Australian-headquartered BHP Billiton has defended the special discounted pricing arrangements for electricity that apply to its southern African aluminium smelters, acknowledging that it was still benefiting from these long-term agreements forged with Eskom 10 years ago. It also believed that the agreements should stick for the duration of the contract time up to 30 years.
BHP Billiton South Africa chairman Xolani Mkhwanazi told the portfolio committee on trade and industry on Friday that if a cost-benefit analysis was done on its Richards Bay smelters, they were not the cheapest in the world to run. He had previously argued that the company believed in the sanctity of all its contracts as it had obligations to employees, customers and suppliers.
Mkhwanazi, who was the chairman of the National Energy Regulator of SA (Nersa) when the most recent discounting agreements were forged with Eskom, was evasive when pressed by ID MP Lance Greyling on whether BHP Billiton was shielded from the ever-increasing price of electricity.
“I am not sure what you mean by shielded,” he said.
Greyling, a member of Parliament’s energy committee who came to monitor the company’s input before the trade and industry committee, said he smelt a rat.
First, the agreement was forged when Mkhwanazi happened to be at the regulator, before he took up the job at BHP Billiton. It appeared from what he had said to the committee that he had realised at that time of the agreement that the price of electricity would come under pressure in the following years, even though Eskom still had spare capacity at the time.
Greyling twice asked the question: “The big unanswered question is why in 2003 – when we were aware that capacity was becoming constrained – did we enter into the Mozal one and two and Hillside extensions? This was when Dr Mkhwanazi was chief executive officer of Nersa.”
He was referring to BHP Billiton’s Mozal aluminium plant in Mozambique and its Hillside smelter in Richards Bay.
Greyling noted that South Africa now faced “a massively constrained capacity” for its electricity supply.
He repeated the question: “In your deals with Eskom, does that shield you from increases that the rest of the economy is faced going forward. Are you completely shielded from that?”
He also asked whether the special pricing arrangements, in terms of which BHP Billiton paid about 16c a kilowatt-hour (kWh) compared with more than 66c/kWh by the ordinary consumer, would change as the cost of electricity rose.
Mkhwanazi declined to answer. He did say that BHP Billiton paid less for electricity at its Quebec plant in Canada but did not spell out if this was the result of a special pricing deal.
Greyling said it was clear that the special pricing agreement only factored in the rand’s fluctuations and aluminium price movements. “If you take out the variable of the electricity price… it takes out the risk from the equation for the smelters. It forces Eskom to be a kind of partner in the business of aluminium smelting because it is tied up with the aluminium price and the rand-dollar exchange rate.
“All this does is expose Eskom to the risk of its costs going up exponentially,” Greyling said.
BHP Billiton Aluminium SA president Lucas Msimanga said the company behaved well by cutting production at its Bayside plant in Richards Bay. “We still maintain the 50 percent [reduction] at Bayside,” he said, noting that this was imposed in 2008. “We are still working with Eskom in terms of the load sheds as well.”
DA MP Geordin Hill-Lewis asked why the company decided to build aluminium smelters in Mozambique when there was spare capacity at Bayside.
Mkhwanazi replied: “Why did we invest in Mozambique… precisely because these were public-private partnerships based on incentives from government. We are just participants as good citizens.”
The company also did not see the global aluminium price rising for a number of years, which means Eskom will effectively be subsidising the company for some time if Nersa’s hearings do not overturn the special pricing agreements.
Last year, after enormous public pressure and repeated questions about the massive costs of the agreements, Eskom referred the matter to Nersa.
The Nersa hearings are expected to start next month.