11 December 2009 COMMODITIES OUTLOOK The bottlenecks: Eskom and Transnet a pain By Matthew Hill

"Whew, only 35%." Not exactly a phrase echoing through the offices of SA mining houses after Eskom proposed a new, lower tariff increase to the energy regulator last week. Though 10% lower than the initial application, 35% a year over the next three years will hammer the local mining sector into the ground. One of the hardest hit will be the gold sector, which uses significant amounts of power in its deep-level mines. Costs have already been climbing faster than inflation, as miners have to dig deeper to produce less gold. Ferrochrome producers will also take a knock. SA produces 45% of the world's ferrochrome (used to make stainless steel). Xstrata, in a joint venture with JSE-listed Merafe Resources, is the biggest producer. SA's mining production volumes have been decreasing for a decade, and the new electricity tariffs won't help the situation. Nor will the shortage of rail infrastructure. Though transport logistics utility Transnet has been improving over the past year, particularly on the Sishen-Saldanha iron ore export line, much more needs to be done. For example, SA's main coal export terminal, Richards Bay Coal Terminal, will load only just over 60 Mt of coal onto ships this year. It has the capacity to load 72 Mt. It was supposed to have increased this to 91 Mt by the end of the month, but the expansion has been delayed because of technical issues. Transnet CEO Chris Wells says Transnet is 60% to blame for the terminal not matching its capacity, with the mining companies also partly responsible. Government's rail monopoly is investing nearly R90bn over the medium term to expand its capacity, including the coal and iron ore and manganese export lines. Eskom is also investing heavily, which is a major driver behind its huge tariff increase application. Will it kill off SA's mining industry completely? Not necessarily. Fund manager ClucasGray analyst Brendon Hubbard says companies will have to be more energy efficient to minimise the effect of the tariff hikes. It will also give companies impetus to consider building their own generation capacity, using fuels such as waste gas.