Inside South32’s (new) secret deal with Eskom

SOUTH32, headquartered in Australia, owns and operates the largest aluminium smelter in the southern hemisphere, Hillside in Richards Bay. More to the point, Hillside, which produced 719,000 tonnes of aluminium last year, is the single largest industrial consumer of electricity, accounting for more than 5% of Eskom’s total electricity sales – more than 10TWh per year. 

The smelter has been controversial since load-shedding began in 2007, not only because it consumes vast amounts of electricity at deeply subsidised rates (more on this later) but also because it has faced far less – if any – load-shedding. 

And while Hillside has created jobs, most of South32’s profit leaves South Africa, along with much of the manufactured product. Last year, Hillside was the largest revenue source for South32, contributing $1.8bn (R34bn) out of $9bn revenue.

In a nutshell, what South32 and Eskom have effectively done is export South African energy – and this over a decade when power was the scarcest commodity around. This is because aluminium is made from the raw product alumina, which is imported from Australia for processing, with South Africa’s scarce energy being the major input into the process.

History of secrecy

Hillside has a long history of striking preferential pricing deals with Eskom, and refusing to divulge details. 

The first such deal was struck in 1992, pegging the electricity price for Hillside to the aluminium price – which meant that lower global aluminium prices allowed Hillside to pay Eskom less for energy. At the time, the basis of the massive discount was that Eskom had abundant coal and a large surplus of power, and it was useful to have a large anchor consumer.

Subsequent pricing deals continued on this template even though Eskom knew by the late 1990s that it would face electricity shortages within a decade if it did not invest rapidly in new generation. As indeed happened. 

More remarkably, the full discount offered by Eskom to Hillside only became public knowledge in 2013 – and only after Media24 waged a four-year court battle to get this information.

Eskom and BHP Billiton, from which South32 was unbundled, had cited “commercial confidentiality” for hiding this information. The Supreme Court of Appeal disagreed, finding that “consumers undoubtedly have a public interest in the information in the hands of Eskom, which affects the payment and consumption of electricity supplied by Eskom”.

When it came out, you could see why they’d fought to keep it secret. Media24 revealed that Hillside was buying electricity at a staggeringly low 22c per kWh from Eskom – something The Witness described as “The Big Billiton Rip-off”. This was far below the average R1.40/kWh paid by domestic consumers at the time, and half the 41c/kWh it cost Eskom to supply electricity. It also meant Billiton was paying far less than the average R1.61 that many factories were paying for power at the time.

During the legal process, Eskom applied to the National Energy Regulator of South Africa (Nersa) to set aside the long-standing pricing agreements, arguing that the grid was under strain, it no longer had access to surplus capacity, and it faced a financial crisis. Nersa declined the request.

New deal, same methods

In July 2021, at the height of Covid-19, South32 and Eskom said they had negotiated an updated pricing agreement for Hillside that would run for 10 years. Given the fact that load-shedding was at its peak, consumers would have been justified in expecting a fundamental change in the pricing. 

But yet again, despite the court finding in 2013, Eskom, South32 and Nersa once again chose to withhold the pricing information from the public. 

They did release a redacted version of the 10-year price deal, but all reference to price had been blacked out, as had the annual price adjustment. All we know is that the price is now rand-based and that the annual price increase is pegged to the producer price index. 

Nersa approved the deal with the claim that the “net benefit” to the country is a positive – but it provided none of the detail that would allow anyone to verify that. 

In 2023, South32 and Eskom defended the new deal, claiming the rand-based price is higher than earlier contracts and has a built-in increase linked to inflation. South32 said “it cannot say how much it pays for power as this forms part of a confidentiality agreement”. 

This is a bald claim to confidentiality, without any justification. 

In March 2024, Open Secrets submitted Promotion of Access to Information Act requests to Eskom and Nersa asking for the details, including the documents related to the price South32 pays for the electricity it consumes at Hillside. 

In July, Eskom responded, sharing only the publicly available (and heavily redacted) agreement. “The disclosure … could disadvantage Eskom in other [pricing] negotiations with potential applicants, as insight to the redacted information … is likely to create an expectation of the same treatment,” it said.

A cynic might say Eskom doesn’t want anyone else to know how good a deal South32 received.

Yet, there is information in the public domain that provides clues. 

First, while South32 is clearly paying more for electricity, this hasn’t hurt its bottom line. In 2022, it reported that the aluminium price had more than offset the increase in energy costs and problems at South Africa’s ports. Things were going so well, in fact, that it declared a record dividend of more than R6bn immediately after the new deal was signed with Eskom.

Second, while Eskom trumpets the fact that the new deal provides for inflation-linked increases, this ignores the reality that South Africans have faced price hikes for power far above inflation. In 2021, the year the South32 deal was signed, average electricity prices for consumers went up by nearly 16%. Between 2007 and 2022, the average electricity price rose 653% – more than four times higher than inflation over that period.

It’s hard not to conclude that the agreement, if anything, protects South32 from the regular Eskom tariff increases that shift the costs to the wider public.

Shielded from blackouts

Another controversy is whether Hillside experiences any load-shedding. South32 and Eskom stress that the agreement provides for “interruptibility” of supply to Hillside. But the specifics of this have also been redacted in the new deal.

What we can see is that the agreement confirms that Hillside will never face electricity interruption of more than two hours at a time (a protection normal consumers don’t enjoy). It also limits the hours in which the smelter can face power interruptions per year, and guarantees the plant a certain amount of recovery time after each interruption – but those two figures have also been redacted.

It also seems that, in the past, Hillside hasn’t absorbed the crushing power cuts which businesses and households have faced. While 2023 was the worst year for load-shedding, with power cuts on more than 90% of days, South32 said Hillside enjoyed a record year for production due to “energy-efficiency efforts as well as daily engagement with Eskom”. 

Remarkably, Nersa and Eskom defend the agreement on the basis that Hillside’s usage actually brings stability to the grid. Nersa says: “Hillside’s use of electricity throughout the month is consistent and assists in the full utilisation of Eskom’s committed network capacity”. It says this provides “demand certainty” and provides “system stability benefits”. 

It’s a curious argument, as Eskom hasn’t had sufficient capacity at any time in recent years. While this has improved, electricity minister Kgosientsho Ramokgopa has said the grid remains constrained – so it isn’t clear why having a customer sucking up large amounts of power at a low tariff is helpful for the grid. 

South32’s sweetheart deal has been justified on the basis that it provides much-needed jobs to an economy with 33.5% unemployment. 

But a 2017 master’s thesis from the University of Cape Town chemical engineering department concluded that “economic linkages to the broader society have not been created at significant scale” from Richards Bay’s aluminium industry cluster.  

It added that while producers like South32 benefited from discounted electricity, they had no incentive to sell to domestic markets at a price lower than the international price.

This view was echoed by a local aluminium manufacturing business, which told Open Secrets it sees little benefit from Hillside. In particular, it cannot access aluminium at a price lower than on the international market due to a 15% import levy that it says only serves to protect South32. 

Time for transparency

In the midst of an energy crisis, endemic corruption and rocketing power costs, it is unconscionable that the public has no access to the price and terms on which Hillside buys its electricity. Worse, Eskom is defending this secrecy while simultaneously demanding a price hike of 36%-44% for ordinary consumers.

This secrecy is the rule, not the exception. This must change. The narrow commercial interests of large corporations and unsupported claims of confidentiality cannot trump the real public interest in accessing this information.

* Marchant is head of investigations at Open Secrets

♦ VWB ♦

BE PART OF THE CONVERSATION: Go to the bottom of this page to share your opinion. We look forward to hearing from you.