Johannesburg, 6 April 2018 – An increase in the price of electricity will deal South Africa’s metals and engineering (M&E) sector – which is just beginning to come out of the doldrums – a serious blow and potentially lead to job losses, Steel and Engineering Industries Federation of Southern Africa (SEIFSA) Chief Economist Michael Ade cautioned this morning.
“SEIFSA agrees that it is entirely within ESKOM’s right to apply for the third Multi-Year Price Determination (MYPD) Regulatory Clearing Account (RCA) Year 2 (2014/15), Year 3 (2015/16) and year 4 (2016/17) and contends that, if accepted, the proposed applications total of R66.6 billion will result in roughly a 35 percent hike in tariffs by ESKOM. Against this backdrop, SEIFSA has today made a submission to the National Energy Regulator of South Africa (NERSA), opposing the granting of a hike,” Dr Ade said.
He said constrained electricity supply and increasing electricity costs will invariably have a negative knock-on effect on the country’s ability to export, reduce competitiveness and foreign earnings and also adversely affect GDP growth over time. He said thisespecially so given the fact that the electricity-intensive sub-industries in the M&E sector are also the most robust exporters and earners of foreign exchange.
Dr Ade said the Federation believed that the contributory impact of increasing electricity costs on the sector would include a slowdown in production and growth, an increase in product prices, a decline in exports and poor export competitiveness, under-utilisation of production capacity, low import substitution industrialisation due to reduced domestic production, substitution of locally manufactured inputs with cheap imported components, and disruption in fixed investment.
“The proposed hike in tariffs will no doubt impact negatively on production volumes. Most energy-intensive users in the economy are still consuming below their 2008 levels where production was relatively higher, when compared to the current period. The latest production index in the M&E cluster at the end of 2017 is currently below its 18-year average (spanning 2000 to 2017) of 101.8 index points and the performance at the end of 2017 was roughly 20% below the peak before the crises gained momentum,” said Dr Ade.
He said SEIFSA understands the current challenging situation faced by Eskom, particularly the need to ensure the utility’s financial sustainability. However, he warned that Eskom’s financial sustainability is inextricably linked to the financial sustainability of its customers, which need an affordable tariff to maintain sustainability and, thus, remain Eskom’s customers. He said there was no doubt that the proposed increase in tariff would have a negative impact on both the individual companies in the M&E cluster and the economy in general.
“Electricity is an absolutely essential input for the metals and engineering sector. If the tariff applications go through, it will be a critical setback for the sector’s efficiency and competitiveness and act as a constraint to the possibility of the sector maximising its long-run production function.
“The tariff hike can increase production costs in some sectors and further dampen productivity and competitiveness. In fact, high energy costs have regularly been cited as a crucial variable in the basket of causal factors towards high costs of production in both the basic non-ferrous metals products and basic iron and steel products sub-industries,” he said.
In conclusion, Dr Ade said although SEIFSA is not in favour of any increases at all to the current electricity price, if such an increase should be found to be absolutely necessary, then the Federation believes that a much lower percentage increase than requested should be considered.
“It is essential that any tariff increase should be based on reasonableness, with directives for Eskom to improve on efficiencies, as a further inevitable consequence will be more loss of jobs in the M&E cluster,” Dr Ade said.
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