The Economic Impact of Electricity Price Increases on ... - Eskom

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Of the mining firms, it is only platinum producers that are likely to be able to pass higher electricity costs onto their consumers Firm Sector <strong>Electricity</strong> costs % total costs Comment Ability to pass on costs Northam Platinum 6.6% Good AngloPlat Platinum 5.0% Implats Platinum 6.0% Lonmin Platinum Reliance <strong>of</strong> selected mining companies on electricity and ability to pass on increased costs Big geographic concentration but, in the medium term, pricing power in Platinum is strong. Big geographic concentration but, in the medium term, pricing power in Platinum is strong Very Good Very Good Platinum 3.0% Good Harmony Gold 12.0% Worst positioned within the Gold sector. We see the ability to pass this cost on as very poor. Very Poor Gold Fields Gold 7.0% Poor AngloGold Ashanti Gold 6.0% Poor Merafe Diversified mining 21.0% We believe ability to pass cost on is reasonably good - SA is 50% <strong>of</strong> world production. ARM is generally a price taker and as a result has limited ability to pass prices onto customers. <strong>The</strong> PGM Good ARM Diversified mining 7.0% and ferrochrome industries are dominated by SA supply, and as prices are in the high percentiles <strong>of</strong> the total cost curve, there is better ability than other materials to pass on price increases, or face closure For heavy minerals the operations are not the global prices setters but costs are near marginal cost, and Poor Exxaro Diversified mining 4.0% there has been limited benefit from higher prices in recent years. SA is not large enough to directly influence prices but the steepening <strong>of</strong> the cost curve is supportive. Only commodities where SA is the marginal producer Poor Anglo Diversified mining 3.0% are able to pass cost increases onto consumers. <strong>The</strong>se include PGMs (Platinum Group Metals), ferrochrome, and, to some extent, manganese Iron ore prices are determined between large Brazilian Moderate Kumba Diversified mining 3.0% and Australian producers and Eastern consumers. <strong>The</strong>re is no ability to pass price pressure onto consumers other than for the cost plus contracts with ArcelorMittal SA Poor 24 Source: Deloitte analysis adapted from (Deutsche Securities, 2010) Vulnerability <strong>of</strong> sectors to rising electricity prices Passing on the costs • Given limited above-ground stocks, the large proportion <strong>of</strong> global production that SA contributes and the current level <strong>of</strong> industrial consumption , it is argued that the platinum sector should be able to pass higher electricity costs onto its consumers • Gold sector analysts believe that the sector will have little capacity to pass on any costs to consumers because <strong>of</strong> large above ground reserves and SA’s falling percentage <strong>of</strong> world production (8% - 10%). • Of the diversified mining companies, only Merafe (really a manufacturer) is in a good position to pass on increased costs, since it controls 50% <strong>of</strong> world supply. <strong>The</strong> other diversified miners are believed largely to be price takers in the markets in which they operate and so have little pricing power. ©2012 Deloitte Touche Tohmatsu Limited. All rights reserved. 2
about the vulnerability <strong>of</strong> the sector to rising electricity prices. Basic metal, Cement and Paper producers are among the most reliant on electricity… Manufacturing • Basic metals are one <strong>of</strong> the most heavily reliant on electricity, both in terms <strong>of</strong> the share <strong>of</strong> electricity in direct costs and measures <strong>of</strong> electricity intensity. • Cement production is also quite heavily reliant on electricity, however the ability <strong>of</strong> cement producers to pass on increased costs is relatively strong (in a concentrated market the competition will not be willing to absorb price increases unless there is significant surplus capacity) • Paper and pulp-manufacturing is also a relatively energy intensive activity, but the share <strong>of</strong> electricity in total costs seems to vary considerably from one plant to the next. Sappi report that electricity costs ranged from 5% to 9% <strong>of</strong> total costs for three <strong>of</strong> its plants • Manufacturers <strong>of</strong> metal, glass, paper and plastic packaging for food and beverages is surprisingly reliant on electricity as an input with electricity costs for a diversified packaging company, such as Nampak, amounting to 4% <strong>of</strong> total costs (Deutsche Securities, 2010). • <strong>Electricity</strong> is a relatively small portion (around 2.3%) <strong>of</strong> total costs for major food manufacturers such as Tiger Brands and Pioneer Foods. In addition food producers can pass on higher costs relatively easily. 90 80 70 60 50 40 30 20 10 0 80 34 15 10 10 9 9 6 5 1 % <strong>of</strong> Opex 35 30 25 20 15 10 5 0 ©2012 Deloitte Touche Tohmatsu Limited. All rights reserved. Source: (Deloitte& Eskom, 2009) Source: (Deloitte& Eskom, 2009) 30 20 20 20 % <strong>of</strong> Opex <strong>The</strong> manufacturing sector is too diverse to make any generalisations 25 <strong>Electricity</strong> costs as a % <strong>of</strong> total operational costs - various manufacturers Vulnerability <strong>of</strong> sectors to rising electricity prices <strong>Electricity</strong> costs as a % <strong>of</strong> total operational costs - metal manufacturers 10 3.9 2
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The Economic Impact of Electricity Price Increases on ... - Eskom

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