JOHANNESBURG, 7 DECEMBER 2020 – Manufacturing businesses in South Africa cannot afford a further electricity tariff hike, given the strain the economy is under, Steel and Engineering Industries Federation of Southern Africa (SEIFSA) Chief Economist Chifipa Mhango said today.
Commenting after SEIFSA’s presentation to the National Energy Regulator of South Africa (Nersa) on Eskom’s Multi-Year Price Determination Regulatory Clearing Account (RCA) for 2014-2015, 2015-2016 and 2016-2017, Mr Mhango said any tariff increase coming out of this process would scupper any hope of a meaningful business recovery in a sector that has over the past few years struggled amid rising power costs and erratic supply, rising imports and subdued demand, among other challenges.
In 2019 alone, the Metals and Engineering (M&E) industry spent a total of R11.7-billion in electricity costs. Although the level of impact varied across sub-sectors, Mr Mhango said nevertheless SEIFSA had observed a huge impact in the basic precious and non-ferrous metals, with that sub-sector having a significant share of electricity costs in its cost structure.
This rise, he said, could potentially be higher, following the Pretoria High Court’s decision to set aside Nersa’s decision to deduct the Government’s R69bn equity injection received over three years from allowable revenue for 2019/20, 2020/21 and 2021/22.
“Local companies in the M&E sector will have to absorb additional shock in the form of an increased electricity price of at least 10%,” Mr Mhango said. “We remain hopeful that Nersa will be granted leave to appeal that high court decision as any additional cost to the already high cost doing of business in the M&E industry will limit the sector’s economic recovery,” he said.
Mr Mhango said electricity was a crucial component of the M&E cluster of industries, and production processes in some of the high energy-intensive sub-components were heavily dependent on power supply. He said high electricity prices affected not only the productivity of companies in the sector, but also their profit margins since they could not pass these increases onto consumers, who were themselves under considerable financial strain.
Mr Mhango warned that any further increase in the electricity price would also have a negative ripple effect on other sub-industries, further slowing down production and growth in the sector and worsening the country’s unemployment crisis, which currently stands at 30,8%.
“It will also have dire consequences for President Cyril Ramaphosa’s economic recovery plan, which has infrastructure development at its heart. With input costs currently outstripping selling prices in the industry, the local content aspect of this plan will be constrained by a lack of local supply,” Mr Mhango said.
Mr Mhango said while SEIFSA understands that the multi-year application is intended to provide price certainty to customers and investors, enabling them to plan ahead, the Federation took a dim view of repeated, costly RCA applications in a stagnant economy. He said any increases resulting from such applications were bound to compound business and investment uncertainty.
“We continue to implore the Government to place a moratorium on further electricity tariff hikes in order to accommodate struggling businesses and support the economy at this unprecedented time,” Mr Mhango said.