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Power supply crisis in South Africa escalates, putting mining operations and the wider economy at risk

It was notable in South Africa this week that along with faulty infrastructure, flooding and wet coal, the idea of sabotage was also invoked as a major cause of the growing crisis at parastatal electricity generator Eskom.

And the accusation of sabotage didnt come from some wild-eyed conspiracy theorist on the extreme fringes of South Africas fractious politics. No, it came right from the top, from Cyril Ramaphosa, the relatively new President, whos been struggling to right the South African economy ever since he took power in February 2018.

So far, he hasnt had much success. Indeed, his ongoing failure was highlighted this summer when South Africa won the rugby world cup this year, and players and pundits repeatedly stated that the victory was much needed as a fillip to mitigate from the ongoing difficulties at home.

And central to the performance of the South African economy is the ability of Eskom to provide an adequate and interrupted supply of power to the countrys industry, and in particular the mining industry. With increasing regularity, Eskom has been failing to do this.

The most recent failures have been some of the worst yet.

Stage 6 load-shedding, where 6,000 megawatts of power is removed from the countrys generating capacity was implemented for the first time this week, with Eskom saying that it was now also planning for Stages 7 and 8. Previously, the highest load-shedding rate had been Stage 4.

Petra Diamonds Ltd (LON:PDL) was one company which was seriously effected, being forced to shut down operations at its famous Kimberley mine. Also facing stoppages was Harmony Gold (JSE:HAR), which ceased operations at its nine South African mines for two nights, and Sibanye-Stillwater (JSE:SGL), which closed all its deep-level mines. Anglo American (LON:AAL) said it had been effected but didnt say how.

Eskom is currently carrying around US$30bn of debt, and has been plagued by incompetence in recent years, as long-standing and experienced managers have been edged out to make way for political appointees. Critics regularly accuse these appointees of looting the company.

And as recently as last week, President Ramaphosa was praising the recent construction of the Medupi power station as a “fitting symbol of the importance of our state-owned enterprises”.

Medupi has come in years late and almost four times over budget, and is currently not performing to expectations. Another new power station, Kusile, is also underperforming. Just as troubling for South African industry though, is that because Eskom is so saddled with debt it is unable to provide efficient servicing and maintenance to its older power stations. That means that there is little likelihood that things will improve any time soon, and all this in the context of a 500% increase in tariffs over the past decade or so.

It all adds up to a teetering parastatal behemoth that is becoming increasingly unreliable, and which is becoming a symbol of South Africas wider economic decline. In November Standard & Poors cut the countrys credit outlook to negative. Many observers expect the country to swing into recession as a result of Eskoms load-shedding programme, and that in turn is having an effect on credit ratings.

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