19 October 2009
editorial
Johannesburg — THE Coega aluminium smelter project that Rio Tinto finally put on ice last week was, in a sense, a relic of a bygone era, an era in which SA was under the illusion that it had plenty of electricity to spare -- and that energy-intensive investment was worth courting.
Now we know better. But the history of the smelter project serves as one reminder of how we got into this mess, highlighting the way the government clung to the notion that cheap energy was one of SA's key competitive advantages long after that notion had ceased to be appropriate.
The Coega project goes back to 2001, when the government and Eskom began negotiations with French aluminium producer Pechiney. When Canadian rival Alcan merged with Pechiney in 2003, the government continued to pitch aggressively for the project, arguing SA's merits as the best site for an aluminium smelter.
At long last, at the end of 2006, the contracts were signed, amid great fanfare. Coega had finally landed its big anchor tenant. Alcan was going to be the first to benefit from the Department of Trade and Industry's Developmental Electricity Pricing Programme, designed to stimulate energy- intensive investment in SA.
Eskom signed a 25-year agreement to supply the 1300 MW of power the Coega smelter would ultimately need. And it committed to investing billions of rands to upgrade the transmission lines needed to get the power to Coega.
So where was the cloud over this happy scenario? By the time the contracts were signed, we had already had the extensive Western Cape power outages. By the end of 2006, Eskom's reserve margin was already well below 10%. Though it was denied at the time, those Western Cape outages were a symptom of the strain SA's electricity grid was already under. They were a foretaste of things to come, of the national power crisis that struck in January last year.
In the wake of the crisis, talks were reopened on the Coega smelter project, which was now that of Rio Tinto, which had bought Alcan in 2007. Now, those talks have ended in failure. And this can only be a huge relief. The smelter was to be a tolling operation: importing the raw material , alumina bauxite, adding electricity and a bit of labour and exporting the finished aluminium. So all SA was really selling was electricity, and a lot of it -- 1300MW is the output of a small power station (Koeberg, for example, generates 1800MW).
It's not clear how much aluminium smelters add to the balance of payments given that the exports of finished product must be netted off against the imports of raw materials. And this smelter was going to need only about 1000 workers once it was up and running.
As it is, BHP Billiton has closed one of its aluminium smelters in Richards Bay because of the power shortage. Eskom is not going to have a surplus of power any time in the foreseeable future, even once it's built the new power stations that are going to cost us an arm and a leg over the next few years. Eskom would argue that SA's power price will still be reasonably competitive even after a few years of tariff increases. But that doesn't mean we will be a candidate for energy-intensive investment any time soon -- and especially not in the Cape, where there are no big base-load power stations other than Koeberg -- and where Eskom's plans for another nuclear station have also been put on ice.
So the smelter is no loss to SA. But what of Coega? The government has long clung to the idea of a heavy industrial plant as anchor tenant. That has not happened, despite more than one attempt (remember that before the aluminium smelter, there were long but ultimately failed talks on a zinc smelter in the late 1990s). So maybe it's time for the government to take another look at the model it has in mind for Coega. It needs to be more realistic about what is possible, and to focus on projects that will take the advantage of resources SA does have -- not the ones it doesn't.
The history of the shelved aluminium smelter is a bracing lesson to government about being realistic in its effort and focus
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