Mittal cuts capacity as power surges, takes buy-back knock

6th February 2013 By: Terence Creamer - Creamer Media Editor

JSE-listed steel producer ArcelorMittal South Africa (Mittal) has again warned that further sharp increases in South Africa’s electricity prices could be “catastrophic” for both its operations, as well as the downstream industries that it supplies.

Speaking following the release of 2012 results, which showed a R518-million headline loss, CEO Nonkululeko Nyembezi-Heita confirmed that its decision in October to shut its electric arc furnaces in Vanderbijlpark was partly attributed to the electricity increases that had already been instituted. However, the plants had also been struggling to operate within environmental parameters stipulated by the authorities.

The closures had reduced Mittal’s yearly nameplate capacity to 6.5-million tons from 8-million tons and there were no immediate plans to restart the plants, in light of weak market conditions.

The group, which is a top ten Eskom customer and consumed 2.5% of the utility’s sales in 2011/12, had approached the National Energy Regulator of South Africa (Nersa) to raise its objections to Eskom’s proposed 16% yearly increases over the coming five years to 2018.

After major energy efficiency initiatives and plant closures, Mittal had still absorbed average yearly tariff increases of 18% a year over the past six years, a pace of increase that had been “extremely problematic” to accommodate. Power currently accounted for 7% of the group’s total costs.

“To pass on such an exponential rate of increase over such a short period of time has been catastrophic for industry,” Nyembezi-Heita argued.

The group has tabled a proposal to Nersa for subsidies and environmental levies to be removed from the tariff, arguing that these social expenditures should rather be financed directly from the fiscus. It estimated that in 2012 alone Mittal paid nearly R300-million in subsidies.

Eskom’s initiative to buy back power from ferrochrome smelters was also having a negative impact on Mittal’s commercial coke business, whose sales slumped by 27% last year.

The unit, which shipped 995 000 t of commercial coke in 2007, recorded sales of only 460 000 t in 2012 as ferrochrome producers cut production in favour of power buy-backs.

The revenue contribution from the commercial coke business fell sharply, from R870-million in 2011 to R503-million last year on lower volumes and prices.

“Sadly, 2013 hasn’t started all that brilliantly for the [ferrochrome] sector, or for ourselves, given that Eskom has now announced a new round of the buy-back programme and so more and more of the furnaces are being taken off production.”

Ferrochrome producers Hernic, Xstrata-Merafe and International Ferro Metals have confirmed that they are participating in the second buy-back round, and Eskom estimates that it has secured about 950 MW of capacity under the programme.

The deals will run from December 1, 2012, through to March 31, 2013, and have been designed to create a demand-side cushion for Eskom’s summer maintenance programme.

Eskom spent R1.8-billion between December 2011 and May 2012 buying back power from industrial customers.