In its submission to the National Energy Regulator of South Africa (NERSA) on Eskom’s request for a further 25,3% electricity price increase for the year ending in March 2016, SEIFSA urged NERSA to decline the power utility’s request, arguing that its approval would have “a debilitating effect on the economy”.
“The metals and engineering sector has been struggling for more than five years, owing to fierce import competition from Asian economies, industrial action, increasing production costs and power outages, among other factors. Therefore, the sector cannot be asked to bear the brunt of another electricity price hike,” SEIFSA Chief Economist Henk Langenhoven said.
He said that the stability of electricity supply and its costs were almost as crucial as its availability. Mr Langenhoven said that given the fact that the sector exported 60% of its production, international competitiveness was vital for its competitiveness and continued survival.
“Electricity is an absolutely essential input for the metals and engineering sector.
Exorbitant price increases will have a crippling effect on an already declining sector,” Mr Langenhoven warned.
He added that the possible overall impact of the envisaged electricity price increase on inflation had been captured by the South African Reserve Bank. Its assumption was that any increase would only materialise in September, and that increases will return to +/- 13% in 2016/17 and 2017/18.
“In this scenario, headline inflation will be 0,1 to 0,4 percentage points higher at an average of 5% and 6,5% for 2015 and 2016 respectively. Most of the impact would be felt through the direct effects of the electricity price, which has a weight of 4,13% in the consumer price index basket,” said Mr Langenhoven.
The indirect effects were estimated at 0,1 percentage points in 2016. The most disturbing fact was that, despite electricity not being such a large portion of input costs, it represented a critical quantum relative to net surpluses of companies in the different industries (surplus as a percentage of all inputs, excluding allowances for depreciation).
“This highlights the importance of administered price movements as well. When transport and logistics costs are added to electricity costs, the share of these administered prices to total input costs doubles to 8%. Producers have no control over these prices,” Mr Langenhoven said.
He added that the erosion of profit margins is most strikingly shown by the patterns of electricity increases relative to merchants and producer prices, as well as the price movements as measured at the factory gate. “Factory gate” prices were measured by the intermediate production price index which, in the metals and engineering sector, represents 70% of the latter.
“When one takes all of the above into account, it goes without saying that another increase in the price of electricity would be detrimental to the South African economy in general, but more so for the metals and engineering sector,” Mr Langenhoven concluded.