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NFTN Foundries and Energy Cost Portfolio committee on trade and Industry IPAP III 2 November 2011 Presenters: Adrie El Mohamadi David Mertens. IPAP 2012/13. Agenda. SA Foundry industry and NFTN SA Foundry industry as employer Engagement of Industry with Government - PowerPoint PPT Presentation
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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
IPAP 2012/13
• 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
IPAP 2012/13
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
IPAP 2012/13
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
IPAP 2012/13
Industry structure by type
IPAP 2012/13
Markets served by the SA foundry industry
Export and local markets
Highly Competitive environment
Competing with the rest of the world
IPAP 2012/13
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
IPAP 2012/13
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
IPAP 2012/13
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
IPAP 2012/13
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
IPAP 2012/13
IPAP 2012/13
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
IPAP 2012/13
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
IPAP 2012/13
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
IPAP 2012/13
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%
IPAP 2012/13
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
IPAP 2012/13
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
IPAP 2012/13
Foundries and Electricity Tariffs
Electricity tariffs for foundries vary by over 50%, depending on location
IPAP 2012/13
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
IPAP 2012/13
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
IPAP 2012/13
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
IPAP 2012/13
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)
IPAP 2012/13
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
IPAP 2012/13
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
IPAP 2012/13
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
IPAP 2012/13
Thank You http://www.nftn.co.za
IPAP 2012/13
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
IPAP 2012/13
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