POWER CRUNCH MAJOR CONCERN AT ANNUAL MINING INDABA

UNCLAS SECTION 01 OF 03 PRETORIA 000315

SIPDIS

SIPDIS
SENSITIVE

STATE PLEASE PASS USAID
STATE PLEASE PASS USGS
DEPT FOR AF/S, ISN, EEB/ESC AND CBA
DOE FOR T.SPERL, G.PERSON, A.BIENAWSKI, M.SCOTT, L.PARKER

E.O. 12958: N/A
TAGS: ENRG EMIN EPET SENV BEXP AMGT SF
SUBJECT: POWER CRUNCH MAJOR CONCERN AT ANNUAL MINING INDABA

REF: A) Pretoria 262
B) Cape Town 31
C) Pretoria 214
D) Pretoria 168
E) Pretoria 132 and previous


1. (SBU) SUMMARY: The nadir of South Africa's electricity crisis
may have passed - when mines were shut-down for lack of electricity
guarantees (Ref C),but electricity supply problems will persist for
the next four-five years until significant coal-fired power plants
come on line. In the interim, the nature of the power crunch will
be determined by the ability of government and industry to cooperate
and implement conservation and efficiency measures. The impact on
economic output will be significant, but is difficult to quantify at
this point (Ref A and Septel). The state of infrastructure,
including plants and distribution remain a question mark. The power
problems in South Africa were a major topic of concern at the
February 4-7, 2008 annual Mining Indaba, attended by Mining/Energy
Officer and Specialist (Septel). End Summary.

--------------
Power Woes Continue - Aims to Reduce Waste
--------------


2. (SBU) Background: State power supplier Eskom and the SAG alerted
South Africans to persistent electricity supply shortfalls and began
imposing "load-shedding" (rolling black-outs) on consumers at the
end of 2007. The power crisis reached a head in mid-January when
over 25 percent of the country's 37,761 MW of capacity was
unavailable for planned (3,675 MW) and unplanned (5,647 MW)
maintenance, exacerbated by low coal stockpiles at plants (Refs).
Eskom alerted mines and major companies on January 24 that it could
no longer guarantee electricity supply. After four-five days
closed, mines restarted operations with about 90 percent of their
electricity under a rationing system. Analysts expect and the SAG
admits that there will be significant shortages until large new
coal-fired plants come on line in 2012.


3. (SBU) In his February 8 "business unusual"-themed State of the
Nation address (Ref B),President Thabo Mbeki again apologized on
behalf of the SAG and Eskom for the power crisis and exhorted South
Africans to adopt energy conservation and efficiency measures. He
said he would shortly announce a team of "energy champions" experts
who would help the SAG in easing energy demand. Mbeki thanked the
private sector for its contribution to mitigating and resolving the
crisis, pointing out General Electric's offer to assist by advising
on solutions and procuring scarce turbine equipment. At a luncheon
with industry leaders on January 28, GE CEO Jeffrey Immelt told
Economic Counselor he was going to meet with President Mbeki and
offer to help South Africa with up to 4,000 MW of generation
capacity, using turbines available from a cancelled deal. GE Energy
Market Development Leader Johan Cilliers confirmed to Energy Officer
GE's efforts to work with the SAG to devise short-, medium-, and
long-term solutions for the power crisis.


4. (SBU) Also speaking on the margins of Parliament meetings in
Cape Town, Public Enterprises Minister Alec Erwin sought to allay
QCape Town, Public Enterprises Minister Alec Erwin sought to allay
foreign investors' concerns about the electricity emergency, which
he said should be overcome within the next six months. He claimed
that South Africa was not alone in facing tight energy supply, and
asserted that the country would "fairly quickly" regain a sufficient
reserve margin of 16 percent. Westinghouse Senior Vice President
Dan Lipman and Regional Vice President Rita Bowser met with Minister
Erwin in Cape Town on February 12 to reinforce its bid on
significant new nuclear build, in addition to showing commitment to
its participation in the Pebble Bed Modular Reactor project. Bowser
told Energy Officer that Erwin was optimistic on the SAG's ability
to mitigate the power problems.

-------------- -
Mining Sector Complains - But Will Do its Part
-------------- -


5. (SBU) The February 4-7, 2008 Mining Indaba in Cape Town was
dominated by surging commodity prices, fears of a U.S. recession,
and angst over South Africa's power crunch (Septel). In her opening
address, Minerals and Energy Minister Sonjica Buyelwa conceded that

PRETORIA 00000315 002 OF 003


the SAG had not planned adequately and there would be large-scale
shortages. She cited key elements of the national response plan
(de-moth-balling plants, cogeneration, rationing, conservation,
energy efficiency, and solar traffic lights). Buyelwa fended off
criticism that her department building lights were left on at night,
claiming that lights were only utilized when the cleaners were
working. She called for municipalities, businesses, and consumers
to turn off lights and electricity when not in use. Buyelwa
applauded (as also did President Thabo Mbeki in his State of the
Nation address) Anglo American CEO Cynthia Carroll's calming remarks
calling for cooperation and ingenuity, rejecting finger pointing and
afro-pessimism, and qualifying South Africa's energy problem as
surmountable - and not a disaster.


6. (SBU) At the Mining Indaba and in other venues, mining officials
complained that power reductions and uncertainty will have a
significantly negative impact on output. Platinum prices continue
to surge and set daily records ($1,977/oz on February 13) based on
uncertain supply in South Africa, which accounts for 80 percent of
the world's supply. Sister metal rhodium surged past $7,000/oz at
the start of this month. Major platinum producer Anglo Platinum has
announced that it expects to lose 150,000 ounces of production in

2008. Smaller producer Northam Platinum adopted a contrarion view,
stating the 10 percent cut in power would not affect its output.
Number two gold producer Gold Fields warned that a 10 percent drop
in its power would result in a 20 percent drop in production output,
because 50 percent of power consumption was dedicated to pumping,
cooling, and ventilating. Anglo Gold Ashanti said it would lose
200,000-400,000 ounces or 10-20 percent of its South African
production. Harmony Gold Mining CEO Graham Briggs (with all their
operations in South Africa) lamented the dual challenges of rising
costs and Eskom. The Chief Economist at Stellenbosch University
told Economic Counselor deep mines which require more than 50
percent of their power for maintenance purposes may suffer an even
greater output loss per unit of power cut. Chamber of Mines (COM)
Advisor Dick Kruger told Energy Specialist that Eskom was having
difficulty in delivering the promised 90 percent of power to mining
companies. COM Economist Roger Baxter told Energy Specialist he
foresaw cuts in mine production of over eight percent if current
problems persisted. Gold companies warned that persistent cuts
could lead to shaft closures and job reductions.


7. (SBU) The consensus view is that companies will begin to adopt
more energy saving measures over time. A former DME official
predicted to Energy Officer that in the short-term Eskom would get a
handle on maintenance and companies would adopt conservation and
efficiency practices, but in the longer-term, he saw supply problems
getting worse, before they were resolved. He characterized the
power shortage as a giant failure in SAG policy, since it could have
been averted. The former DME official anticipated that mining
Qbeen averted. The former DME official anticipated that mining
companies might use the leverage of accommodating conservation
measures with respect to gaining favorable response on the vexing
issue of gaining mining license conversion by 2009. For example,
Anglo American CEO Cynthia Carrol committed to gaining 15 percent
efficiency in its operation, gaining applause from the Mining and
Energy Minister seated next to her. COM Economist Roger Baxter told
Energy Specialist that demand has already declined and mines and
companies will continue to implement energy saving measures;
however, he corroborated the view that a 10 percent drop in power
would cause a greater drop in output. DME Chief Director: Nuclear
Tseliso Maqubela told Energy Officer that the problem was already

SIPDIS
abating, but the SAG still had to "tighten the screw one or two more
turns."

--------------
Another Target is Manufacturing
--------------


8. (SBU) Manufacturing has been another target of forced reductions
for Eskom to balance its power equation and output has been
significantly reduced. South Africa Petroleum Industry Association
Director Connel Ngcukana told Energy Officer he estimated that
manufacturing output was down 20 percent. Arcelor-Mittal South
Africa announced on February 13 that it may have to ration steel to
its domestic customers, owing to disruptions in production arising
mainly as a result of the electricity crisis. Aluminum and
ferrochrome smelters tend to suffer an output loss directly

PRETORIA 00000315 003 OF 003


proportional to electricity cuts. Coca Cola blamed power cuts and
related shortages in carbon dioxide for a fall-off in production and
sales.

--------------
Other Infrastructure Woes
--------------


9. (SBU) Many observers fear that there are equal or greater
problems with electricity transmission and distribution. Attempted
restructuring of electricity distribution has been long delayed and
analysts believe there is significant under-investment and risk
there. For example, a sub-station failure triggered a large
black-out in Cape Town on the eve of the Mining Indaba and the
opening of Parliament. Although ports and refineries receive
priority and are not subject to load-shedding, this outage shut down
the Caltex-Chevron refinery, requiring 5-7 days to restart
operations. The Cape Town Airport worried about obtaining adequate
jet fuel, but was able to find alternative sources.


10. (SBU) COMMENT: Energy Officer and Specialist found
interlocutors at the Mining Indaba still bullish on doing business
in South Africa for a range of commodities. However, uncertainty in
South Africa's power supply makes riskier projects in DRC, Zambia,
and elsewhere on the continent look more enticing. The SAG has
given the public the erroneous impression that the problem is under
control by greatly reducing random and aggravating load-shedding in
residential neighborhoods. In fact, the SAG's second failure -
after failing to plan for adequate power - is its inability to plan
for efficient load-shedding and power-sharing. Forcing mining and
manufacturing to bear the brunt of the electricity crisis is not
sustainable. There does appear to be room for reducing waste and
harvesting efficiencies in both industrial and residential sectors.
The ultimate impact of power woes on economic output, growth, and
jobs will be significant, but difficult to quantify at this time.
The prolonged use of aging plants will be a challenge during the
southern hemisphere winter (June-August),when there will be peak
demand for power capacity.

BOST