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Business News

Power crisis casts shadow over South African economy

South Africa's mining industry should return to full operation today after Eskom, the state-owned power company, said it would increase power to the industry by 90 per cent.

The public enterprise minister, Alec Erwin, yesterday introduced a raft of measures to bring a quick end to the energy crisis that saw many of the nation's mines, a pillar of Africa's largest economy, shut down in recent days. In addition to the pledge for the increased power destined for the industry, the world leader in gold and platinum production, Mr Erwin said the government would introduce energy rationing from March, and that individuals who exceed their allocation would have to pay a penalty tariff.

Economists warned that the episode had badly shaken investor confidence, and that the measures to reduce consumption would create a serious drag on the overall economy. Razia Khan, the chief economist for Africa at Standard Chartered, said that the power shortages and its fallout "could knock one or two percentage points" off her forecast 4.8 per cent in 2008 GDP growth. The emergency measures to deal with the shortfalls are totally focused on reducing demand, rather than increasing supply, which will have a knock-on effect for growth, she said.

Crucial to minimising the impact is to get the mining industry back to operating at peak capacity. Anglo American, Africa's biggest miner, said yesterday that it was working closely with the government to resume full production as soon as possible. But yesterday its Kumba iron ore mines were still operating at partial capacity, its platinum operations were idle, while its base metals mines were running at a severely reduced level. The company said: "Anglo American and the mining industry have already made proposals to reduce electricity consumption in the short term and it will be of critical importance for all major industries to act in South Africa's best interests and play their part in resolving this national emergency. Anglo American has formed an energy task team to address the critical issues, and meetings with the ministerial committee charged with resolving the power emergency have taken place."

Tobias Woerner, a mining analyst at MF Global Securities, said that beyond the short-term outages, the energy situation did not bode well. "This is not a short-term problem, but something that they'll have to deal with over the medium to long term." Indeed, Rio Tinto said this week that it may put major capital expenditure plans on hold until its is sure about the security of supply.

Mr Woerner added, however, that any fall in production would probably be offset by the new heights scaled by several commodities that came in reaction to the outages. He said: "Estimates could be at risk to a certain extent, but a shortfall in production should probably be offset by higher prices in platinum, iron ore and other commodities."

In a note to clients, Mr Woerner said the South Africa travails could increase the likelihood that BHP Billiton would raise its £65bn bid for rival Rio Tinto, both of which have operations in the country. He said: "The need for mining companies to have access to both reliable and low-cost sources of power becomes increasingly prevalent, particularly for highly energy intensive metals such as aluminium. It is primarily for this reason that Rio Tinto favoured Alcan for its sources of hydro-power, which no doubt BHP Billiton will be viewing with interest."