Aluminium smelters: The developmental state gone mad?

South Africa has no bauxite ore! Despite this geological fact, South Africa (and Mozambique) has aluminium smelters. Bauxite ore is the raw material for creating aluminium. The ore comes to us from Australia (and possibly Suriname and Brazil), we process the ore to produce aluminium and then ship it out. If we don’t have bauxite ore, why then do we have aluminium smelters? Well, we have a deepwater port and cheap electricity. And these smelters are very energy hungry. (The aluminium smelters are as large customers for Eskom as some of our cities.)

The world is a volatile place and investors need certainty, argues the government. So the government then provides policy for so-called “developmental pricing” that provides variable pricing for electricity. In fact, we have policy to attract energy intensive industries, when we are likely to face shortages. We already have cheap electricity. The “developmental pricing” in practice means that the price of electricity can be linked to cost of inputs.

So, for instance, when the price of aluminium is high, the price paid for electricity is high. And when it is low, the price for electricity is lower. But we are not sure about what deals are struck. The secrecy of these deals, and the huge about of energy they consume, is discussed by Kristin Palitza, on this website.

What then about job creation? Job creation is negligible, given the infrastructure investment by the government and the variable pricing. There are about 6 000 to 8 000 jobs in all the aluminium smelters in South Africa. The return in terms of downstream industries (for example, catalytic converters) is also minimal, as the ingots and T-bars are shipped out to other countries. Why does a clothing manufacturer, engineering firm or a furniture factory not receive the same type of incentive as smelters do, especially since they could create jobs?

David Fig, a respected academic and environmentalist, raises environmental issues forcefully:

The cost of our electricity is relatively cheap by world standards because we are not including the “externalities” in the price, ie the costs to our health and to our environment. Our coal is extremely low quality, resulting pollution is high and the rates of respiratory disease in South Africa are very prevalent. Because of our burning of coal, we account for between 1% and 2% of the contribution to global warming. We should be moving away from industries which are energy intensive, at least until we are substantial producers of renewable energy. If we look at the situation objectively, we are not so much exporting aluminium as cheap electricity, and the health and environmental costs are being borne, not by Eskom or BHP Billiton, but by our communities, our health bills and our pollution clean-up bills.

(You can access another of David Fig’s papers online here.)

And because smelters consume so much electricity, they place a significant strain on us meeting our energy needs in the future. So one of the reasons we have power failures is because we have smelters.

A different scenario of renewable energy, variable input cost prices for small and medium manufacturers and beneficiation might bring some sanity to this picture. As it stands, the aluminium smelters represent the ascension of multinational corporations — which run the smelters — over our developmental objectives. This cannot be what we have in mind when we speak of the “developmental state”.