Miners push for lower power tariffs

LOCAL mining companies continue to push for a downward review of electricity tariffs, especially in the wake of declining commodity prices on international markets.

Government, however, is determined to hike the tariff to USc14 per kilowatt hour, which is the regional average, from the current UcS9/kWh.

The mining sector is presently being charged about USc13/kWh for power, and mining houses want the tariff cut to USc7/kWh.

The Chamber of Mines of Zimbabwe claims that besides the effects of power shortages and high tariffs, the sector is grappling with depressed metal prices, low capital and FDI inflows, and generally high local cost structures.

Chamber of Mines CEO Mr Isaac Kwesu indicated in a recent report that, "Most producers feel that the current electricity tariff regime is too high and not sustainable for the quality of deposits being exploited hence there is need for a review.

"The average tariff for the mining industry is currently around 10cents per kWh, though most gold producers are paying around 13 cents per kWh compared to the national average or general tariff around nine cents.

"Most mines interviewed would like to see a tariff that is competitive to regional standards, and reflective of their cost structure.

"Around 50 percent of the mining houses said they would prefer tariff between US8c and US9c to remain in business or to improve their production.

"The other respondents feel a tariff between US6c and US7c is fair and would help to improve the feasibility of the sector or even to break even to match US$1,85 billion," said Mr Kwesu.

The mining sector requires about 120MW to operate viably though demand is forecast to rise if the sector secures investment capital.

It is understood that if the planned US$3,8 billion mining projects are achieved by 2020, electricity demand will soar to 210MW.

"The sector currently requires about 120MW to remain in business, while the demand is anticipated to rise steadily if the industry secure additional investment capital.

"The demand is rising to as much as 150MW in 2016 and as high as 210MW in 2020 if requisite capital is secured," explained Mr Kwesu.

Regional experience

The continued lobby by mining companies for lower electricity tariffs is not peculiar to Zimbabwe.

In a region where power utilities are increasingly adjusting power tariffs upwards to fund better generation capacity, mining companies are unsurprisingly seeking concessions from governments.

Despite spirited attempts to dissuade their government from increasing electricity charges by the South African Chamber of Mines, the National Energy Regulatory Authority of South Africa approved a 9,4 percent increase for 2016 to 2017.

Similarly, Zambia's government increased tariffs for mining companies on January 1 to USc10,35/kWh.

Increases for commercial and industrial customers were reversed on February 6, but mines did not get any reprieve.

Zambia is importing electricity at USc19/kWh.

Before the increase, Zambian mining companies had filed a lawsuit against the proposed increases and the case is before the Lusaka High Court.

Zambian mines consume about half of the country's power output. The country has capacity to generate more than 2 200MW.

Like Zambia, Zimbabwe imports power to meet domestic and industrial demand.

With a decline in output at Kariba South Hydro Power Station, which has for long been the country's workhorse — producing 750MW — the Zimbabwe Power Company has had to negotiate with suppliers like South Africa's Eskom and Mozambique's HCB.

Eskom is supplying Zimbabwe with 100MW.

But the power comes at a cost: the estimate is that it is at over USc14/ kWh meaning the utility sells to its customers at a loss.

Emergency power supplies are even more expensive at USc18/kWh.

Estimates suggest that the local mining sector loses more than US$10 million annually to power outages.

With mining being a 24-hour operation, most mines are partially bridge the gap between demand and supply, particularly during times of peak demand, through self-generation.

Mining companies such as Old Nic, a subsidiary of listed Falgold, have been mothballed due to challenges associated with power supply.

The mining sector has been the backbone of the economy since 2009 and last year it contributed more than US$1,85 billion in revenues and accounted for more than 62,5 percent of export earnings.

Falling commodity prices

Declining international commodity prices, occasioned by slowing economic growth in China, the world's largest consumer, has hit many countries hard.

Zimplats, Zimbabwe's biggest platinum producer, has been reeling from declining prices and in an analysts and media briefing in February, group CEO Mr Alex Mhendere said the miner slashed its capital expenditure budget for the year to June 30, 2016 by US$50 million to conserve cash.

The company's revenues in the six months to December 31, 2015 fell 12 percent from US$234 million realised in the same period a year earlier, as platinum prices sank 42 percent.

Among other cost-cutting measures, managers' salaries have been cut by 2,5 percent, while executive managers had theirs slashed by 15 percent.

Recruitment has also been frozen.

According to a recent report from the IMF, oil prices dropped 32 percent between August 2015 and February 2016. Coal and natural gas prices, which are linked to oil prices, declined as well.

Metal and agricultural commodity prices tumbled nine and four percent respectively.

As revenues fall, miners fret that an additional cost through a power tariff increase will serious dent their viability.