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Cablegate: South Africa: Minerals and Energy Newsletter

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 PRETORIA 003298

SIPDIS

STATE PLEASE PASS USAID
STATE PLEASE PASS USGS

E.O. 12958: N/A
TAGS: EPET ENRG EINV EIND ETRD ECON SF
SUBJECT: SOUTH AFRICA: MINERALS AND ENERGY NEWSLETTER
"THE ASSAY" - ISSUE 7, JULY 2005

REF: A) PRETORIA 3049, B) PRETORIA 2998

THIS CABLE IS NOT FOR INTERNET DISTRIBUTION

1. (U) Introduction: The purpose of this monthly
newsletter, initiated in January 2004, is to highlight
minerals and energy developments in South Africa. This
includes trade and investment as well as supply. South
Africa hosts world-class deposits of gold, diamonds,
platinum group metals, chromium, zinc, titanium,
vanadium, iron, manganese, antimony, vermiculite, zircon,
alumino-silicates, fluorspar and phosphate rock, and is a
major exporter of steam coal. South Africa is also a
leading producer and exporter of ferroalloys of chromium,
vanadium, and manganese. The information contained in
the newsletters is based on public sources and does not
reflect the views of the United States Government. End
introduction.

---
Key
---
2. (U) Key to some of the terminology and abbreviations
used is given to facilitate understanding.

BEE (Black Economic Empowerment) - the scheme whereby the
South African Government promotes black participation in
business.

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- t = tons,
- t/d = tons per day,
- c/l = cents per liter,
- t/m = tons per month,
- t/y = tons per year,
- oz = troy ounces (31.1 grams),
- cmg = centimeter grams,
- mcf = million cubic feet,
- tcf = trillion cubic feet,
- R = SA currency (rand),
- MW = megawatts,
- kt = thousand tons,
- bbl/d = barrels per day,
- MW = megawatts,
- PGM = platinum group metals.

----------
HOT ISSUES
----------

First Regional Electricity Distributor Launched
--------------------------------------------- --
3. (U) On July 4 in Cape Town, newly appointed Minister
of Minerals and Energy Lindiwe Hendricks launched the
first of South Africa's proposed six regional electricity
distributors (REDs). In order to meet President Mbeki's
deadline of July 1 for the establishment of the first
RED, the Cape Town Metro area was chosen as the nucleus
for this RED - to be known as RED ONE. Over the next six
to eighteen months negotiations and legal amendments will
be required to persuade the other 39 municipalities in
the region as well as Eskom to voluntarily join the new
entity, to ringfence their electricity distribution
assets and operations, and to transfer assets and staff
to RED ONE. Although the other five REDs may require
some unique manipulations, RED ONE will serve as the
prototype. The President has stated that all the six
REDs must be in place by February 2007, but legal,
constitutional, commercial, and operational hurdles still
must be resolved


-------
NUCLEAR
-------

SAFARI Reactor Conversion
-------------------------
4. (U) In a July 19 news release, Minerals and Energy
Minister Lindiwe Hendricks announced that the Safari-1
nuclear research reactor at Pelindaba outside Pretoria
would, in line with international trends, phase out the
use of highly enriched uranium (HEU) fuel - greater than
20% U-235 - in favor of low enriched uranium (LEU). She
said that the state-owned Nuclear Energy Corporation
(NECSA) would convert its research reactor fuel
manufacturing plant over the next three years, and that
this marked another milestone in government's program to
ensure the safety of nuclear materials. The remaining
HEU would be applied to the manufacture of diagnostic
medical isotopes, mainly Molybdenum-99. SAFARI
conversion ensures medical isotope production for a
longer period, the Minister said.
-----------
ELECTRICITY
-----------

Eskom Signs Siemens and Re-opens Camden
---------------------------------------
5. (U) With the signing of a $286 million contract with
Siemens on July 22, Eskom is on course to carry out its
mandate to provide new power generation capacity. Under
the contract, Siemens will supply seven open cycle gas
turbines for two new diesel powered stations to be built
in the Western Cape Province for peak capacity. The two
power stations will have a combined capacity of more than
1,000 MW and together cost about $600 million to build.
A 588 MW station will be built in Atlantis on the west
coast and a 440 MW station will be built at Mossel Bay on
the south coast. Siemens must design, manufacture, and
commission the turbines by April 2007. This will help
meet the projected increase of 2,500 MW in peaking
capacity required by 2010. To meet the projected
increase in base load demand, three mothballed coal-fired
stations will be brought back into service at Camden,
Grootvlei, and Komati. These plants have a combined
capacity of 3,540 MW. Camden started operating
commercially at the beginning of July for the first time
in 15 years. The Managing Director of Eskom Enterprises
Brian Dames said that these projects were all part of
Eskom's $3.3 billion capital expenditure program approved
by the board last year.

6. (U) In an unrelated matter, Eskom has signed a two-
year wage agreement with the National Union of
Metalworkers (Numsa) for an annual pay increase of 6.5%
for each year. This is above the current official
inflation rate of about 3.9%.

----
COAL
----

Old King Coal
-------------
7. (U) Coal was South Africa's most valuable mineral
mined in April, exceeding the value for both the gold and
platinum group metals. The value of coal sales in April
2005 was $412 million compared to $387 million for gold
and $380 million for PGMs. For the period February 2005
to April 2005, year-on-year (y/y) coal sales have risen
by 13.8%, while PGM sales have fallen by 4.0% and gold
sales have plunged by 12.3%.

----
FUEL
----

Fuel Prices Continue to Break Records
-------------------------------------
8. (U) On August 3, the Department of Minerals and Energy
(DME) again increased the retail price of gasoline in
rand terms by 5.0% and the wholesale prices of diesel and
kerosene by an average of 3.1% and 3.7%, respectively.
This is on top of the July 6 increases of 5.7%, 10.5% and
8.9%, respectively. The benefit obtained from a slight
strengthening of the rand was overshadowed by the
increase in the price of crude oil, which was totally
responsible for the latest price increases.

------
MINING
------

T'is the Season of Labor Discontent
-----------------------------------
9. (U) The season for wage negotiations in the mining,
steel and electricity industries has kicked off with the
usual extreme positions adopted by management and labor -
management offering wage increases as low as 2.5%, and
labor demanding as high as 20%. The Chamber of Mines,
representing the gold and coal mining industries, has
offered workers wage increases of 2.5% and 4%,
respectively. This contrasts with the individual union
demands - Solidarity's 12.3%, the National Union of
Mineworkers' (NUM) 20%, and the United Association of
South Africa's 12%. The gold mining industry during the
last two negotiations agreed to wage increases of 8-10%,
significantly above the then inflation rate of 5-6%. In
light of the poor income performance of gold, management
is determined to hold to the inflation rate, currently
running at about 3.9% as calculated by the South African
Reserve Bank's CPIX index (consumer price inflation less
interest costs).

10. (U) Negotiations for the gold mines appear to have
reached an impasse and the unions have threatened to take
some 100,000 workers out on strike as of August 7 if the
mines do not up their offer. If this comes to pass it
will be the first industry wide strike since 1987, which
lasted for 21 days. The Chamber of Mines, representing a
large chunk of South Africa's gold producers, has offered
wage increases of 5% in categories 3 and 4, and 4.5% in
the higher job categories, as well as a 0.5% increase in
employers' provident fund contributions and a 10%
increase in the employees' living out allowance.
Mantashe says the NUM and other unions are demanding a
12% increase in wages.

11. (U) To counter the Reserve Bank's official inflation
rate figure of 3.9%, Solidarity developed a "mine worker
inflation index" estimated to be 5.7% for the year to May
2005. Solidarity economist Lullu Krugel said that the
CPIX measure underestimated the inflation position for
mine workers because the weighting was last adjusted in
2001. New weights for oil, steel and property prices
were not factored in, and that while administered prices
(water, electricity, transport, telephone, fuel) rose by
12.4% in 2004, they were underestimated.

12. (U) In the meantime, the National Union of
Metalworkers (Numsa) and Solidarity went on a three-day
pay strike at the Anglo American's subsidiary Highveld
Steel and Vanadium on July 27. The union's demanded an
8% increase but settled for 6% on July 29. Highveld is
the world's largest producer of vanadium products. The
plant annually produces some 900,000 tons of steel, 4.4
million kg of Vanadium Pentoxide (V2O5) and 2.1 million
kg of Ferrovanadium. Additionally, the three major
platinum producers (Anglo Platinum, Impala Platinum and
Lonhro Platinum) have yet to settle with their unions.

13. (U) (Note: Update on the Gold Miner's Strike. On
August 12, the gold miner strike came to an end. The
strike lasted for four days compared to the 21 days in
1987, so that was a blessing for the industry and the
economy - gold still accounts for about 10% of South
Africa's export earnings. As negotiations go, neither
side got what they wanted and in truth some political
pressure may have been brought to bear on both sides for
a quick, affordable and acceptable settlement. The
agreement covers two years. For the first year the
following will take effect:

- wage increase of 6% to 7% with the latter for the
lowest earners;
- living-out allowance of R1,000/month to be phased in
over the two years;
- 1% increase in the employer's contribution to the
worker's Provident Fund;
- R10,000 funeral cover per miner.

For the second year the wage increase will equal the
inflation rate plus 1%, with a minimum increase of 5% for
higher paid workers and 5.5% for lower paid workers. No
settlement has yet been achieved in either the platinum
or coal sectors, but the gap has narrowed. End Note.)

-----------
ENVIRONMENT
-----------

South African Companies Target Kyoto Market
-------------------------------------------
14. (U) Four Johannesburg Security Exchange (JSE)-listed
companies stand to earn $99 million under the Kyoto
Protocol if their emission reduction projects are
approved by the EU Commission. Under the Clean
Development Mechanism South Africa can, on behalf of
these industries, buy and sell Certified Emission
Reductions (CERs) for greenhouse gases. The current
price is about $7 per ton of carbon dioxide equivalent
(CDE). Anglo American's Highveld Steel & Vanadium
propose to cut emissions by 12.4 mt per year to earn
$86.8 million. Mittal Steel proposes to cut 763,960 t
through a waste-to-electricity project and earn $5.3
million. African Explosives propose to cut gas emissions
from nitric acid production by 260,000 t to earn $1.8
million. Omnia Fertilizer proposes to cut annual nitric
oxide emissions at its Sasolburg plant by 670,000 t to
earn $4.7 million. The income will be used to upgrade
existing plants to meet emission requirements.

15. (U) According to Lwazikazi Tyani, the Minerals and
Energy Director for the Clean Development Mechanism, the
governments of Japan, Britain, Germany, Denmark, Canada,
and France have expressed interest in South African CERs.
Andre de Nysschen, Highveld's Chief Executive said that
the Clean Development Mechanism was attractive to steel
makers as a means of making capital-intensive emission
reduction projects more affordable. Graham Edwards,
Managing Director of African Explosives, estimated that
capital expenditures for his company would total
$800,000, but "we have the potential to earn $1.9
million."
----------------
RENEWABLE ENERGY
----------------

A Darling Wind Farm in the Cape
-------------------------------
16. (U) On July 13, Environmental Affairs Minister
Marthinus van Schalkwyk dismissed the only appeal against
his February approval of a $10 million project to erect
four Danish-designed wind turbines at Darling in the
Western Cape Province. The proposed development entails
the erection of four wind turbines with a total power
capacity of about 5.2 MW, enough to supply the small town
of Darling with electricity in summer when demand is
fairly low and winds are constant. This will be the
first wind power generating facility developed by a
private company that feeds into the nation's power grid.
Eskom, the power utility, is also developing an
experimental wind farm at Klipheuwel in the Western Cape,
well known for the strength and frequency of its winds.
These developments are in line with the government's
policy to diversify energy sources and for renewable
energy to contribute 5% of total energy supply by 2012.
FRAZER

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