Eskom retracts Glencore-Xstrata challenge

Asha Speckman and Ann Crotty

THE WITHDRAWAL of Eskom’s intervention in the merger between Glencore and Xstrata is “unfortunate”.

18.1.2013Professor Merle Holden part time tribunal member, Norman Mamoim tribunal chairman and Andrew Wessels full time tribunal member at the Competition Tribunal on the merger between Glencore International and Xtrata at the DTI campus in Sunnyside Pretoria.Picture: Etienne Creux. Credit: Etienne Creux

So said Competition Commission deputy commissioner Thembinkosi Bonakele on Friday after the power utility said it had reached an initial agreement with the merging parties.

“The issues Eskom raised haven’t been resolved,” Bonakele told Business Report.

Eskom, which relies on coal to fuel more than 80 percent of its power generation, had raised concerns it would be unable to secure supplies at competitive prices for its plants.

Bonakele told the Competition Tribunal’s hearing on the matter, which started on Friday, that some of Eskom’s concerns could be dealt with within a policy framework and the commission had raised the concerns with the Departments of Mineral Reserves, Energy and Public Enterprises.

“We have raised with them the issues that affect coal price in the domestic market,” Bonakele said.

David Unterhalter, senior counsel for the merging parties, said “there is very little basis” to show how the merger could change Eskom’s situation regarding rising costs of coal and supply constraints.

Kiren Maharaj, an executive for primary energy at Eskom, which sources coal for power generation from Glencore and Xstrata, said in her witness statement that the utility wanted undertakings from the merging parties that “the ratio of Eskom versus export tonnages would be maintained after the merger, new supply contracts could be entered into if required to keep the ratio intact and export parity pricing would not be applied to domestic supply contracts”.

Meanwhile, Eskom is awaiting the outcome of its application, in a separate process, to increase electricity tariffs by 16 percent a year for the next five years.

The tribunal hearing into the merger and specifically Eskom’s submission kicked off more than an hour late on Friday as the various parties ironed out last-minute details.

Eskom said the agreement terms were confidential.

However, the utility noted that a framework had now been established within which Glencore and Eskom could co-operate with each other on a mutually beneficial basis, govern the interaction between them and achieve a resolution regarding existing and future coal supply agreements.

It added: “Eskom expects the spirit of the memorandum of understanding will ensure that its concerns relating to the potential impact of the merger will be addressed.”

Eskom spokeswoman Hilary Joffe said Glencore and Eskom had not set a timeframe on reaching a resolution.

One competition lawyer said that the proposed agreement being ironed out by Eskom and the merging parties was reminiscent of the memorandum of agreement between the Department of Trade and Industry and LNM Holdings (now ArcelorMittal) at the time of the controversial Iscor deal.

“These sort of agreements are non-binding and tend to be ineffectual; they seem to be designed as face-saving tactics for one of the parties, in this case Eskom,” the lawyer said.

While the merger is of significance to coal consumers such as Eskom, analysts said its intervention in the proceedings before the competition authorities seemed to be indecisive and lacked commitment.

“It was difficult to conclude what Eskom’s real objective might have been, whether it was designed to extract some guarantees from Glencore or as a PR exercise to draw the public’s attention to its cost of coal inputs,” one analyst remarked.

He added that he did not believe the involvement of Cyril Ramaphosa’s company, Shanduka, as a major Xstrata shareholder had anything to do with Eskom’s decision to withdraw its intervention.

The National Union of Mineworkers (NUM), the second party due to give evidence at the tribunal, was “satisfied” with the Glencore-Xstrata deal, NUM representative Lungile Tyatya said at the hearing.

The hearings were adjourned for the tribunal to reach a conclusion.

Meanwhile, Glencore, the world’s largest publicly traded commodities supplier, and coal mining company Xstrata have pushed back the deadline for their £22.6 billion (R318.5bn) merger to March 15.

Regulatory processes in South Africa and China “remain ongoing” and the UK’s takeover panel had consented to extend the deadline from January 31, Switzerland-based Glencore and Xstrata said in statements on Friday.

The parties have already received unconditional approvals for the merger in seven countries, including Canada, Japan and Brazil. – Additional reporting by Bloomberg