BHP Billiton coal price vs electricity

[Sneeky]

Anyone catch Carte Blanche and see the insert on the mess ESKOM is in regarding long term contracts that were signed with big users like BHP Billiton?

What we sit with is everyone getting nobbed and forced to swallow massive electricity increases while these big companies continue to get it at age old prices.

The irony lies in the fact that on the back of a 'soaring' coal price (a main reason for the proposed 60% increase in electricity tariff) these companies are forcing up the electricity price while they themselves are not subjected to these rapidly escalating costs due to long term contracts that are in place!
We are a coal rich country, these guys are selling a raw material at high cost, getting it converted into something that they desperately need for their production process and buying it back at a fraction of the going rate.

If I understand this correctly someone cocked up big time.

[Leftfoot]

If I understand this correctly someone cocked up big time.

Yes ESKOM!. You cant blame BHP Billiton, they made a sound business deal.

Mozambique supply Eskom with power from Kabora Bassa then send it back to BHP Billitons Mozal smelter in Mozambique at discounted rates....Eskom stupidity.

They said BHP Billiton does not add any value to South Africa as they import Alumina and export aluminium and in so doing depleting our natural resources (Coal). If BHP Billiton left SA tomorrow, the coal would still be exported to China and others (thats why we have the biggest coal export terminal in the world RBCT). In the banking sector BHP Billiton provide(d):D business worth R2.4Billion to Standard Bank PA. Locally they have built schools and clinics (more that 15) and closing the smelters would effectively close Richards Bay.

I bet BHP Billiton would seriously consider buying out Cabora Bassa, currently only running at 25% of designed capacity, and then resell to the dumb @sses at Eskom

I found the report of Carte Blanche very one sided and using BHP Billiton as a scapegoat. Poor stuff:mad:

[Alan]

Enron would be proud :sick:

[HavocXphere]

they themselves are not subjected to these rapidly escalating costs due to long term contracts that are in place!
Actually, I think those long term contracts are what created the Lowest-Electricity-Cost-in-the-World situation. Now the contracts are running out and Eskom needs to buy at reigning market prices....which are far higher than anything they were used to paying. E.g. Those ~45 mil tons they announced will be purchased for the winter. That was at market price.

[Sneeky]

The contracts were not on the coal side, but on the sale of electricity, ESKOM made a conscious effort to move away from major coal suppliers in favour of the BEE companies, which coupled with poor management on ESKOMs part, eroded the coal stocks to what you see today. Now they have to go back to the companies they shunned initially to assist them in fixing the problem it seems and they want top dollar for their higher quality coal.

The point was that the coal suppliers are commanding 'market related' prices for coal, yet they are enjoying the luxury of not suffering from the effects that this has on energy costs because they have contracts in place that have fixed the electricity price to them for long periods.
Whilst they milk the price on one end and everyone coughs up, they don't, as they are guaranteed cheap electricity.
They win hands down.

[ghoti]

So we pay export costs for our own product?

[Deenem]

Exactly the same thing is happening with oil.

The big oil companies (Exxon, CalTex, BP, SHell) bought the rights to pump out the oil long time ago, a few years ago they got $20 for each barrel they pumped, now they getting $110, but it costs them the same now as it did then, they've already bough the right to pump it out, so the extra $90 is pure profit.

Wonderful advertisement for the 'Free Market'

[DJ...]

Wonderful advertisement for the 'Free Market'

This electricity crisis wasnt a 'free market' issue. It was caused by a parastatal's innefectiveness to do their job and poor planning on governments part. It had nothing to do with the free market. In fact, a competitive environment would have ensured that this crisis never took place and eluding to another thread where you are posting, technological developments induced by a more competitive environment would have ensured a less pollutive electricity supply. :rolleyes:

[Ozymandias]

Yes ESKOM!. You cant blame BHP Billiton, they made a sound business deal.

Mozambique supply Eskom with power from Kabora Bassa then send it back to BHP Billitons Mozal smelter in Mozambique at discounted rates....Eskom stupidity.

They said BHP Billiton does not add any value to South Africa as they import Alumina and export aluminium and in so doing depleting our natural resources (Coal). If BHP Billiton left SA tomorrow, the coal would still be exported to China and others (thats why we have the biggest coal export terminal in the world RBCT). In the banking sector BHP Billiton provide(d):D business worth R2.4Billion to Standard Bank PA. Locally they have built schools and clinics (more that 15) and closing the smelters would effectively close Richards Bay.

I bet BHP Billiton would seriously consider buying out Cabora Bassa, currently only running at 25% of designed capacity, and then resell to the dumb @sses at Eskom

I found the report of Carte Blanche very one sided and using BHP Billiton as a scapegoat. Poor stuff:mad:

R18-billion rands of annual aluminium exports against R250-billion of a annual losses to businesses and industry at brown stage one. Not so sure that Carte Blanche report was so one-sided.

[DJ...]

R18-billion rands of annual aluminium exports against R250-billion of a annual losses to businesses and industry at brown stage one. Not so sure that Carte Blanche report was so one-sided.

This statement doesnt change the fact that it is not BHP Billiton's issue or fault for that matter! It was a very one-sided report, the fault lies purely on the deal-makers from Eskom and government's side. Although their reasoning might have been for employment and community development.

[Ozymandias]

This statement doesnt change the fact that it is not BHP Billiton's issue or fault for that matter! It was a very one-sided report, the fault lies purely on the deal-makers from Eskom and government's side. Although their reasoning might have been for employment and community development.

No it's not BHP Billiton's fault and the report stated that.

[DJ...]

No it's not BHP Billiton's fault and the report stated that.

It didnt really come across this way! I know that towards the end they spent a few seconds mentioning that BHP were just running a business and its not really their fault, yet the majority of the report was not very complimentary of them. This was pretty unwarranted I believe.

[icyrus]

It didnt really come across this way! I know that towards the end they spent a few seconds mentioning that BHP were just running a business and its not really their fault, yet the majority of the report was not very complimentary of them. This was pretty unwarranted I believe.

Well in the end the fact remains that we are deep in it (thanks government and eskom) and they are not helping the situation but rather making a handsome profit off of it.

[Sneeky]

This statement doesnt change the fact that it is not BHP Billiton's issue or fault for that matter! It was a very one-sided report, the fault lies purely on the deal-makers from Eskom and government's side. Although their reasoning might have been for employment and community development.

It is not their fault, they just took advantage of the incompetence of ESKOM execs.
BHP are also only one example.

Bottom line is that ESKOM and BHP both produce/generate products that are essential to each others continued existence.
BHP's hands are however not tied as to how they price their product to ESKOM where ESKOM cannot pass these increases onto them, because of the contracts.

They are milking it and the public have the right to know. Corporate responsibility and all that.
What happens to BHP when the contracts expire, if the public are being forced to swallow 60% now and possibly a doubling of electricity charges in 2 years, what will BHP be subjected to?
They would not accept that, ever, probably just threaten to push the price of coal up again to maintain the inflated margins they are currently enjoying because of ESKOM's dependence on them now.

[Ozymandias]

It didnt really come across this way! I know that towards the end they spent a few seconds mentioning that BHP were just running a business and its not really their fault, yet the majority of the report was not very complimentary of them. This was pretty unwarranted I believe.

I don't know. They were raising questions and aired answers from three economists, the CEO of BHP Billiton and Dr Richard Young.

[DJ...]

Well in the end the fact remains that we are deep in it (thanks government and eskom) and they are not helping the situation but rather making a handsome profit off of it.

As a business man reporting to shareholders on a profit basis, I would have done the same thing that BHP did. I also wouldnt be very keen to relinquish the contractual rates, especially if they are one of only a few reasons why I continued to operate in this country.

[icyrus]

As a business man reporting to shareholders on a profit basis, I would have done the same thing that BHP did. I also wouldnt be very keen to relinquish the contractual rates, especially if they are one of only a few reasons why I continued to operate in this country.

I understand what BHP did and have no doubts that any business man would do the same. The bottom line though is that we are in a crisis and can sooner afford to lose BHP's business entirely than to let this escalate for the sake of their profits.

Doesn't matter what I think though. The government will do what they please and the massive cost will be passed onto the hapless consumers. Needless to say, we are in for a long crisis.

[DJ...]

I agree to an extent. However it would result in a major financial and employment loss if BHP were to pull out of SA.

[icyrus]

I agree to an extent. However it would result in a major financial and employment loss if BHP were to pull out of SA.

Yeah it would and, unlike the power crisis, it would happen all at one time making its impact appear much bigger.

[Sneeky]

In any long term contracts there have to be clauses that will decide whether or not the contract needs to be relooked at, for both parties sake.
The brains at ESKOM seem to have just dug themselves, and the country, a huge hole.

As for BHP (and others) they need to come to the party, they cannot just sit there making handsome profits during a national crisis.

There is more than one way to skin a cat they say, and when it comes to mining rights and the like they better be careful. If they hold a gun to this countries head now, it wont be forgotten.

The short and medium term effects of this proposed electricity price hike are still not known, hence why there is such debate surrounding the increases.

I would sooner pay extra if there was a levy going to the BEE coal companies enabling them to deliver, rather than pay these fatcats at BHP when the money all ends up offshore at the expense of the people of this country, honestly. I am so over Africa being ripped off.

[Leftfoot]

As for BHP (and others) they need to come to the party, they cannot just sit there making handsome profits during a national crisis.



Well here in Richards Bay BHP Billiton are closing down two thirds of the Bayside smelter and running the other 2 smelters at less 10% of full capacity. 800-900 jobs will be lost at Bayside and then another 1200 contractors as well. I think BHPBilliton do see a need to reduce consumption and have come to the party more than most other mines IMO. This will have a severe impact on Richards Bay.


We have therefore commenced consultations with our employees about a possible closure of operations of the B and C potlines at Bayside. Total annual production loss will be just over 120,000 tonnes across all three smelters (100% basis), including approximately 92,000 tonnes from Bayside.

Ironically, TATA Steel (Richards Bay) switched on their new Ferro-chrome smelter on Thursday....so more strain on the network!:confused: Apparently when in full operation, they will generated 14% electricity from exhaust gases given off by the smelter.

[Sneeky]

Interesting, but perhaps they don't.
All heavy users are being effectively forced to reduce their consumption of electricity by 10%, that's a given.
The easiest way to do this is to close down and and lay off labour, when looking at bottom line profit.

The issue with BHP is the coal prices, if you have info on that it would be welcome. I would love to understand more about the differences and motivations for price increases.

[werries2]

Were all the coal companies not forced through this same contracts to sell coal to eskom for years at a fraction of the market price? Heard that eskom were paying R40 per ton for several years while the export proffit were R400 per ton. No brainer really who I would rather like to sell to...

Oh btw eskom still wants to be the main chicken on the yard, and refuses to buy electricity from other producers in the country. Windpower etc can be easily generated on farm and sold to the grid when the farmers have excess and they could buy when they need power. Too complicated for eksdom to comprehend perhaps?

[Ozymandias]

I would love to understand more about the differences and motivations for price increases.

So would I. It seems as though they are trying to fatten their balance sheet to increase their credit rating so that lenders will back their future capital expansion plans. Eskom is a state enterprise and all dividends go to the government. The government has been using Eskom as a tool for it's industrial policy to attract industry to locate here due our cheap electricity prices. It also uses Eskom as a tool for foreign aid by exporting electricity to our neighbours at below production cost. IMHO, the government should underwrite any loans that Eskom needs to increase it's generating capacity.

[bekdik]

Solution is simple. If Eskom can't afford to run with present income. then wind it up.

DTI can create a newco and sell Eskom's assets to newco for R1.

Newco does not need to take over Eskom's existing contracts.

Newco now has enough resources to supply its primary user - RSA.

Newco can sell new contracts at economically sustainable prices.

Problem solved without sinking the economy.

QED.

[Sneeky]

yeah, but that would be seen as a negative move by government and business confidence would drop along with the possibility of other potential foreign investment projects.

Rock and a hard place.

A coal rich country should enjoy cheaper coal prices. Market related (global) pricing is opportunistic.