Speaking at the NERSA public hearings on Eskom’s regulatory clearing account application held at the Gallagher Convention Centre in Midrand today, SEIFSA Chief Economist Henk Langenhoven said if the quantum of the application goes through, the already embattled metals and engineering sector would be further crippled.
“SEIFSA is not in favour of any increases. If an increase is absolutely necessary, a much lower percentage increase should be proposed,” Mr Langenhoven said.
He added that collectively the mining, construction, the auto and metals and engineering sectors contribute nearly 20% of South Africa’s gross domestic product, hence sustaining these important sectors was crucial for the economy.
“The performance of these sectors has deteriorated significantly since June last year and the outlook for the next two years remains dire. Exorbitant electricity price increases will have a crippling effect on these sectors in general and the already declining metals and engineering sector in particular. The metals and engineering sector exports 60% of its production and international competitiveness is key to survival; any electricity cost increase will erode it even further,” Mr Langenhoven warned.
Production in the metals and engineering sector has not recovered since the 2008/9 financial crisis and has deteriorated further since June 2015. Production is currently 30% below the peak of 2007.
The possible overall impact of the envisaged electricity price increases on inflation had been captured by the South African Reserve Bank and the assumptions were that any increase would return to +/-13% in 2016/17 and 2017/18.
“In this scenario, headline inflation would 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 electricity prices, which have a weight of 4,13% in the consumer price index basket. This does not show the impact on producers, of course. The indirect effects are estimated at 0,5 percentage points during 2016,” Mr Langenhoven said.
Although electricity was not a large portion of production inputs in the metals and engineering sector, its importance was nevertheless equivalent to blood in the human body: without pressure and/or loss of blood, death can be expected. In the metals and engineering sector’s case, business closures and employment losses would t be a given.