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

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Rising electricity prices could have a material impact on food retailers whose share <strong>of</strong> electricity costs in total costs ranges from 3% to 4.3%... Firm Sector Electric ity % total costs 26 Comment Ability to pass on costs Secondround impact Lewis Retail 1.0% Moderate High Spar Food Retail 1.0% Franchisees pick up direct electricity cost, making it the exception among food retailers. Good Low JD Group Retail 1.6% Moderate High Truworths Retail 1.8% We have not included the indirect component via leases – Truworths is one <strong>of</strong> the more exposed in this regard. Moderate Moderate Clicks Retail 1.9% Moderate Moderate Foschini Retail 1.9% We have not included the indirect component via leases – Foschini is one <strong>of</strong> the more exposed in this regard. Moderate Moderate Massmart Retail 2.3% Moderate Moderate Woolies 3.0% Pick n Pay Shoprite Reliance <strong>of</strong> selected retailers on electricity and ability to pass on increased costs Food Retail Food Retail 3.1% 4.3% Cost <strong>of</strong> refrigeration makes electricity more significant for food retailers. Cost <strong>of</strong> refrigeration makes electricity more significant for food retailers. Source: Deloitte analysis adapted from (Deutsche Securities, 2010 Cost <strong>of</strong> refrigeration makes electricity more significant for food retailers. Good Low Good Low Good Low Retailers Vulnerability <strong>of</strong> sectors to rising electricity prices • For food retailers, refrigeration is another significant driver <strong>of</strong> electricity consumption. As such food retailers are generally exposed to a much higher proportion electricity costs in total costs. • Non-food retailers report that their direct electricity costs are between 1 and 2% <strong>of</strong> total costs. • A further source <strong>of</strong> electricity-related cost pressure in the retail industry is the increase in ‘common charges’ incorporated in lease costs. Clothing retailers such as Foschini and Truworths appear to be most exposed to this category <strong>of</strong> costs • Food retailers are in good position to pass on increased electricity costs to their consumers because they face relatively inelastic demand but given the concentrated nature <strong>of</strong> the retail market most retailers should be in a relatively good position to pass on costs. (Deutsche Securities, 2010). …But non-food retailers are exposed to the second-round impact <strong>of</strong> price increases since, consumers with squeezed real incomes are likely to reduce their spending on discretionary items ©2012 Deloitte Touche Tohmatsu Limited. All rights reserved. 2
<strong>The</strong> construction industry emerges consistently the industry with the lowest reliance on electricity. Firms in finance, insurance and banking and telecommunications and media also have very limited direct exposure to electricity costs… Firm Sector <strong>Electricity</strong> costs as a % total costs Absa Banks 1.0% Metropolitan Life Assurance 1.1% Nedbank Banks 0.8% FirstRand Banks 0.8% ABIL General financials 0.7% Standard Bank Banks 0.7% Discovery Life Assurance 0.6% Liberty Life Assurance 0.6% Sanlam Life Assurance 0.2% Old Mutual Life Assurance 0.2% Source: Based on Deutsche Securities, 2010 27 Finance, insurance and banking industry electricity as a % <strong>of</strong> costs Deloitte Telecommunications and media electricity as a % <strong>of</strong> costs Company Percent (%) Telkom 0.76 Vodacom 0.43 MTN 0.09 Naspers Media 0.5% Source: Based on Deutsche Securities, 2010 Source: Deutsche Securities, 2010 Key Points Vulnerability <strong>of</strong> sectors to rising electricity prices • <strong>The</strong> construction has very limited direct exposure to rising electricity prices but may be impacted indirectly through lower investment spending and lower demand for new construction. • Construction companies in South Africa including WBHO, Murray and Roberts Holding, Group Five and the Aveng Group face direct electricity costs <strong>of</strong> between 0.25% and 0.3% <strong>of</strong> total costs. • Firms in the finance, insurance and banking sector are relatively resilient to electricity prices increases since electricity costs only account for between 0.2% and 1.1% their total operating costs . • That said, the pr<strong>of</strong>itability <strong>of</strong> firms in this sector could be negatively impacted by the second-round impact <strong>of</strong> higher electricity prices. • Firms in the telecommunication and media sector also have very limited direct exposure to rising electricity prices, since the proportion <strong>of</strong> electricity costs in total costs is between 0.1% and 0.8% • Until this becomes a more material cost, there will probably little response by media and telecommunications firms to rising prices ©2012 Deloitte Touche Tohmatsu Limited. All rights reserved. 2
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