ZESA Holdings has disregarded an agreement with miners to ensure uninterrupted power supply, a situation which has cost the resources industry millions of dollars in potential lost output, Business Times can report.
ZESA imposed the worst power cuts in three years early this year following reduced output at its largest power plant, the Kariba South Power Station, due to dwindling water levels. The situation has been exacerbated by poor generation at ZESA’s ageing thermal power stations in Harare, Hwange, Bulawayo and Munyati.
Zimbabwe last experienced such serious blackouts in 2016 following a devastating drought. As part of diligence, the mining industry, which contributes about 15% to the country’s GDP and more than 60% of the foreign exchange earnings, signed an agreement with ZESA for an uninterrupted electricity supply. Under the agreement, the miners pay for electricity in advance in US dollars, and in return they expect to get dedicated power supply.
But ZESA has not been honouring its side of the agreement, and continue to load-shed the mining sector. This has angered the miners who say ZESA’s failure to honour the agreement will put the economy in peril. Miners are among the biggest consumers of electricity in the country and are already grappling with weak profits that could be compounded by the potential output loss due to power outages of up to 40%, according to the latest survey.
If ZESA’s continued power generation problems destabilise the mining industry, the economy will feel the pinch, especially if the power crisis forces the sector to shed jobs. The monetary authorities will also take a hit as mineral exports are one of the leading foreign currency earners for Zimbabwe.
In a survey conducted by consultants Albert Makochekanwa and Caren Pindiri, which was released last week, all mining houses indicated that despite paying for electricity in advance and in foreign currency under the agreement, ZESA has not been honouring the signed agreement, causing irreparable damage to the mining sector.
The consultants are Economics lecturers at the University of Zimbabwe. Almost all the miners said they were experiencing regular and prolonged power outages. Some had been cut off for up to three days a week, the survey showed.
“Almost 60% of respondents were facing power outages of up to 3 days a week, while 30% were facing between one and two days. About 10% were facing power outages of less than one day per week,” the survey said.
“The majority of respondents indicated they signed agreements with ZESA and were making advance payments in foreign currency for the supply of dedicated power. Almost all respondents indicated that the power outages have resulted in production stoppages and output losses of between 1% and 40%.
“About 80% of respondents also indicated that the revised tariff framework for the mining sector is high. Approximately 70% of respondents were of the view that the power situation would deteriorate in 2020 while 30% indicated that the power situation will remain the same.” Miners want ZESA to respect the signed ringfencing contract.
“Almost all respondents underscored the need for ZESA to honour and respect the contract signed with the mining houses and provide dedicated uninterrupted electricity as per the agreement,” the survey said.
Almost all mining companies also want to be allowed to import electricity directly for their consumption, according to the survey. Half of the miners have proposed a tariff between US$0.07 per kWh and US$0.09 per KWh, while 40% recommended a tariff between US$0.05 per KWh and US$0.07 per KWh. Approximately 10% recommended a tariff of between US$0.09 per KWh and US$0.10 per KWh.
Isaac Kwesu, the Chief Executive of the Chamber of Mines, said mining was a critical sector which should be spared the crippling blackouts. “Mining requires electricity for both operations 24/7 and the safety of workers. It is very costly to have production stoppages. The safety of workers also needs to be guaranteed,” Kwesu told Business Times.
Responding, Owen Mavengere, the retail manager of the Zimbabwe Electricity Transmission and Distribution Company (ZETDC) said the power utility had prioritised the mining sector “because they have supported us to anchor electricity imports, which are very expensive. We are currently engaging stakeholders for further imports. Unfortunately, where we are coming from, we nearly collapsed, but we are now back on our feet as consumers are now paying the correct tariff,” Mavengere said.
“As far as the ring-fencing agreement is concerned, where miners have paid in advance, I will agree that we should give power to the miners 24/7. However, we have two components of imports, that is, firm where electricity is guaranteed and non-firm where it depends on availability. The firm component is the way to go. We need to correct that. To say we have reneged on the ringfencing agreement, no, we will honour that.”
Business confidence index in the mining sector now stands at +2.2 for 2020, falling from +8 in 2019. This means mining executives are slightly confident about their business in 2020. Statistics show that the 2020 index was weighed down by various variables such as access to capital, political and country risk, and economic prospects.
The mining industry is expected to record decline in output growth with the majority of respondents (80%) indicating that their output for 2019 will be less than 2018 by a range between 10% to 40% on the back of the above challenges. Gold miners expect a negative output change of between -5%, to -35%; platinum 0% to -7%; diamond -30% to -40%; chrome ore -10% to -20%; nickel -2% to -10%; and coal -10% to -40%.
Currently, most miners’ average capacity utilisation is at around 70%, compared to 75% this time last year. This is due to the power outages, inadequate foreign exchange allocations, capital shortages, high cost structure, and obsolete equipment. However, the platinum group metals (PGMs) continue to operate at 100% capacity utilisation.
Almost half of the miners projects to record marginal to significant profits in 2020, while 30% and 20% expect to post flat and a contraction in profitability respectively in 2020. At the moment, the mining industry has slightly above 35,000 formally registered employees, a figure which excludes small and artisanal miners and other unregistered mining employees.
About 60% of respondents indicated that they had lost some critical skills during 2019, citing erosion of incomes because of inflation as well as government policy that disallows payment of salaries in forex. About 60% of supplies and consumables were sourced off shore and 40% were locally procured. Of the 40% sourced locally, about 30% were manufactured in Zimbabwe.