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Henk Langenhoven, Chief Economist of the Minerals Council of South Africa joins Investec's Treasury Economist and Power & Infrastructure team to discuss the impact of loadshedding on the mining sector and the wider economy.
South Africa has entered the new year with a worsening energy crisis threatening to continue well into 2023, and every facet of our already flailing economy has taken a hit. SMEs cannot afford to go off the grid putting thousands of jobs on the line and a lack of power has put a spanner in the intricate network of supply chains that keep this country running. But a recent announcement from stats SA shed some light on the damage Eskom’s failings have done to one of our most significant industries. The concerning news landed on the 17th of January when Stats SA announced that mining output decreased by 9% year-on-year in November 2022 –the 10th consecutive month of decline in mining production.
This crucial issue was discussed on Investec’s fortnightly podcast No Ordinary Wednesday. According to the experts, things are not looking hopeful. With the newly constructed Medupi and Kusile power stations not fully operational due to a long list of crises from leaks to explosions, and older infrastructure beyond repair and set to be decommissioned, thousands of desperately-needed megawatts are simply unavailable for the foreseeable future. “Collectively, this has effectively forced us now into this load shedding stage for the next two years, at least between stage four and stage eight,” explains Dieter Matzner, a consultant on Investec's Power and Infrastructure Finance team. “This is going to be the norm, there is no way that this can be reduced.” According to Matzner, we’ll need to build between 4000 and 6000 megawatts of wind and solar projects annually for the next 20 years just to replace existing nuclear and coal-fired power station capacities which are set to be decommissioned. It’s a mammoth task – and experts aren’t optimistic.
It’s a very worrying time to be in the industry, says Henk Langenhoven, Chief Economist at the Minerals Council of South Africa. “Our two biggest concerns are the cost impact and the impact on production. “When we get to anything higher than stage four that means we have to save energy,” he explains. “That's in many instances not possible because the most energy-intensive part of mining is actually the smelters and the refiners. If you need 400 megawatts for those to operate, then you need 400 megawatts. It’s that simple. Because of this,” we’ve already seen a drop in production this year.” There’s also the issue of the labour force. According to Langenhoven, most of the electricity-intensive parts of the mining sector also employ the most people, and employment in the sector is still recovering from the effects of COVID.
With little hope on the horizon as to when we can expect some respite from blackouts, Langenhoven is deeply concerned that the current state of the grid is unsustainable. “Remember, most of what we mine and refine is exported, so this cannot continue without mining losing its production, its ability to service its clients and its ability to earn foreign exchange.”
While the recent lifting of the 100 megawatt cap on private power production has been a welcome development, private projects to take advantage of this are still very much in the early stages of development and are a short-term solution.
Faced with a coming decade in darkness, Langenhoven reflects on the long-term effects of the energy crisis: “It's not only about 2023, it's about the uncertainty that is infused into decision making about fixed investment,” he explains. “In the mining sphere, there are more mergers and acquisitions than expansion and very few massive new projects happening. So this additional very serious energy constraint increases the uncertainty about future potential for mining investment and mining production expansion.” He continues: “It is a great pity, because we think we have only really explored about 20% of the country's potential mineral wealth. We know that there is much more to be explored and to be mined. But the energy crisis puts the investment hurdles just higher and higher and that is not what we need.”