South African pgm mining companies received a blow yesterday (25th June) after it was announced that Eskom has received an average 31.3 per cent interim tariff increase.

The National Energy Regulator of South Africa (Nesra) confirmed that the state-run power supplier will be able to implement the increase from 1st July to 31st March 2010.

However, the news has been met with widespread disapproval in the mining sector, with the Chamber of Mines predicting that platinum production prices could rise by as much as three per cent, Bloomberg reports.

Furthermore, analysts have explained that the decision is likely to add to inflation at a time when the government is attempting to haul South Africa out of its first recession for 17 years.

"This increase in input costs for business will generate a 'ripple' effect that will be reflected in the final price of goods and services," commented Neren Rau, CEO of the South African Chamber of Commerce and Industry.

"Consequently, it will have a negative impact on inflation and could contribute to a further slowing down or even a reversal of the current downward path of inflation."

The tariff increase announcement was perpetuated by the monetary policy committee deciding to leave interest rates unchanged at 7.5 per cent yesterday, rather than reduce them as expected.

Eskom has been struggling to stay on top of its costs after seeing its net income slide 86 per cent in the year to March 2008 and it still requires about R150 billion to fund its R385 billion five-year expansion plan.

The higher energy prices are unlikely to cover rising expenses and the Congress of South African Trade Unions has claimed that the tariff - which is four times above the eight per cent inflation rate - is unjustified.

"It is clearly another attempt to shift the burden of Eskom's capital costs for restructuring from the government on to the consumers. The consequences will be catastrophic," it said.

Eskom, which suffered from a series of major blackouts early in 2008, revealed last year - after seeing its request for a full tariff rejected - that it could record a R3 billion loss in 2009.

As a result, Nesra has also announced that it intends to monitor the utility's primary energy costs, particularly in relation to coal, for which its expenses are accelerating despite the price remaining steady.

According to Engineering News, Eskom Spokesman Fani Zulu responded positively to news of the "prudence of the costs" investigation, noting that the company has already made efforts in this area.

While the mining sector was outraged at the tariff hike, Cornelis van der Waal, Energy Industry Manager at Frost and Sullivan, claimed that the move was necessary for South Africa's long-term future.

"The increase will be hard on consumers in the medium term, but we maintain that a long-term view needs to be taken on this issue," he said.

"These decisions must be taken in the interests of the country's economic development, the sustainability of industry and ensuring a reliable supply of electricity. Hiking tariffs now is the best way to support these long-term goals."

Eskom's power crisis last year badly affected pgm production at South African mines, with the utility only able to run at 90 to 95 per cent capacity for some time after the initial outage.

Sources:

SA power prices to increase by 31,3% (25/06/09)

Nersa to probe Eskom’s primary energy costs (25/06/09)

Eskom Wins 31% Tariff Gain, Spurring Inflation, Costs (Update3) (25/06/09)

Ÿ Adfero Ltd