NFTN

Foundries and Energy CostPortfolio committee on trade and Industry

IPAP III

2 November 2011Presenters: Adrie El Mohamadi

David Mertens

IPAP 2012/13

• SA Foundry industry and NFTN

• SA Foundry industry as employer

• Engagement of Industry with Government

• Energy cost for the Foundry Industry

• Proposals for competitive energy prices

Agenda

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• the dti established the NFTN as part of the IPAP as a key

action programme under the metals fabrication, capital and

transport equipment cluster of sectors.

• The NFTN is administered by the CSIR to adhere to PFMA

requirements

• NFTN is the culmination of a significant government and

industry association-led effort

NFTN overview

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Some of our stakeholders

Vision

The NFTN will facilitate the development of a

globally competitive South African Foundry industry

through the provision of appropriate services; in order to reduce import leakage,

increase local production and increase investment in the industry

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SA Foundry Industry

Metal Melting and pouring of castings

• 180 production plants in SA• Big plants (1000 people +) to very small (20 People)• International companies to family business• Some in-house foundries • Iron, Aluminium, Zinc, Bronze, Special alloys• High level of flexibility and engineering versatility• Added Value: machining, coating, assembly • Spread all over country: Gauteng, KZN, WC, EC

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Industry structure by type

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Markets served by the SA foundry industry

Export and local markets

Highly Competitive environment

Competing with the rest of the world

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Product examples

Foundries and its Markets-Automotive

• Customers are global companies

• Market is extremely well developed and pricing must be globally competitive

• Programs are global and can be produced anywhere in the world

• Automotive contracts imply price reductions over life time, i.e. price must

reduce by 3% every year

• Need to be competitive in Dollar or Euro terms

• Foundry products are commoditised

• Local contents will be preferred by local OEM’s, but local market is relatively

small (<1% of global automotive market)

• Scale of local projects often too small to fill up foundries in SA

• Customers are not willing to compensate us for rising local costs, they just

move away from us and/or not awarding new orders.IPAP 2012/13

Foundries and its Markets-Mining

• Mining companies face extreme cost pressures and must source castings and steel products at least cost per ton mined

• In most cases the OEM suppliers to mines and the mines themselves are global players and have procurement departments that work across continents to compare product performance and cost

• Products sold into mining are becoming increasingly commoditised

• As a result contribution margins are small and manufacturers must produce large volumes in order to cover fixed costs.

• To sell large volumes requires the manufacturer to be able to export profitably as the local market does not sustain sufficiently large volumes

• Product are increasingly imported into South Africa from countries that enjoy lower input costs for a variety of reasons

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Our Competitors

Some internal competition in SA, but we are mainly competing with the rest of the world

Europe has strong foundry base: Germany, France, Italy, Poland,..

Developing countries coming into the markets China, India, Thailand, Brazil, Mexico, Turkey

•Large volume imports of castings are a reality: •Ford engine plant: Puma engine project 100% import•Break callipers for cars•Mining consumables such as grinding balls•Pipe fittings•Valves and faucets•etc

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Foundries and Employment

• Direct Employment estimated between 12,000 and 15,000• 20,000 people employed in processing of components

• Machine shops finishing and assembly• Key industries such as engine plants

• Employment is estimated to have reduced by 10%-15% since 2008 (from 42 companies surveyed)

• Recent Plant closures:.• 2010- Eclipse West Plant- 500 jobs lost• 2010- Eclipse East Plant partial closure• 2011- Eclipse Dimbaza in EC- 350 jobs lost• 2011 Krynie Brothers in Gauteng – 22 jobs lost• 2011 Belmec in EC– 70 jobs lost• 2011 Alfa Foundries Springs – 60 jobs lost• 2012 Last week Crown Cast closed its doors – 130 jobs lost• 2012 Another foundry looming to close down 280 jobs

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Foundries and costs

•Capital intensive industry

•Material cost is substantial: no real local advantage and large scale export of foundries’ raw materials such as high value steel scrap

•Labour rates: have increased significantly in SA

•Continued Rand strength

•Government incentives are reducing (MIDP/APDP)

•Added pressure on environment creates additional costs

•Escalating Energy cost : From very competitive in 2008 to uncompetitive in 2011

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Competitive disadvantages for foundries in SA

• Automotive Foundries: market is small but diverse in its requirement• Competitive foundries are high volume and/or focussed on

specific products• E.g. German or Brazilian iron foundries: 150,000 Tonnes per

annum or more covering few products• SA iron Foundries: 15,000 to 25,000 tonnes covering a wide

array of products• High volume foundry in SA must rely on export: exchange rate

risk

• Supplier base more limited and less developed, sometimes monopolistic• Examples are waste disposals, scrap materials and some raw

materials IPAP 2012/13

NFTN Industry working groups

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Engagement of industry with Government regarding high energy costs

Intensified engagement started in 2011 at various levels

•Engagement with local governments by various individual companies•Engagement with provincial governments•Engagement with Nersa as NFTN energy working group in January 2012 •Engaged with Salga as NFTN working group in April 2012•DTI engaged with DOE

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Foundries and the impact of energy

Foundries are energy intensive: melting, heat treatment, coating processes etc.

Energy is one of the most important cost inputs

A survey of 42 foundries showed electricity alone as 14% of total operational cost for FY 2012 or 25% of added value

Operating plants with metal conversion only have electricity costs versus total operational costs as high as 18% or almost 35% of added value

Margins are completely eroded as a result of electricity increases.The 2011 increases have landed us in a situation where most local foundries are

paying higher energy costs than our competitors in France, Germany, Poland, Thailand, Mexico,…

Cost for electricity is a major threat to the survival of the foundries is SA

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Electricity cost escalation 2000-2015

*2010 increase was the point where SA lost its competitiveness regarding industrial electricity costs (for most local authority users)

Eskom Cume Municipality cume PPI R/KWhNMBM domestic output cume

2000 100.0% 100.0% 100.0% 0.212001 105.5% 107.0% 107.8% 0.232002 111.0% 113.4% 119.8% 0.242003 117.9% 125.9% 129.3% 0.262004 127.8% 138.7% 129.5% 0.292005 133.0% 144.7% 133.1% 0.302006 139.8% 152.4% 140.0% 0.322007 148.0% 159.2% 155.0% 0.332008 188.7% 207.0% 171.2% 0.442009 247.8% 258.7% 186.9% 0.542010 309.3% 315.7% 192.0% 0.662011 387.5% 404.1% 202.6% 0.852012 449.5% 448.6% 222.9% 0.942013 521.5% 520.4% 236.2% 1.092014 604.9% 603.7% 250.4% 1.272015 701.7% 700.3% 265.4% 1.47

2013, 2014, 2015 electricity increases at 16%; ppi at 6%

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Electricity price: OEM global benchmarking 2011

Eskom is competitive

NMBM two Tariffs Time of use and

Metered demand

NMBM 2012/13 forecast: with most expensive in the world

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Foundries and Electricity Tariffs

Almost all Foundries procure electricity through the Municipalities

Problem 1 = Current Municipal Mark-ups

Problem 2= Eskom increases for years to come

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Foundries and Electricity Tariffs

Electricity tariffs for foundries vary by over 50%, depending on location

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Foundries and Municipalities

-Extreme municipal mark-ups in some municipalities, particularly KVA

-Tariffs for large consumers similar to tariffs for small consumers

- Chronic under spending in many municipalities on infrastructure despite the above, increasing costs to consumers as quality of supply is poor

- NERSA bases tariffs on needs of individual municipalities

- Industry depends on needs of local government for strategic matters

- Industry is a milk cow for municipalities through electricity accounts- Electricity income used for other purposes

- Industry pays for bad debt of other customers

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Foundries and Municipalities example

Data from Budget NMBM 2011/12 - 2013/14 page 10,21,22, 26

Electricity and Energy (R1000)

Income (Standard Classification) 1 304 766 1 583 008 1 892 532 2 382 288 2 958 915 3 553 596Income (non Standard Classification) 1 196 832 1 502 322 1 769 657 2 206 868 2 753 364 3 329 835Bulk Purchases electricity 1 180 288 1 473 000 1 865 000 2 256 650Repairs & Maint Electricity 23 296 33 965 34 912 25 409 38 059 39 913Total Expenditure electricity 993 209 1 277 044 1 470 162 1 980 055 2 490 120 3 004 134Capex (Mio) 235 000 202 847 86 000 118 000Expenditure other than Bulk Purchase 289 874 507 055 625 120 747 484Municipal Mark-Up 311 557 305 964 422 370 402 233 468 795 549 462Municipal Mark-Up% 31% 24% 29% 20% 19% 18%

2009/2010 estimate for bulk purchase based on Eskom increase and constant usage vs 2010/2011

2007/2008 (Act) 2008/2009(Act) 2009/2010(Act)2010/2011 (current

reporting)

2011/2012 (budget before special

increase)

2012/2013 (Budget submitted 2011)

NMBM extracts 700Mio + from electricity account for 2011/2012 budget

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Effect of Municipalities on some of foundries

NMBM extracts more than R10 Mio out of one foundry with a R200 Mio turnover

Some remarkable mark-ups :

KVA charge Eskom Megaflex: R 29.24

KVA charge NMBM on TOU : R 108.45

Tariff 2011/2012 Rand/year Rand/KwhNMBM TOU 32 387 620 0.80NMBM Urban large 32 321 237 0.80CapeTown TOU 28 753 492 0.71Eskom Megaflex 21 641 035 0.53Eskom Urban large 21 406 265 0.53

Autocast Port Elizabeth Typical use

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Eskom Prices and Foundries

Eskom Tariffs would have been acceptable for Foundries up to 2012 (total cost per KWh around 0.6 R/Kwh)

Increases for future years above PPI will jeopardise competitiveness of our industry

Uncertainty around level of increases creates hurdle for potential investment and for acquiring orders and new projects(German foundries have stable 3-year forecast)

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Foundries and energy savings

Foundries have saved energy through various initiatives-internal process improvements-investment for energy savings (power factor and

others)-through Eskom IDM

NFTN energy team provides the platform for further implementation of improvements

NFTN energy management manual

Investments for energy savings are not obvious based on tariffs already being uncompetitive and insecurity regarding pricing in future IPAP 2012/13

Alternatives to Eskom and Municipalities?

Price of gas more problematic than price of electricity

Benchmarking for gas prices for medium user in Euro/MWh

Germany : 28USA : 14NMB supplier : 123

Alternative electricity sources will be per definition more expensive than bulk production and distribution through Eskom and Municipalities froma costing perspective

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Foundries and Energy-The way forward

Need an urgent strategy for the foundries regarding energy pricing to prevent catastrophe

– 2011/2012 pricing in some municipalities already threatens the survival of many foundries

– 2012/2013 increases are a further step to mark the end of many foundries

– Our proposal is that all foundries have access to electricity at Eskom Megaflex rates for 2012/2013

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Conclusion

Municipalities are currently burdening the energy intensive users and seriously jeopardising their survival, causing plant closures

and plant reductions

Projected Eskom increases are an additional threat

A combination of both will be lethal for the industry

The Foundries in South Africa need urgent intervention regarding energy tariffs to avoid catastrophe

Tariffs must be globally competitive and stable

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Thank You http://www.nftn.co.za

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Data from Budget NMBM 2011/12 - 2013/14 page 10,21,22, 26

Electricity and Energy (R1000)

Income (Standard Classification) 1 304 766 1 583 008 1 892 532 2 382 288 2 958 915 3 553 596Income (non Standard Classification) 1 196 832 1 502 322 1 769 657 2 206 868 2 753 364 3 329 835Bulk Purchases electricity 1 180 288 1 473 000 1 865 000 2 256 650Repairs & Maint Electricity 23 296 33 965 34 912 25 409 38 059 39 913Total Expenditure electricity 993 209 1 277 044 1 470 162 1 980 055 2 490 120 3 004 134Capex (Mio) 235 000 202 847 86 000 118 000Expenditure other than Bulk Purchase 289 874 507 055 625 120 747 484Municipal Mark-Up 311 557 305 964 422 370 402 233 468 795 549 462Municipal Mark-Up% 31% 24% 29% 20% 19% 18%

2009/2010 estimate for bulk purchase based on Eskom increase and constant usage vs 2010/2011

2007/2008 (Act) 2008/2009(Act) 2009/2010(Act)2010/2011 (current

reporting)

2011/2012 (budget before special

increase)

2012/2013 (Budget submitted 2011)

Annexure

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