If Eskom’s worst-case scenario of Stage 8 power cuts this winter becomes reality, the consequences for an economy already in meltdown will simply be chilling. And if it gets worse than that, the Minerals Council SA warns that production in the mining sector could grind to a halt.

Eskom’s warning on Thursday to brace for the grim prospect of the utility having to slash as much as 8,000 megawatts from the grid to prevent a complete blackout will put paid to any faint hopes for economic growth this year, while simultaneously fuelling the flames of inflation.

Capital Economics warned in a commentary that this threatened to engulf South Africa with a “period of stagflation”. But a case could be made that South Africa is already caught in the trap of stagflation and that the looming surge in Eskom power cuts this winter will worsen and extend this unenviable state of affairs.

Stagflation occurs when an economy is contracting or barely growing, unemployment is high and inflation is on the boil. South Africa’s economy for several years now has been marked by the first two of this troubling trio, but that combination has helped to contain the third – inflation– by suppressing demand and wages.

But consumer inflation since May last year has been above 6% and food inflation raced to a 14-year peak in March of 14%. With an unemployment rate that has been well north of 30% over that period of time – a shocking level – and an economy that contracted 1.3% in the final quarter of 2022, stagflation would appear to already be a reality.

If it looks like a duck and quacks like a duck, chances are that it ain’t no goose.

And if Stage 8 becomes a reality against that backdrop, the consequences for an economy in meltdown will be chilling as the cold of winter sets in.

For example, the Minerals Council SA, the main industry body for the mining sector, provided the following glum assessment to Daily Maverick:

“Currently, at Stage 6 load shedding we are curtailed by 20% of contracted supply for 10 hours from 14:00-24:00. The industry (mining and smelters) consumes about 10,000 MW (30% Eskom supply) so we give up 2,000 MW,” said Christian Teffo, the Minerals Council’s deputy head, techno economics, in an emailed response to our queries.

“If Eskom goes into Stage 8, I estimate that we would have to be load curtailed by 2,666 MW over the same number of hours at the same times of day as above. This will result in further losses of production as some of our members stop operations to be able to drop the required load.”

The rotational power cuts have been estimated by the South African Reserve Bank (Sarb) to slash as much as two percentage points from economic growth, while consultancy PwC believes it may be as much as five percentage points.

So any increase in power outages from current levels will just cut economic growth further. The IMF already sees growth of only 0.1% for 2023, so expect that forecast to get cut to a contraction. You really can’t have a lower growth forecast.

Inflationary costs

Of course, households and businesses are blunting this scalpel with the scramble for self-generation, which itself adds to the gross domestic product.

But that comes with costs, and the Sarb estimates that the power woes are adding 0.5 of a percentage point to inflation because of the costs incurred by businesses, notably for diesel, to keep the lights on.

Ramped-up power cuts will mean more diesel getting burnt and higher costs for businesses, which will have to be passed on to consumers at some point.

This, by the way, is a classic stagflationary quagmire.

The power crisis has also been extracting a toll on the rand, which fell to a record low of 19.51/dlr last week, according to Bloomberg. The rand fell over 1% at one point Thursday morning – on the latest Eskom news – to 19.48/dlr and was still trading at over 19.40 late on Thursday.

The first sign of Stage 8 might hurtle it toward 20/dlr, though some analysts reckon the currency is “oversold” and has a long history of rebounds. But its previous comebacks did not take place in the context of Stage 8.

To top it all off, the currency’s crash will stoke inflation further and has likely sealed the case for yet another interest rate hike of as much as 50 basis points when the  Sarb’s Monetary Policy Committee meets next week.

“… the chance of a 50 basis point hike in South Africa this month is growing on the rand’s collapse,” Investec chief economist Annabel Bishop said in a note on Thursday.

That, in turn, will choke economic activity even further.

You can see where this is headed. The cycles are vicious and feed off each other. And will Stage 8 be the limit? If it’s not, industries such as mining could grind to a halt.

“If the power constraints become too severe, we could go into essential loads where the mining industry would only receive 20% of contracted electricity supply. At that point, only essential services like fans and pumping will operate,” the Minerals Council’s Teffo said.

“This means there will be no production from mines, nor processing, smelting or refining of minerals until electricity supplies are restored.”

That would literally signal lights-out for SA.

Source: dailymaverick.co.za