US embassy cable - 05PRETORIA3298

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. 
 
-    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. 
 
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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 
 
 
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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