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Simply put, South Africa is in the midst of an energy crisis, which is restricting the amount of electricity available.
This is not new: the country has been experiencing power outages for more than a decade, but the scenario has worsened in recent times. The country’s state-owned power company, Eskom, is riddled with debt, has old infrastructure, doesn’t look very good and was recently paralyzed by a strike.
South Africa relies on aging coal-fired power plants for most of its energy. In 2020, 7% of its energy came from renewable sources, according to the International Energy Agency.
South Africans faced power outages for 288 days last year, while this year there have been power outages (actually, continuous power outages) affecting families and businesses up to ten hours a day, with network operators acting on so-called load loss: normal. Power outage periods to save energy.
Ajay Gupta, country analyst at research and analysis corporation GlobalData, the parent company of Just Food, sums it up: “It is evident that the country is suffering with burden reduction, as well as emerging unemployment and emerging inflation, which negatively affects all industry and industry spaces. “
South African leader President Cyril Ramaphosa declared a state of crisis earlier this year in a bid to resolve the crisis and appointed an electric power minister who has the enormous task of formulating a response to the emergency.
Addressing the nation, Ramaphosa said: “We will have to act to mitigate the effect of the crisis on farmers, on small businesses, on our water infrastructure, on our transport network and a host of other spaces and services that help the lives of our people. “
The South African Consumer Goods Council (CGCSA) has sent the president an open letter calling on the government to act in favour of the agri-food industry.
However, things can get worse on the power front before they get better.
So far, Eskom has not gone beyond Phase 6 of forced blackouts, which require the removal of 6,000 megawatts (MW) from the national grid. However, the company said it would possibly have to move to stage 8, which would require up to 8,000 MW, resulting in 16 hours of outages in a 32-hour cycle, due to higher demand in the winter months. Winter began this month in the southern hemisphere.
And to add to the country’s woes, it faces the prospect of a water crisis as South Africa’s creaking water infrastructure struggles to meet the demands of an ever-growing population.
According to the World Bank, South Africa has the 33rd largest economy and 23rd population on the planet, with 59 million inhabitants, but is it a failed state?
No, says Iain Williamson, CEO of local monetary heavyweight Old Mutual, but urgent action is needed.
He recently said: “The existing political environment is characterized by political failures, endemic corruption and stagnant service delivery. These disorders contribute to a sense of paranoia around the proposed solutions. In addition, points such as social unrest, concern about network collapse, and the potential for sanctions further undermine South Africa’s social capital and erode levels of acceptance.
However, Williamson said the South African economy “has demonstrated remarkable resilience in 2023, exceeding expectations despite the demanding situations posed by the bewildering load disconnection cycle. “
And he advised that we see “remarkable progress in the production of energy from the personal sector”, in renewable energies.
Data released last week revealed that South Africa’s food and drink production sector has performed well, speaking in part because the industry does not consume as much electrical energy as other types of production.
In addition, investments in renewable power and outage mitigation measures to mitigate in the long term have helped corporations in the sector cope.
But the country’s largest food brands are far from satisfied with the scenario and the effect it’s having on their operations.
Earlier this month, Premier Group revealed that its profits had risen despite the power outages.
For the fiscal year ended March 31, it posted a profit increase of nearly 40%.
The pasta candy maker, behind brands such as Blue Ribbon bread and CIM cookies, said it had controlled the pass-through of the costs of power outages in the country, but warned that a possible buildup of power outages could leave it struggling to stay awake. with the demand of visitors.
The prime minister said he had spent ZAR 32 million ($1. 66 million) on diesel generators, but chief executive Kobus Gertenbach told Reuters news firm it had proved too expensive in terms of the overall situation.
“Our overall ability in terms of ability to run turbines to run bakeries is not prohibitive compared to the category, so the amount of prices it adds is a few pennies consistent with bread and can be recovered smoothly in the market. “he said.
However, Gertenbach said about 10 percent of the steelworks’ total production was lost in that era due to forced cuts.
“In my view, [Eskom is moving towards load disconnection] point 8 would start to have an effect on our ability to continue producing enough products to serve our market. “
Tiger Brands, South Africa’s largest food group, said in expired May that it expected forced cuts to lead to higher prices that would reduce revenue.
The owner of the Jungle Oats, Albany and Cresta rice brands, commenting on their half-year results, said the force cuts had cost him R37 million in the grain sector alone.
In a statement, it said: “Operating prices are expected to rise particularly due to the loss of higher degrees of cargo in the winter season. “
Its local counterpart Libstar, which has a broad portfolio of products that includes baby food, soups, pasta and dairy, also warned that it will face situations for the rest of the year.
In an observation on the publication of its annual effects in March, it said the load loss had added R39 million to its operating prices and had made a capital investment of R13 million in turbines during the year with an additional R6. 3 million spent on generator. capacity from January 2023.
Meanwhile, South African poultry organization Astral Foods revealed in late May that its operating profit had fallen 89% year-on-year in the six months to the end of March.
It said it had incurred R741 million in cargo loss costs.
In a statement, Astral said: “All capital expenditures have been suspended, for those necessary for mandatory maintenance and emergency measures for the supply of electricity and water. “
RFG Holdings, which has a portfolio ranging from topple and canned vegetables to baked goods and frozenArray, has also been hit by the power outages but, like Premier Group, has seen an increase in profit.
In the six months ended April 2, profits rose 36. 7% year-on-year, driven by food value inflation of 14. 8%.
However, RFG said the loss of cargo continues to affect production and costs.
CEO Pieter Hanekom said the company had invested heavily in backup turbines over the past seven years and that operational control had worked well in difficult cases to limit the impact of pressure drop on plant efficiency.
It said diesel prices to run the turbines amounted to R37. 8 million over the six-month period.
“With existing pressure drop levels, the weekly average of diesel to run the turbines is about R2m,” he said.
Speaking to analysts after the release of overdue earnings last month, Hanekon said: “The continued loss of cargo has had a significant impact on our business. “
Ramaphosa criticized earlier this year for not putting enough flesh on the bones of his strategy to solve the energy crisis after signaling a state of disaster.
But, in a speech this week, he outlined some of the steps he has taken and plans to take.
He admitted that “given the patience of load loss, for example, few people can consider the effect of a reshaped energy landscape,” adding that “we are nearing the end of load loss, transforming the electrical system. “energy market to make it more competitive. “And success is imperative for the long term of the country. “
He added: “Many of those reforms are driven by legislative and regulatory changes, which might not motivate many people, but have a very broad effect on people’s lives and the functioning of the economy. “
He revealed that licenses for production projects of any duration have been eliminated.
“As a result, more than a hundred projects are under development lately, representing more than 10,000 MW of new generation capacity and 200 billion rand of investment in the personal sector,” he said.
He said that rooftop sun tax incentives are being implemented for businesses and households and that, significantly, “Eskom is broken down into separate entities for generation, transmission and distribution,” while its debt burden is addressed through ZAR 254 billion debt relief, subject to strict conditions.
“This will allow the company to make investments in its infrastructure,” Ramaphosa said.
In order to enshrine some of these proposals into law, the bill amending the electric power law is being finalized for submission to the country’s parliament.
“These developments are part of the status quo for the first time in our country of a competitive market for force generation,” Ramaphosa added.
Most likely, the president’s final point will be music to the ears of Old Mutual’s Williamson, who needs to see greater involvement of the personal sector in energy production in the country.
Writing before the president’s statement, he said public-private partnerships want to be “because we have a framework and a style shown on which to build. “
He added: “The lessons learned from the Covid-19 pandemic have highlighted the importance of those partnerships in achieving positive results. By taking advantage of these partnerships, we can face today’s demanding situations and work towards a greater future for the country. “
The food production industry would have liked to see an express intervention on its behalf, as a key industry, as requested through the CGCSA in its open letter to the president this year. Possibly it would like to be treated as critical infrastructure that can also only be exempt from load shedding, such as hospitals and water treatment plants.
While the action plan announced by Ramaphosa will be welcome, food corporations expect to see the effects overnight.
And while they were going to recover some of the investment prices in diesel turbines or on-site solar installations through value stocks, that might not be an option in the future.
Astral said in May that a “macroeconomic crisis” in South Africa puts the available source of income “under wonderful pressure. “
He added: “The costly and ongoing disruption of agribusiness processing corporations and built-in food production price chains has left South Africa with increasing degrees of starvation and poverty, among the most vulnerable communities, and an even greater risk to food security is plausible. “
And, as we’ve heard, capital investment in other projects is largely suspended in some corporations, as it’s mandatory to deal with the energy crisis.
RFG said its renewable energy program has accelerated in reaction to sustained degrees of load disconnection.
“Solar installations at 4 more production sites are expected to be completed in the current part of the fiscal year and 3 in fiscal year 2024,” he said.
South Africa’s big food corporations perform well, as does the sector as a whole, but they hope the country’s politicians can deliver on their promises to enable them to thrive in the future.