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Shut down the aluminium smelters

Friday’s news that South Africa’s gold and platinum mines had been forced to suspend operations because Eskom could no longer guarantee the power supply has emphasised just how bad our electricity crisis has become. We can switch off lights, swimming pool pumps and geysers to our heart’s content but the reality is that we need immediate access to more power and I would suggest that one way to do this would be to shut down BHP Billiton’s three aluminium smelters

Aluminium is jokingly referred to by some in the industry as molten electricity and it is not hard to see why. Between them the Richards Bay-based Hillside and Bayside smelters and the Mozambique-based Mozal smelter employ around 7 000 employees and contractors and use 2 150MW of electricity, around 5,5% of Eskom’s total capacity.

These aluminium smelters operate on our coasts because they have contracts guaranteeing a supply of the cheapest electricity in the world. For the most part, alumina is shipped in from BHP Billiton’s operations in Australia and Brazil, processed at the smelters and shipped directly out again to their end destination. They need a constant supply of power — load-shedding can be disastrous to these operations, resulting in whole potlines having to be replaced at a cost of hundreds of millions of dollars.

Here’s what I think the government should do:

  • Shut down and mothball the Hillside, Bayside and Mozal smelters as quickly as possible. These smelters face disruptions anyway, and there may be benefits in shutting down operations in a orderly manner.
  • Pay the full salaries of every single employee and contractor for as long as these operations are down.
  • Give BHP Billiton whatever penalties/tax breaks it needs so that shutting these operations down do not effect their profit margins.
  • Cancel the ill conceived 1 150MW Rio Tinto Alcan smelter that is planned for Coega in 2010. Pay the fines and penalties for cancelling this operation.

This move would not be popular with BHP Billiton or Rio Tinto, but it is time to make pragmatic decisions that will benefit the whole economy. By doing this we could bring the equivalent of a Koeberg power station online within a few months. This, combined with the other power saving suggestions, could be enough to minimise the effects of load-shedding on the mines, factories and small businesses that power our economy and save us from the mass layoffs and closures that are likely to happen if the current situation prevails.

Author

  • Jaxon Rice is a developer at Soup Consulting. By night he is the lead singer for a rockabilly band called the Diesel Whores. He blogs at http://jaxonrice.com.

22 Comments

  1. Phil Phil 27 January 2008

    Jaxon,
    I have been advocating this for a while now.

    That the mines are viewed as a more expendable industry is questionable.

    Aluminium smelting is the same as exporting electricity.

    Because it is the exploitation of the countries finite resources, with the benefit heading offshore, it is a morally questionable practice in the first place.

    Mozal doesn’t even provide SA residents jobs, for heavens sake.

    Open those breakers and SA will win back a virtual powerstation overnight.

  2. Dominic Tweedie Dominic Tweedie 27 January 2008

    This is exactly the right thing to do and the case is well stated here. Thank you Jaxon Rice.

    Then if is to be done let it be done quickly. If not, then let us start a “Close the smelters!” movement, quickly and powerfully, based on Internet communications if the first place.

    Better to close the smelters and to keep the mines open.

  3. Jon Jon 27 January 2008

    The ANC may well decide that this sensible option is the way to go. But then, along comes a BHP-Billiton or Rio Tinto guy in a snappy Savile Row suit and tells them “there’s something in it for you not to shut us down”. And, from here on in, the ANC bigwigs just dream in dollar signs. With lots of noughts.

    Come on, we’ve seen it all happen before.

    They all want to be like Yengeni — only bigger.

  4. Owen Owen 28 January 2008

    Firstly, TM as CEO of our economy should be fired as he has not fired anyone else and we need to fire someoen to show that we do not tolerate incompetatnce.

    Then this idea will probably make sense.

    However, the fact that the mines get a few days notice shows that the ANC collective has no idea what is going on. It appears that planning does not even go past 7 days.

  5. Owen Owen 28 January 2008

    btw my bad spelling was left to emphasise my point.

  6. Dominic Tweedie Dominic Tweedie 28 January 2008

    Would you buy a used car from this man?

    Erwin, quoted in Engineering News:

    “In fairness to the Eskom executives, they had to consider the prospect of stopping major projects. Of course, we have to give that thought, and we
    have given it thought. But it is our clear view that this would be too adverse an impact on the economy and that we can actually manage to maintain
    our investment profile, but do it in a much more carefully planned, scheduled way,” Erwin argued.

    “Alcan,” he continued, “is a contract and we will honour that contract. But as with all major contracts, we will discuss the practicalities and the implications of it.”

  7. Ebrahim-Khalil Hassen Ebrahim-Khalil Hassen 28 January 2008

    Jaxon, your policy options is what we need. A couple of things 1. Apparently in the electricity supply contracts for the smelters there is space for downtime. (Not transperent so we do not know). 2. We must perhaps think about cancelling the smelter contracts, and paying whatever fines. It is a case of smelters vs. the economy. I am also lonking to an earlier post on this I did some time back.

    http://www.thoughtleader.co.za/ebrahimkhalilhassen/2007/10/17/aluminium-smelters-the-developmental-state-gone-mad/

  8. Bonginkosi Bonginkosi 28 January 2008

    Are you serious, Jaxon? I can’t figure out whether you are pulling a leg or not. ESKOM must switch off it’s biggest customer? And potentially have a few power stations up Mpumalanga way mothballed as a result? Am I hearing you right?

  9. Apocalypse Now Apocalypse Now 28 January 2008

    This is all such a no-brainer – duoooh!? that we can only wonder whether the struggle for power and money has addled the ANC governments brains to pap en sous

    When I watch Homer Simpson, I think of Jacob Morogo (CEO ESKOM), while Mr Burns is Thabo Mbeki.

    During a visit south of the Hottentots Holland recently I got the distinct feeling that people in Cape Town have started to luminesce green in the dark – and its not beacuse they’re such cool party trancey people. It has to be Koeberg se nuts en moer!

  10. Jaxon Rice Jaxon Rice Post author | 28 January 2008

    Hey all – thanks for the comments. Ebrahim-Khalil – it was your original post on the smelters that got me thinking along these lines in the first place.

    Bonginkosi – I am being serious. I really think that it would be the best solution to bring immediate power back online and keep our economy moving forward. I cannot see them mothballing any power stations in the foreseeable future, even if we did mothball the smelters temporarily.

    The important thing if we do go this route is to make sure that not a single BHP Billiton worker or contractor loses their job as a result of this and to make sure that the profitability of BHP Billiton is not put at risk. Whether we do this with tax breaks or by paying fines is another discussion altogether.

    BHP Billiton stands to lose as much from these power cuts as anyone else. They have huge mining operations that were standing still over the weekend, and a prolonged outage would be disastrous for these smelters anyway, effectively shutting them down while the potlines are replaced. These smelters consume vast amounts of electricity while processing imported Alumina and employing a relatively modest amount of people. It makes total sense to me to shut them down.

  11. Bruce Bruce 28 January 2008

    What would this all mean for my stocks in aluminium…What would the broader political impacts of this be? Who has stakes in ensuring this does not happen?

  12. Bonginkosi Bonginkosi 28 January 2008

    You remember the energy crisis that we had in Cape Town a few years back? What happened? ESKOM came up with the plan to manage the demand side. I think, if I remember correctly, that about 200MW were saved with the intervention to switch everybody to CFLs.

    Well, in effect, what you are suggesting is in some respects a demand side intervention. So here is a few questions.
    -Why not convert the whole country to CFLs? And maybe also ask for a law that prohibits selling of all old fashioned incadescents.
    -What about switching off all geysers especially during peak times? You do know that geysers account for about 25% of all power consumption.
    -How about rationing companies most of their unnecessary loading of the system? Like air-conditioners when everybody has gone home etc.

    Every bit helps. But I think it is rather drastic to just demand-manage one customer. Everybody should be responsible.

  13. Jaxon Rice Jaxon Rice Post author | 28 January 2008

    Bonginkosi – banning incandenscent light bulbs is an excellent idea – one that should also have been implemented a while back. The government already has a free cfl-for-incandescent swap program for poorer communities. You are right that everyone has to do their part, and it seems as if people are getting the message. My concern is that last Thursday’s shortfall of 4000MW caused the mines and other heavy industries to be shut down, and even the most optimistic projections for power saving through light bulb replacement, switching off geysers and other domestic strategies don’t come close to that figure.

    This is happening in Summer. What happens in winter when power demand normally peaks? My view is that if we are looking at a shutdown of heavy industry in general like we saw last week it makes sense to target the one industry that uses the most electricity and impacts the economy the least.

    Nevertheless, I absolutely agree that everyone has to do their bit.

  14. Craig Craig 28 January 2008

    Never mind making ESKOM unpopular with Rio Tinto et al, they have already had a huge impact on the stock market in the mining sector, as well as on the metal prices.

    The power crisis goes global!

  15. Jon Jon 29 January 2008

    Isn’t Australia ridiculously lucky? They earn a fortune by shipping out their vast reserves of bauxite (aluminium ore), earning healthy sums of export dollars, and then letting the other poor sods in other countries chew up all their electricity in turning this ore into aluminium? Molten electricity indeed, but with someone else doing the smelting.

    Brilliant, cobbers!

  16. Daniel Daniel 29 January 2008

    A very noble thought, but misguided. At any point in time Hillside is busy changing out a pot in it’s line of roughly 760 pots. To do what you propose is to put at risk about 23 tons of primary aluminium per pot, equating to about 17000 tons of meatl , with a market value of $20 000 000. It is also not possible to just start up a pot after it has been shut down, it must be replaced. At R3 000 000 per pot this also equates to a tidy sum.

    A pot takes about two months to replace, so we are looking at 107 years in man hours to replace Hillside’s potlines. At a average salary of R60 000 per year ( this is a highly specialized process) and eighteen people in a team the salaries to maintain just that team will we well over R100 000 000 untill the plant will be able to start again. The salary component will stay the same reagrdless of how many teams you throw in.

    If you do not know what you are talking about, please don’t talk. However noble you think your thoughts are, you will not pick up that tab…..

    Unless you plan to employ the people working in other areas in the plants, they will lose their jobs. I have given you the outline for just one of the plants, you proposed the shutdown of all three. Why not propose a change in management strategy at eskom, or even replacing them completely, heaven knows, they have proven their incompetence. Why are we still supplying our neighbours at cut rates? Why is there no coal at the power stations? Why are the BEE transport companies not being given an increased rate to compansate for escalating fuel costs, so they can afford to get the coal to the power stations?

    BTW, as BHP-Billiton is a global player with a lot of respect in the world of business. If they withdraw investment, it will be seen as detrimental for other companies to bring their cash to South Africa.

    Sorry Jaxon, very bad idea…..

  17. Jaxon Rice Jaxon Rice Post author | 29 January 2008

    Daniel, thanks for the comments. It sounds like you know a lot more about the actual operations than I do, and your knowledge is appreciated.

    I have to wonder, however, if you read my whole post? I am aware of the enormous cost involved in shutting down a potline and replacing pots, and one of the central tenets of my argument would be that the government would have to carry all the costs of mothballing and maintaining the smelters, as well as pay the salaries of everyone involved.

    That aside, thanks again for explaining some of the other factors involved and for contributing to the discussion

  18. Daniel Daniel 29 January 2008

    I actually wanted to illustrated that it is economically more feasible to construct another powerstation than to shut down the smelters.

    I fully agree that goverment should carry the load, but it is the people at grass roots that will feel the brunt of such an expenditure.

    Government is 100% liable, it is not the people who do not have low cost lightbulbs, or even the smelters. Government ignored the warnings, we all know that.

    I do have another theory, maybe off the wall. All hell broke loose just after the Polokwane debacle. If you want a country to submit to you, bring the economy to it’s knees. I suspect a Zuma/Cosatu collaboration in achieving this goal, a economic coup. It cannot be coincidence that two months ago there wasn’t even a threat to mining, and now they shut down. Economy does have growth spurts….but this is ridiculous.

    I hope I am wrong….

  19. Richard Richard 29 January 2008

    Jaxon,
    I actually work in a Aluminum smelter in the UK.
    We are currently facing closure if we cannot
    secure a power contract at the right price in
    order to be competitive with other companies.
    Your desire to close the smelters in South
    Africa might happen sooner than you think due to
    the Aluminum companies re-locating to the middle
    East to take advantage of cheaper power through
    Gas powered stations,also countries like Malaysia
    are looking to build smelters.The maint point is,
    that there is not enough generating capacity in
    most countries due to lack of foresight by
    Governments to build more Power stations and
    like the UK the price of Electricity is very
    high for all consumers and forcing Compamies
    re-locate.
    Richard.

  20. J. Nic J. Nic 29 January 2008

    The causes of the power failures are known to all. What is needed is decisive actions to keep the economy from crumbling and Jaxon makes a valid point.
    I do not know how many SA labourers will be affected by the Billiton smelters shut down, but if any they can temporary be accommodated in the mines, or the construction of a the suggested nuclear plant.
    I support Dominique Tweedie’s suggestion of starting a “shut the smelters down” campaign, and “no” I won’t even buy a used bicycle from a person whith such incoherent reasoning.

  21. Paddy Paddy 30 January 2008

    Based on the last week’s news reports (Star 29th Jan had some good breakdowns of specific generators and power stations) the cause of the power problem seems pretty clear to me. How do we go from Nov 2007 – no power cuts to Jan 2008 15% – 20% shortfall.

    Our esteemed management/accountant class (no racial overtones intended) decided to change the coal delivery contracts from long term (high quality) to short term purchases based on spot prices (25% of coal delivery – Star 29th Jan). These were delivered by truck with little (or no) way to perform quality control on the coal delivered. This coupled with depleted stockpiles (Carte Blanche 27th Jan) and the traditional South African shutdown for December plus the excessive consecutive rainy days in the first three weeks of January exposed what was previously concealed by excess production.

    Eskom Management should acknowledge these #$%^up’s. Eskom management’s long December leave is the direct cause of the timing of the shortfall.
    Government planning shortfalls are another story – they always had tradeoffs and could not be expected to plan for management failures.

    And as for Coega we have already invested billions in the (possibly ill advised project) but the eastern Cape needs all the industrialization (Alcon) we can get.

    As does the rest of our country.

  22. J. Nic J. Nic 31 January 2008

    Daniel
    The fact that BHP Billiton is a globally respected company does not give them or any other multi national the right to dictate governance to the South African state. They are in business for profits and along therewith is risk. The higher the returns, the higher the risk.
    Indigenous South Africans have suffered severely due to superexploitation by imperialist forces both national and international, a situation that cannot be condoned any longer.
    The smelter switch off will benefit the broader economy on which the state relies and to to hell with BHP Billiton.

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