South Africa: Minerals and Energy Newsletter "THE ASSAY" -

UNCLAS SECTION 01 OF 04 PRETORIA 004002 SIPDIS SIPDIS SENSITIVE STATE PLEASE PASS USAID STATE PLEASE PASS USGS DEPT FOR AF/S, EEB/ESC AND CBA DOE FOR SPERL AND PERSON E.O. 12958: N/A TAGS: EPET ENRG EMIN EINV EIND ETRD ELAB KHIV SF SUBJECT: South Africa: Minerals and Energy Newsletter "THE ASSAY" - Issue 10B, October 16-31, 2007 This cable is not for Internet distribution. ¶1. (U) Introduction: The purpose of this newsletter, initiated in January 2004, is to highlight minerals and energy developments in South Africa. This includes trade and investment as well as supply. South Africa hosts world-class deposits of gold, diamonds, platinum group metals, chromium, zinc, titanium, vanadium, iron, manganese, antimony, vermiculite, zircon, alumino-silicates, fluorspar and phosphate rock, and is a major exporter of steam coal. South Africa is also a leading producer and exporter of ferroalloys of chromium, vanadium, and manganese. The information contained in the newsletters is based on public sources and does not reflect the views of the United States Government. End introduction. --- Key --- ¶2. (U) Key to some of the terminology and abbreviations used is given to facilitate understanding. BEE (Black Economic Empowerment) - the scheme whereby the South African Government promotes black participation in business. - t = tons, - t/d = tons per day, - c/l = cents per liter, - t/m = tons per month, - t/y = tons per year, - oz = troy ounces (31.1 grams), - cmg = centimeter grams, - mcf = million cubic feet, - tcf = trillion cubic feet, - R = SA currency (rand), - MW = megawatts, - kt = thousand tons, - bbl/d = barrels per day, - MW = megawatts, - PGM = platinum group metals. -------------- HOT NEWS -------------- -------------- Westinghouse Electric South Africa Launched -------------- ¶3. (SBU) The Westinghouse Electric Company officially launched its South African operation under the name Westinghouse Electric South Africa on November 5. This followed the approval by the Competition Commission of its acquisition of the South African company, IST Nuclear (ISTN),which is a leading provider of nuclear services and systems. Regional Vice President South Africa said the acquisition brought together local experience and international expertise that should position Westinghouse to bid on the first tranche of Eskom's new nuclear build. This is targeted to total 20,000 MW over the next two decades. The ISTN purchase also meets the South African Government's objective of building a local nuclear-industry capacity around Eskom's multibillion dollar nuclear power program. ISTN has been working with both South African and U.S. based investors in developing the smaller, new-generation Pebble Bed Modular Reactor (PBMR) being developed in South Africa. ¶4. (SBU) Westinghouse plans to promote its AP1000 nuclear power plant, which is the company's third-generation plus pressurized water reactor system (PWR). Bowser said Westinghouse's modular design of units of 1,100 MW would be advantageous for power distribution and would promote localization of suppliers. ISTN supplied the helium test facility for the PBMR and is contracted to design key systems for the PBMR demonstration unit to be built at the Koeberg site by 2011. Westinghouse is a group company of Toshiba Corporation, is the world's pioneering nuclear power company QToshiba Corporation, is the world's pioneering nuclear power company and is a leading supplier of nuclear plant products and technologies to utilities throughout the world. Westinghouse supplied the world's first Pressurized Water Reactor (PWR) in 1957 in PRETORIA 00004002 002 OF 004 Shippingport, Pennsylvania. Today, Westinghouse (PWR) technology is the basis for approximately one-half of the world's operating nuclear plants, including 60% of those in the United States and South Africa's Koeberg plant. Westinghouse holds a 15% share in the PBMR. -------------- DIAMONDS -------------- -------------- Diamond Cutting and Polishing -------------- ¶5. (SBU) World Federation of Diamond Bourses President Ernest Blom said in his presentation at the recently held Southern African Institute of Mining and Metallurgy's "Diamonds - Source to Use 2007" colloquium, that South Africa's cutting and polishing industry is estimated to be the world's fifth largest by value, after India, China, Russia and Israel. Blom noted that there were 157 diamond-cutting factories in 2006, employing about 2,500 cutters and consuming $700 million worth of rough diamonds from both domestic production and imports. An additional 1,000 cutters operated micro businesses in the informal sector. Exports were valued at $700 million with a further $100 million stockpiled or sold locally. Blom said a South African cutter (Basil Watermeyer) produced one of the most important text books on diamond cutting and another (Alex Leibowitz) was the original inventor of the automated diamond polishing and bruting machines that revolutionized the industry. ¶6. (SBU) Conventional wisdom (and economics) has it that the South African cutting and polishing industry, with its relatively high wage structure, cannot compete with low-wage countries like India and China. Cutting costs per carat in those countries are 10% to 15% of those in South Africa. This effectively limits locals to the larger and higher-quality stones. The SAG has challenged this perception and maintains that with proper training, experience, opportunity, and use of state-of-the-art technology, the local industry could eventually compete for lower value and smaller stones. However, for the present, the industry - as with most other sectors - is in the throes of a major skills shortage, with concomitant high wages. (Comment: Jewelry Council of South Africa CEO said the local cutting industry could at least double in size if gold and diamonds were leased at rates similar to those available to competitors, such as Italy and the U.S. where bank finance rates are 3% to 5% compared to rates of 14% and more in South Africa. -------------- Mixed Views on Diamond Fundamentals -------------- ¶7. (SBU) Views on the global diamond production outlook diverged at the above "Diamonds - Source to Use 2007" colloquium. MSA Geoservices Director Frieder Reichhardt said significant opportunities exist for major alluvial, marine, and kimberlite diamond finds in West and Southern Africa, specifically in Guinea, Sierra Leone, Liberia, Angola, Namibia, the DRC, Zimbabwe and Botswana. He said these countries are located on ancient "cratons", which contain unique geological structures that tend to indicate the presence of diamondiferous kimberlites. According to Reichhardt, in Qpresence of diamondiferous kimberlites. According to Reichhardt, in the 1960/70s, West Africa collectively accounted for some 200 to 250 million carats, but output had since declined due to political turbulence. This region, as well as southern Africa, had now achieved a level of stability and "juniors" (small mining companies) were starting to make their mark. Reichhardt said he expected to see a number of new mines starting up in the next few years. He highlighted Angola, where 15 major companies are active, as having tremendous diamond potential for both alluvial and kimberlite production and forecast that Angola's yearly production would exceed 12 million carats by 2010, and as much as 15 million by 2015. ¶8. (SBU) De Beers' Patrick Bartlett did not share this optimistic view. He did not dispute that there were hundreds of kimberlites known and still to be found in the region - estimated at 700 to 1,000 in Angola alone. However, Bartlett noted that no major PRETORIA 00004002 003 OF 004 economic finds (that significantly affect global supplies) had been made in sub-Saharan Africa since the early 1970's and that production from major mines worldwide had reached a peak or were in decline. (Comment: This may be true of many producers, but world-class mines such as South Africa's Venetia and Botswana's Orapa and Jwaneng mines are still increasing production and will only go underground in the later 2020's. End Comment.). Bartlett also doubted that many new discoveries would be of the quality of Botswana's and South Africa's mines. Canada was the one exception, but while their kimberlites were of high quality, they were small in area and had relatively short production lives. Bartlett explained that most kimberlites are cone-shaped and decrease in area with depth. He forecast that the major diamond producers would all lose critical production percentages as mines went deeper and moved underground. The one exception might be the Cullinan mine outside Pretoria. It has a more cylindrical shape and could be mined to greater depth. -------------- NUCLEAR -------------- -------------- Anti-Nuclear Group Challenges Nuclear Program -------------- ¶9. (SBU) The SAG has stated that electricity capacity has to more than double over the next two decades, from the current 37 gigawatts to some 80 gigawatts. Twenty gigawatts of the new capacity would be generated by nuclear plants, (conventional PWR's and the new generation Pebble Bed Modular Reactor or PBMR, which is currently under development in South Africa). Previously, construction of a PBMR demonstration plant at Koeberg was delayed when Earthlife Africa, an anti-nuclear group, was successful in overturning the environmental impact assessment (EIA) on procedural grounds. PBMR did not dispute the need for a new EIA, given design changes to the original plant. Now that plans for the PBMR are advancing and the SAG has issued a Draft Nuclear Policy document for public comment, Earthlife is again attempting to delay or entirely stop the government's nuclear plans in favor of renewable energies, without coming up with alternative bulk energy sources needed for the countries energy-intensive economy. ¶10. (SBU) Earthlife Africa has called for the Draft Nuclear Policy to be withdrawn. Their objection to the policy is that it is "a hasty and ill-informed document replete with sweeping unsupported statements as to the appropriateness of nuclear power". Earthlife claims that the policy did not follow the Department of Minerals and Energy's (DME) own procedures as determined by the White Paper (WP) on Energy Policy of 1998. The WP implied that the decision on new nuclear capacity would depend on the environmental and economic merits of alternative energy sources (relative to nuclear) and the political and public acceptance of nuclear power. (Comment. The majority of South Africans support the government's nuclear initiative and, for the foreseeable future, renewable energy sources will not be able to provide the country's bulk power requirements. Qwill not be able to provide the country's bulk power requirements. End Comment.). DME Chief Director has said the comments may result in the draft policy being revised to change the emphasis but would not change policy. State power utility Eskom is moving forward on nuclear expansion plans and is putting in motion EIA's at five coastal sites. If all approvals are obtained, Eskom could start construction of nuclear facilities by 2010, targeting first unit operation in 2016 or 2017. -------------- LIQUID FUELS -------------- -------------- Economic Growth Calls for a New Oil Refinery -------------- ¶11. (SBU) State Oil Company PetroSA plans to invest $6 billion in a refinery at the new deep-water port of Coega in the Eastern Cape. When completed, the refinery would be able to produce 200,000 barrels of fuel per day, making it the largest refinery in South PRETORIA 00004002 004 OF 004 Africa. However, the project is only viable if investors with deep pockets can be found. South Africa's crude oil refineries are situated on the coast in the Western Cape and KwaZulu/Natal provinces, the exception being the inland Natref refinery at Sasolburg in Gauteng Province. Sasol's coal-to-liquid (CTL) and PetroSA's gas-to-liquid (GTL) refineries are located at Sasolburg and Mossel Bay in the Western Cape, respectively. South Africa's refinery capacity is about 515,000 barrels per day and all crude is imported. Output from the two synthetic Sasol and PetroSA plants is 205,000 barrels per day, giving a total refined capacity of 720,000 barrels per day. This capacity was surplus to the country's consumption four years ago and fuel was exported to neighboring states. ¶12. (SBU) The past three years of 5% growth have seen this surplus evaporate and the country now imports some 10% of its fuel in the form of refined products. All refineries are old, expensive to run with low margins, and have had serious environmental problems of late. They need major upgrades or should be replaced by larger and more efficient units. Further, most refinery capacity is located at the coast and fuel is transported inland by road, rail and pipeline. Road transport (mainly private) has grown to the extent that it now impacts normal traffic and is damaging road surfaces. Rail traffic (state-owned) has declined because it is expensive and inefficiently run. The single pipeline from Durban to Johannesburg has exhausted its capacity. Approval has been given for a new pipeline from Durban. If the go-ahead is given for the 200,000 barrel per day refinery, serious consideration will have to be given to how product is to reach the major consuming areas, particularly as Coega is in a relatively remote part of the country. This could have a major impact on its cost structure. BOST