WRAPUP 1-SAfrica Eskom gets price hike, union threatens strike

Wed Feb 24, 2010 10:06am EST

Related Topics

* Eskom granted increases for next three years

* Increases lower than utility had requested

* Hike prompts union strike threat

(Adds strike threat, Anglo, Eskom, cost of power, analysts)

By Agnieszka Flak

PRETORIA, Feb 24 (Reuters) - South Africa's state-owned power firm Eskom will be allowed to hike electricity prices by a nominal 24.8 percent this year, angering the country's trade union federation which threatened to strike.

The increase for the 2010/11 fiscal year fell short of Eskom's request for a 35 percent hike, but critics say the hikes will still have a big impact on investment and job creation in an economy recovering from its first recession in nearly two decades.

Eskom was also granted nominal increases of 25.8 percent and 25.9 percent respectively for the following two financial years.

Cash-strapped Eskom wanted to hike electricity prices by 35 percent a year for three years, to help it raise 461 billion rand ($59.27 billion) to build more plants and avoid the blackouts that crippled the vital mining industry in 2008.

South Africa's electricity is among the cheapest in the world, partly due to a government policy of underpricing power to attract industry in the country.

Eskom's average cost of 3 U.S. cents per kilowatt-hour for the past financial year, compares with 8-9 U.S. cents for OECD countries.

The utility, which provides 95 percent of the country's power, has suffered due to a lack of investment in new capacity and ageing power stations as demand soared.

COSATU RATTLED

South Africa's government bonds gained after Wednesday's announcement. The yield, which moves inversely with the price, on the 2015 bond ZAR157= was 7.5 basis points lower for the session at 8.26 percent by 1115 GMT after touching 8.245 percent directly following the decision at 1021 GMT.

The Congress of South African Trade Unions, which has nearly 2 million paid-up members, said it would explore all avenues to ensure there was no electricity price hike, and would resort to a strike if all else fails.

"If no progress is made in these discussions, the federation will not shrink from mobilising its members, and the wider South African public, in strike action and protests in the streets against such a savage attack on our living standards and economic future," COSATU's spokesman Patrick Craven said.

The South African Chamber of Commerce and Industry said about 250,000 jobs would be lost due to the tariff hike, adding to thousands of other jobs lost during the recession.

Global miner Anglo America plc (AAL.L), which has the biggest mining interests among its peers in South Africa in platinum, iron ore and coal, said it was reviewing the impact of the increase across its businesses, but said it was clear that the electricity raise would add to its energy costs.

Tetsu Kotaki, the chief executive officer of Hernic Ferrochrome, said the increase could harm the industry.

"What the increase means is that in three years, electricity (prices) will double. It's a very difficult time for South African industry. Although it may not lead to a situation of closures (of mining smelters), we will struggle," Kotaki said.

Eskom's acting Chief Executive Officer and Chairman Mpho Makwana said the utility would comment on the decision later.

Analysts said the lower increase would not fuel inflation as much as had been feared. Data on Wednesday showed consumer price inflation was weaker than expected at 6.2 percent year-on-year in January versus 6.3 percent in December. [ID:nLDE61N0UC]

The central bank has said significant power price rises were the main threat to its inflation outlook, but had already factored in a 25 percent tariff increase into its forecast.

"The electricity price tariff increases approved today are also towards the low end of expectations, moderating one of the big risks to inflation in the short and medium term," Andre Roux, head of fixed income at Investec Asset Management. (Additional reporting by Muchena Zigomo, Shapi Shacinda, Phumza Macanda, Vuyani Ndaba, Alison Raymond; Johannesburg newsroom; Writing by James Macharia; editing by Sue Thomas)

FILED UNDER: