BHP Billiton’s SA smelters’ income could fall by $500m in half-year to June

The income of diversified miner BHP Billiton’s two aluminium smelters could fall by about $500-million in the half-year ending June, credit solutions provider Coface South Africa risk analyst George Marais tells Mining Weekly.

South Africa’s only two primary smelters, controlled by BHP Billiton and situated in Hillside and Bayside, in Richards Bay, have shown successive losses, despite the preferred rates at which BHP Billiton is buying electricity from State-owned power utility Eskom.

“The losses were sustained at an average price of $2 391/t; however, the price fell to a low of $1 945/t in December 2011 and, since then, the metal has been maintaining price levels of around $2 100/t. At BHP Billiton’s production rate of 1.2-million tons a year, this would mean a drop of about $500-million in income in the half-year to end-June,” he explains.

BHP Billiton has also reported that it will no longer be investing resources in the production capacity of its smelters and, owing to concurrent losses, could see the plants closing down.

“The cost of producing locally is starting to outweigh the benefits,” Marais states.

Mining Weekly reported in October that Eskom had asked the National Energy Regulator of South Africa (Nersa) to review the “prudence” and “appropriateness” of its controversial legacy contracts with BHP Billiton’s aluminium smelters in KwaZulu-Natal.

The aluminium-price-linked contracts, which were signed in the early 1990s and are known to favour the world’s largest mining company, have been subjected to ongoing criticism since the load-shedding crisis of 2008.

Meanwhile, Eskom has stated that it is revising all local electricity tariffs.

“This could affect input costs and make the smelters even more costly to maintain, and BHP Billiton is focusing its operations on core business, away from operations that it considers to be unprofitable,” Marais says.

If the BHP Billiton smelters do close down, South Africa will no longer be a primary aluminium producer and the industry would have to import all primary aluminium, causing the balance of trade to suffer a more extensive deficit, he adds.

However, another possible outcome to this dilemma could be the buyout of BHP Billiton’s smelters by aluminium major Alcoa Australia, as Alcoa is still expecting demand to grow by 6.5% a year over a ten-year period, he says.

“BHP Billiton recently sold its 33% stake in the Guinea Alumina joint venture to its partners for $1, literally giving it away,” he adds.

The South African aluminium industry is finding it difficult to compete with international industries, as other countries have bigger markets and have made greater technological advances that enable companies operating in those countries to lower their costs, Marais says.

The flood of aluminium imports facing South Africa’s manufacturers is eroding the value of the R55-billion-a-year aluminium sector.

“The strong rand has resulted in imported goods being cheaper than locally manu- factured goods in many sectors and the ability of the Far East to produce products effectively and efficiently at a lower cost is a threat to manufacturing industries in Western countries,” he says.

In addition, these countries often incentivise exports and raw materials used by companies, which results in more productive industries.

In China, the foundry industry is able to produce 40-million tons of casting a year. One foundry in China employs more than 375 000 people, Marais adds.

“South African companies need to be more flexible and look for opportunities in niche markets where their ability is valued,” he suggests.

Further, South African companies should also consider becoming more effective by investing in new equipment and adopting new technology that would drive down costs; however, this requires significant investment and it is difficult for local businesses to justify spending large amounts in the current economic climate, Marais says.