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Cablegate: Electricity Crisis Stalls Coega Aluminum Smelter

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DE RUEHSA #1186 1561404
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R 041404Z JUN 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 4638
INFO RUCPDC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0806
RUEHRL/AMEMBASSY BERLIN 0622
RUEHBY/AMEMBASSY CANBERRA 0678
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RUEHNE/AMEMBASSY NEW DELHI 0489
RUEHOT/AMEMBASSY OTTAWA 0637
RUEHFR/AMEMBASSY PARIS 1362

UNCLAS PRETORIA 001186

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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 EPET EMIN EWWT EIND EINV SENV SF
SUBJECT: ELECTRICITY CRISIS STALLS COEGA ALUMINUM SMELTER


1. (SBU) SUMMARY: The long-time government-championed aluminum
smelter at Coega in the Eastern Cape is the highest profile casualty
of South Africa's power crisis. The SAG is disappointed and still
in denial over the postponement - and potential permanent loss - of
its biggest greenfield project in the queue. The power crisis is a
critical issue for potential foreign investors. End Summary.

2. (U) The power crisis claimed a high-profile industrial casualty
with Rio Tinto on May 29 postponing its $3 billion Coega aluminum
smelter until 2012, when it is hoped South Africa would have sorted
out its electricity problems, according to local press coverage.
Rio Tinto CEO Dick Evan said in London the project had been
suspended for three or four years and it would redeploy its team of
approximately 200 engineers to other international projects. This
raises doubts as to whether the power-intensive project will ever
get off the ground. The project was proclaimed two years ago by the
government as its largest greenfield investment and the long-sought
anchor for the Coega Industrial Development Zone.

3. (U) The delay comes despite recent assurances by the Coega
Development Corporation and the government that the viability of the
smelter was proven and that the current electricity crisis would not
affect its implementation. Rio Tinto SA spokesman Robert Valdmanis
said the pre-construction phase had been completed, but construction
could not begin until guarantees about electricity requirements were
in place.

--------------------
On Again - Off Again
--------------------

4. (U) The latest delay follows an announcement earlier this year
by Rio Tinto CE Tom Albanese that the company would not go ahead
until new power plants had been built and the electricity supply
guaranteed - beyond the existing agreement with state power company
Eskom. The postponement comes amid mounting calls for the scrapping
of energy-intensive projects as the country battles a crippling
power crisis. Critics have questioned the project with respect to
the need to import the bauxite and the small number of jobs it would
create.

5. (SBU) Department of Foreign Affairs Director: USA Fadl
Nacerodien asserted the deal was still very much alive to the
Embassy team on the same day (but in advance of the announcement
reported in the press the following day) at bilateral meetings.
Department of Minerals and Energy Deputy Director General Nhlanhla
Gumede told Energy Officer on June 3 the deal was still in play,
citing the perseverance of the Coega Development Corporation.
Department of Trade and Industry Manager: Americas Desk Cobs Pillay
admitted to Energy Officer that the deal was stalled, but he was
still bullish on the long-term prospects for the smelter and the
Coega Industrial Development Zone. He said Middle Eastern investors
showed a strong interest in the zone and they might even consider
taking over the smelter project.

--------------------------------------------- --
Comment - Successive Evaluation - Government Frustration
--------------------------------------------- --

6. (SBU) The SAG has been promoting this flagship investment since
2001 to seed additional investment at the Coega Industrial
Development Zone and deep-water port near Port Elizabeth in the
impoverished Eastern Cape. The anchor tenant aluminum smelter was
first championed by Pechiney of France, but the project was acquired
first by Alcan of Canada, then by Rio Tinto of the UK. Rio Tinto is
now subject to a hostile takeover bid from BHP Billiton of
Australia, so it is possible that yet another skeptical board may
have to vet the long-delayed deal. This may be the ultimate delay -
to never. It is difficult to quantify the magnitude of other
investment lost to the power crisis, but it is clearly topic number
one for potential FDI investors in energy-intensive industries.

BOST

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