BHP Billiton To Part Close South African Smelter

JOHANNESBURG -(Dow Jones)- BHP Billiton Ltd. (BHP) Tuesday said it plans to partially close its Bayside aluminum smelter in South Africa, focusing instead on two other plants in the region as it absorbs the impact of a nationwide power shortage.

The Melbourne-based company expects to lose about 120,000 metric tons of aluminum production this year, roughly 10% of its annual attributable output in southern Africa, to meet demands for a 10% reduction in its usual electricity use.

The loss will come primarily from the Bayside smelter in Richards Bay, where BHP Billiton said it anticipates output to be reduced by 92,000 tons for the year.

The company said it has begun talks with employees about the possible closure of operations at the B and C potlines at Bayside, which has annual output of about 194,000 tons.

Spokeswoman Bronwyn Wilkinson said 400 jobs and another 500 contract positions could be affected by the closure, depending on the outcome of the talks and the redeployment of workers.

BHP Billiton’s Hillside smelter in Richards Bay and 47%-owned Mozal plant in Mozambique will continue to operate at reduced levels, although Bronwyn said the reduction will be less than if a 10% reduction in power consumption were taken across all three smelters. Hillside has annual production of 704,000 tons, while 47% owned Mozal contributes 265,000 tons to BHP Billiton.

State-owned utility Eskom Holdings Ltd., which supplies about 95% of the country’s power, in late January declared force majeure on supplies of electricity, prompting many mines to suspend operations for up to five days. The utility thereafter has restricted mines and other large-scale consumers to 90% of their normal power use.

However, government last week said mines where there was a threat of job losses would share in an additional 260 megawatts that would be supplied over the next two weeks. That would take many mines to about 95% of their normal power supplies, although the supplies will be phased in and given on a case-by-case basis.

Government and business has said the increased power to mines will likely lead to increased scheduled power cuts elsewhere across South Africa. The power shortage is a result of years of rising demand on the back of strong economic growth not being met with increases in generating capacity.

BHP Billiton said its contracts with Eskom specify that power supplies to its aluminum smelters can only be interrupted about 1% of the time a year, although it has reduced its demand in light of the emergency situation in the country.

Eskom management have said the company is considering power buybacks to help reduce overall electricity use in South Africa, and analysts have speculated it will target energy-intensive aluminum smelters, effectively paying for full or partial shutdowns.

Wilkinson declined to comment on possible power buybacks, but said the company is in ongoing talks with the utility.

Base Metals analyst Will Adams said BHP Billiton’s forecast of lost aluminum production is a "drop in the ocean" and less than the market had anticipated.

Another analyst in London said the market had been looking for the cut to output to be about 30,000 tons greater than BHP Billiton is looking at.

The news had little impact on London Metals Exchange aluminum prices, which were up 0.5% at $3,155 a ton.

BHP Billiton’s shares, meanwhile, ended the day down 1% at 239.55, roughly in line with a decline the broader Johannesburg resources sector.

The company said its 60% owned manganese business in South Africa, Samancor, also is operating at 90% of normal peak power demand, although the impact on production is small and being felt primarily at the metalalloys plant.

BHP Billiton’s coal operations in the country have been minimally affected, and the company said it has offered to help eskopm rebuild coal stocks at its power plants.