal III and Hillside III +,” assures BHP Billiton executive director Mike Salamon.
“But can we get the energy supply to make them happen?” queries Kloppers.
(Although Mozal is in Mozam-bique, it gets its power from South Africa.) “One potline uses about 450 MW of electricity, and the half potline at Hillside would need half of that, so we need about 650 MW to 700 MW in total to make these projects work,” he explains.
And, reportedly, the proposed Coega smelter would need a further 1 300 MW.
To make all these projects possible, Eskom would have to guarantee a continuous supply of an extra 2 000 MW.
Yet Eskom is hard put to meet its current supply obligations.
“Eskom’s reserve margins are low,” cites Salamon.
Lower electricity reserve margins mean higher risks for aluminium smelters.
BHP Billiton’s Southern African smelters, fearing ‘load shedding’ (effectively, emergency power cuts to prevent the overloading of the national grid), especially in the winter, have plans in place to handle such an eventuality without sustaining permanent damage.
These events do occur in terms of the company’s contracts with Eskom and are negotiated in terms of timing and impact.
“We can prioritise our power use within our plants, but I want to emphasise that Eskom is a responsible partner,” affirms Kloppers.
That this concerns Alcan as much as BHP Billiton is clear; Eskom spokesperson Fani Zulu told Business Day early this month that “quite some ground has to be covered still,” concerning negotiations between the Canadian group and the South African electricity utility about power for a Coega smelter.
Indeed, Die Burger newspaper actually described Eskom management as “scurrying around” trying to be able to meet Alcan’s demands for assured power.
It is also clear that, despite the optimistic IDC statements, Alcan has yet to commit itself to the Coega smelter project.
“Aluminium smelting requires electricity in large blocks, and Eskom is fully aware of this; Eskom is one of the best utilities on the planet, it has a very responsible attitude, and our working relationship with them is good – we work together to solve any problems that arise,” stresses Kloppers.
The problem is that no one forecast the economic growth rate South Africa has achieved in recent years, and new power stations take about a decade to build.
“There are genuine constraints on Eskom’s side,” he points out.
BHP Billiton does understand Eskom’s position, has good relations with the utility, and continuously negotiates with it.
The power utility has an about R250-billion capacity-expansion programme for the next 20 years.
Furthermore, the South African government wants 30% of new generating capacity to be built and operated by “independent power providers” (IPP – independent of Eskom, that is).
“We are a large buyer of power, and we pay our bills,” highlights Salamon, “so we can underpin investment by IPPs in electrical generation; we don’t just buy peak electricity.” “If something could be put together, concerning new independent power stations, we could be part of it – we’re interested in increasing our power supply for our African aluminium operations,” he assures.
Eskom is busy recommissioning three mothballed power stations, and the first of these, Camden, began to supply power again last June.
All three should be in full oper-ation by 2011, adding 3 600 MW to Eskom’s capacity.
In total, the utility wants to add 5 000 MW to its capacity by 2011, at a cost of R84-billion.
In addition, by the end of next year there should be two IPP open-cycle gas-turbine power stations in operation in the Western Cape (at Atlantis, north of Cape Town, and at Mossel Bay), which will together add 1 050 MW to peak capacity.
But its is clear that restoring the power-generation margins that aluminium smelters require is some years away, not some months.
“We need long-term supply commitment at an economic rate – typically only 30% to 40% of what you spend on the life of an aluminium smelter (which can have a life of 30 years) is spent when you build it; the bulk is lifecycle costs and energy is a big part of them,” elucidates Kloppers.
“You can’t build an aluminium smelter with only a seven-year electricity supply contract,” he warns.
BHP Billiton recognises that it cannot again have with Eskom the sort of electricity supply contracts it signed for Hillside, Bayside and Mozal.
“Future deals with Eskom would have to be negotiated on a different basis – we want economic energy, not cheap energy,” says Salamon.
“But, with regard to aluminium smelting, we still need a 30-year power-supply horizon,” adds Kloppers.
“Until Southern Africa has sufficient excess electricity for major electricity-consuming industries like aluminium, we can’t have signficant expansion in this region,” he concludes.
It is a pretty safe bet that Alcan management, who have been saying very little in public, are thinking in the same way.
Even with a growing world market.