SEIFSA s submission to NERSA

Transcription

1 PRESENTED BY: Marique Kruger & Dr. Michael Ade EC DIVISION - SEIFSA marique@seifsa.co.za SEIFSA s submission to NERSA Eskom s third MYPD3 RCA for Year 2 (2014/15), Year 3 (2015/16) and Year 4 (2016/17) May 2018

2 THE STEEL AND ENGINEERING INDUSTRIES FEDERATION OF SOUTHERN AFRICA SEIFSA is a Regional Federation representing 23 independent employer Associations in the metal and engineering industries, with a combined membership of roughly companies employing about employees. The Federation was formed in 1943 and companies in Associations federated to it range from giant steel-making corporations to micro-enterprises employing fewer than 50 people.

3 DISCLAIMER The views expressed in this presentation do not necessarily represent those of SEIFSA Associations and/or their membercompanies

4 MAIN MESSAGE ELECTRICITY COST IS A SIGNIFICANT CONTRIBUTORY FACTOR TO THE TOTAL INPUT COSTS BASKET OF THE M&E CLUSTER A CONTINUOUS INCREASE IN ELECTRICITY TARIFFS IS NOT SUSTAINABLE FOR BUSINESSES

5 M&E CLUSTER SHARE IN MANUFACTURING Manufacturing division and major group Metals and Engineering Sub-Components Manufacturing Weights M&E Weights* M&E sector 9 of 20 Manufacturing Comprises 45% of Manufacturing % % Petroleum, chemical Rubber products products, rubber and Plastic products plastic products Basic iron and steel, nonferrous metal products, Basic iron and steel products metal products and Basic Non-ferrous machinery metal products Structural metal products Other fabricated metal products General purpose machinery Special purpose machinery Household Appliances (Radio, TV and Comm. apparatus) Electrical Machinery Electrical machinery and apparatus Motor vehicles, parts and Bodies for motor accessories and other vehicles, trailers and transport equipment semi-trailers Parts and accessories (Motor Vehicle) Other transport equipment Total

6 OVERVIEW OF THE M&E CLUSTER The cluster s share in manufacturing output is nearly 30 percent and it contributes about 3.6 percent of GDP to the South African economy. In 2017, it generally provided employment to roughly people directly ( including informal), including approximately workers in its energy-intensive sub-components. In the same period, the cluster also significantly contributed to employment in other industrial sectors with forward and backward linkages such as the agriculture, mining and quarrying, the petroleum and chemicals, the automotive, the transport and the construction and building sectors. Challenges experienced by the cluster in recent years are still prevalent and the prolonged structural change (instead of a cyclical decline) has made it very difficult for companies to benefit from a slight up-tick in production.

7 PRODUCTION STILL TO RETURN TO STATUS QUO ANTE 2007/08 Although the sector has managed to claw back some output in 2017 since the disastrous production during the global financial and economic crises which peaked in 2009, it is still to attain the record high pre-crisis production levels. Frequent electricity price increases, coupled with other constraints including productivity are detrimental to the continuous growth of the cluster.

8 GENERALLY POOR PRODUCTIVITY A high electricity price increase, which has the propensity to increase the basket of input costs, will not help in remedying the situation.

9 INCREASING COSTS OF EMPLOYMENT

10 M&E CLUSTER REMUNERATION/VA vs NET MARK-UP vs INVESTMENT

11 MAIN MESSAGE ELECTRICITY COST IS A SIGNIFICANT CONTRIBUTORY FACTOR TO THE TOTAL INPUT COSTS BASKET OF THE M&E CLUSTER A CONTINUOUS INCREASE IN ELECTRICITY TARIFFS IS NOT SUSTAINABLE FOR BUSINESSES

12 THE ENERGY-INTENSIVE SECTORS IN THE ECONOMY AND THEIR INTERDEPENDENCIES Most available on electricity share of input costs in economic sectors (2016) Selected economic sectors Electricity share of input costs (R Million: constant 2010 prices) Employment (formal)* 2016 Gross value added (R Million: constant 2010 prices) Agriculture, forestry and fishing 1, ,880 65,843 Mining and quarrying 6, , ,300 Food, beverages and tobacco 2, ,366 83,633 Textiles, clothing and leather ,896 10,995 Wood and wood products ,171 10,501 Paper and paper products ,274 11,615 Coke and refined petroleum products ,630 34,630 Basic chemicals ,155 14,460 Non-metallic minerals ,043 15,045 Basic iron and steel 1,527 35,322 24,730 Basic non-ferrous metals 1,563 18,363 12,370 Machinery and equipment ,293 22,349 Transport equipment ,851 26,505 Construction (contractors) , ,132 Transport and storage 3, , ,944 21,212 3,090, ,053 *Based on Quarterly Employment Statistics except for agriculture, where figures are based on Quarterly Labour Force Statistics

13 INTER-DEPENDENCE BETWEEN M&E CLUSTER AND OTHER SECTORS

14 ELECTRICITY SHARE AS PERCENTAGE OF INTERMEDIARY INPUT COSTS FOR THE M&E CLUSTER (2016 data) Electricity Inputs Sub Sectors Metals and Engineerin g Total % R Million (Current Prices) % R Million Rubber products ,601 Plastic products ,678 Basic iron and steel products ,311 Basic non-ferrous metals products ,511 Metal products excluding machinery ,464 Machinery and equipment ,083 Electrical machinery and apparatus ,368 Television, radio and communication equipment ,102 Motor vehicles, parts and accessories ,490 Other transport equipment ,318 Total , ,926

15 THE ENERGY-INTENSIVE SECTORS IN THE ECONOMY AND THEIR INTERDEPENDENCIES Electricity costs represent on average three percent of intermediary inputs for the M&E sector and varying percentages of turnover recorded in the basic iron and steel products (8 percent), the basic non-ferrous metals (6 percent) and other transport equipment (14 percent). For some basic metals companies (smelters, foundries), this can be a significant portion of their input costs, thereby restricting future production capacity. This shows how serious an impediment electricity costs can be. Apart from transport costs (which are also often exacerbated by energy costs), coal and energy costs represent up to 42 percent of the production costs of some large companies in the steel industry. Therefore, it is very important that electricity price increases are contained in order to reduce overall production costs, which may ultimately lead to more job losses and the closure of strategic industries (like the steel industry).

16 ELECTRICITY COSTS RELATIVE TO TURNOVER (M&E) Electricity Turnover rate Sub Sectors Metals and Engineering % R Million % R Million % Rubber products , Plastic products , Basic iron and steel products , Basic non-ferrous metals products , Metal products excluding machinery , Machinery and equipment , Electrical machinery and apparatus , Television, radio and communication equipment , Motor vehicles, parts and accessories , Other transport equipment , Table 5: Electricity costs relative to turnover Total , , Despite electricity costs not being such a large portion of input costs, they represent a significant portion of the turnover of the electricity-intensive sub-components of the M&E sector.

17 PRODUCTION COSTS BASKET PRODUCTION COSTS INFLATION Cost inflation per item (over 12 months) Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Total cost inflation (12 months average) % M&E Cluster Composite Input Costs PPI (Final Manufactured Goods) PPI (Intermediate Manufactured Goods) Electricity and Water Source: Statistics SA; SEIFSA M&E Cluster Composite Input Cost Index VS PPI Vs Electricity inflation (12 months average)

18 PRODUCTION COSTS BASKET Cont. From the table above, electricity price inflation has come down substantially, with NERSA granting Eskom a lesser increase for the 12 months starting July 2017 However, the current twelve-months average electricity inflation is still higher than that of the selling price inflation (both PPI final and PPI intermediate). Although electricity constitutes the smallest weighting in the M&E composite input cost index (15%), it has significantly contributed to reduced margins, given its direct influence on the long-run production pattern of the sector. It is generally difficult to start a new business in the M&E sector, due to the start-up costs involved and electricity cost is a significant factor. Entrepreneurs find it difficult to enter the sector due to the higher cost base, while intrapreneurs find it challenging to operate and be increasing costs and diminishing returns. innovative under

19 PRODUCTION COSTS BASKET Cont. Also, the twelve-months average PPI for intermediate manufactured goods (factory gate prices), which is more relevant to the M&E sector, is higher than the composite input cost index. An additional electricity price increase will add to production costs and further reduce margins. Profit levels are low, there is general difficulty in doing business compounded by stagnant innovation and investment levels. A tariff increase will exacerbate the situation.

20 PRODUCTION COSTS BASKET Cont. A simulation of the effects of an additional estimated 35% electricity tariff increase on the current status quo and on the total input costs basket provided insight to the impact a change in electricity prices has on overall inflation. An estimated 35% increase in electricity tariff will result in an additional R6 billion increase in electricity costs in the M&E sector, resulting in an additional R213 billion increase in intermediary input costs for the cluster. The higher proportional increase in input costs leads to a corresponding decline in electricity share (2.79%), highlighting the sensitivity of the M&E sector to electricity price increases as intensive users seek alternative means of power. Evidently, the M&E sector cannot sustain a huge increase in electricity prices. A large increase is not sustainable and will lead to huge job losses in the sector.

21 M&E electricity share of input costs (%) Production Index (2015=100) TRADE-OFF BETWEEN ELECTRICITY SHARE OF INPUT COSTS AND PRODUCTION 16.0 Electricity share of input cost vs M&E Production Electricity share of input costs (LHS) M&E Production (RHS)

22 CAPACITY UTILISATION AND INVENTORIES IN THE SECTOR Capacity utilisation (the ratio of actual output to the maximum potential output) is an important measure in the sector. Under-utilisation of capacity increases unit costs of production due to idle capacity, wears and tears of equipment and low levels of investment, rendering the management of inventories at optimum levels almost impossible.

23 M&E CLUSTER GROSS DOMESTIC FIXED INVESTMENT AND FIXED CAPITAL STOCK, % OF OUTPUT When the fixed capital stock is compared to the net operating surplus (as a proxy for profit margins) trend over time, the challenges of the sector become more vivid.

24 NET OPERATING SURPLUS vs FIXED CAPITAL STOCK IN THE M&E CLUSTER

25 MAIN MESSAGE ELECTRICITY COST IS A SIGNIFICANT CONTRIBUTORY FACTOR TO THE TOTAL INPUT COSTS BASKET OF THE M&E CLUSTER A CONTINUOUS INCREASE IN ELECTRICITY TARIFFS IS NOT SUSTAINABLE FOR BUSINESSES

26 M&E CLUSTER TOTAL EXPORTS, IMPORTS AND TRADE BALANCE (2017) The electricity-intensive sub-industries in the M&E sector are also the most robust exporters and earners of foreign exchange.

27 THE M&E CLUSTER TRADE POSITION

28 R Billion SHARE OF INTERMEDIARY INPUTS IMPORTED BY THE SECTOR Intermediary inputs imported The uncertainty and sometimes repetitive costs incurred in manufacturing these intermediary inputs have led to difficulties in planning, further accelerating the closure of domestic production facilities, leading to net importation of these products. This largely explains why the value for intermediate imports has consistently increased since 2009.

29 WORLD STEEL PRODUCTION vs SA STEEL PRODUCTION

30 WORLD APPARENT STEEL USE vs SOUTH AFRICA APPAENT STEEL USE

31 MAIN MESSAGE ELECTRICITY COST IS A SIGNIFICANT CONTRIBUTORY FACTOR TO THE TOTAL INPUT COSTS BASKET OF THE M&E CLUSTER A CONTINUOUS INCREASE IN ELECTRICITY TARIFFS IS NOT SUSTAINABLE FOR BUSINESSES

32 EXPECTED BUSINESS ACTIVITY AND EMPLOYMENT Even though business confidence has slightly picked up against the backdrop of recent domestic political shifts, the fear is that increasing electricity costs may add to the input costs component and eventually reduce production. This may also reverse the gains made in clawing back employment in the sector.

33 DECOMPOSING SEIFSA S CORE MEMBERSHIP INTO EMPLOYMENT (877 SMMEs and about 28,000 jobs at risk, including from some medium to large companies) % % 1000-> 2% % % % % % Classification (range): 0-49 employees (small and micro companies); 50 or more employees (medium to large companies). Classification adapted from TIPS (Trade and Industrial Policy Strategies) (2017). The Real Economy Bulletin. TIPS Publishing.

34 CONCLUSIONS SEIFSA is opposed to any increase at all to the current electricity price. However, if such an increase should be found to be completely necessary, then SEIFSA believes that a much lower percentage increase than requested should be considered. SEIFSA understands the current challenging situation faced by Eskom, particularly the need to ensure the utility s financial sustainability. However, Eskom s financial sustainability is inextricably linked to the financial sustainability of its customers, which need an affordable tariff to maintain sustainability and, thus, remain Eskom s customers. High electricity price increases will definitely have a crippling effect on the M&E sector, which is struggling to adjust to structural changes and revert to the precrises production levels. The M&E sector, together with the mining and quarrying, construction and automotive sectors, contributed nearly 24 percent of the country s GDP in The multiplier effect is potentially double this amount (including job prospects), given the huge existing potential in both forward and backward linkages. Therefore, sustaining these sectors is crucial for the economy.

35 CONCLUSIONS Cont d As systematically highlighted, electricity is an absolutely essential input for the M&E cluster. Excessive electricity tariff increases will eventually stifle ESKOM s supply in the long term as large energy-intensive sectors progressively cut down on demand and install their own powerful diesel generators to mitigate costs. A further consequence will be the erosion of Eskom s customer base as more users switch to the expanding pool of independent power producers. Therefore, it is essential that any tariff increase should be based on reasonableness, with directives for Eskom to improve on efficiencies, as a further inevitable consequence will be more loss of jobs in the M&E cluster. If the tariff applications go through, it will be a critical setback for the M&E cluster s efficiency and competitiveness and act as a constraint to the possibility of the sector maximising its long-run production function. The proposed increase in tariff will also have a negative impact on both the individual companies in the M&E cluster and the economy in general.

36 PRESENTED BY: Marique Kruger and Dr. Michael Ade ECONOMIST Web: Tel: 0861 SEIFSA THANK YOU Marique Kruger