The outlook for investment and job creation in South Africa took a knock this week following an announcement by power producer Eskom about potential load shedding in the months ahead.
Annabel Bishop, the group chief economist at Investec, said load shedding in 2008 due to Eskom’s capacity constraints caused a temporary halt in mining production and capped job creation that year.
Mike Schussler, the chief economist of Economists.co.za, said this year, mining companies faced falling commodity prices and, in the event of production disruptions, would have little incentive to continue operating, hastening decisions on shaft closures.
As to job creation in manufacturing, Schussler said new fixed investment was needed to boost jobs and this was unlikely to happen on a large scale in the absence of energy security.
Cornelis van der Waal, the energy business unit leader at Frost & Sullivan, said energy-intensive businesses had been unable to survive in recent years.
“If the economy is to grow, the country cannot look to mining and smelting,” he said. “We need different activity – more retail and financial services.”
However, industrial policy is intended to reverse the shift from the productive sector to services, by promoting beneficiation – or adding value to raw commodities.
Schussler pointed out that beneficiation was energy intensive and, until Eskom was able to provide enough electricity, many beneficiation projects would not be viable.
Konrad Reuss, Standard & Poor’s managing director in Johannesburg, said the credit rating agency did not explicitly include electricity supply in its assessment of sovereign risk.
“But depending on where the electricity supply story goes, anything that could have a lasting and significant impact on South Africa’s economic performance and economic outlook could become a ratings factor,” he said.
The DA’s spokeswoman for public enterprises, Natasha Michael, told Eskom chief executive Brian Dames yesterday that he could have scared off a number of investors with his statement that Eskom would “drop the customers and protect the country”, if necessary.
Dames had been reporting to Parliament.
According to Econometrix chief economist Azar Jammine, the latest warning comes at a time when electricity consumption is falling dramatically. He said data released this month showed a year-on-year contraction of nearly 7 percent in electricity usage in February, while production fell only 3.5 percent.
Jammine attributed the sharp decline to structural changes in the economy, reinforced by a fall in demand following the 2008/09 recession and the tepid recovery, as well as resistance to price increases.
Jammine said in the 1980s and early 1990s, electricity consumption grew 2 percentage points more than growth in gross domestic product (GDP). But that was no longer the case: electricity consumption was falling while GDP growth was running at about 2.5 percent.
“For every unit of GDP generated, we are using about 25 percent less electricity than we were 15 years ago,” he said.
Eskom warned five years ago that South Africa would be closed to big, new industrial projects until 2013. It seems that date will now be pushed out.
The electricity crisis that emerged in 2007 and 2008 has its roots in a failure by the government to decide on the state-owned enterprise’s future and adequately to invest in new capacity in the early 2000s.
Jammine said the value of economic opportunities already lost was hard to quantify.
Among the big projects cancelled in 2008 when Eskom embarked on load shedding was Rio Tinto Alcan’s aluminium smelter at Coega.