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South Africa’s state power monopoly seeks to raise prices to avoid collapse

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South Africa’s state power monopoly says it will need to charge consumers more for electricity if it is to cut its debts and stave off bankruptcy, even as rolling blackouts continue to plague Africa’s most industrial nation.

Years of corruption and mismanagement under disgraced former president Jacob Zuma left Eskom with surging costs, falling revenues, a fleet of breakdown-prone coal power stations and ballooning debts.

Eskom’s roughly R460bn ($32bn) debt has throttled investment in South Africa’s creaking power supplies and will be a major priority for President Cyril Ramaphosa next year, as he seeks to reboot an economy hit by the pandemic and undermined by persistent power cuts.

André de Ruyter, chief executive of Eskom, which generates nearly all South Africa’s power, told the Financial Times the lossmaking utility needed “cost-reflective” tariffs alongside debt relief of more than $13bn to avoid a collapse that would pose a huge risk to the economy.

Making the case for higher prices, Mr de Ruyter, a veteran of top South African companies who joined Eskom last year, said: “You cannot have a business that tries to sell its product at below its cost of production . . . it never works — and it cannot work in the case of Eskom.”

Before municipal and other surcharges, Eskom’s average standard will rise next year to just under $0.10 per kilowatt-hour, similar to India and China but less than half the tariffs in many European countries. The country’s energy regulator sets the base tariffs.

Chief executive André de Ruyter said Eskom needed ‘cost-reflective’ tariffs alongside debt relief of more than $13bn to avoid a collapse © Waldo Swiegers/Bloomberg

Business and labour groups agreed this month on the need for “a strategy” to reduce Eskom’s debt, but there is disagreement over how to do this. Eskom already relies on state bailouts equivalent to R1bn a week to repay its debts and remain a going concern, a figure that will total about R226bn between 2020 and 2026.

Mr Ramaphosa’s government has considered taking over a portion of the company’s debt. But if Eskom continued to drain cash, the efforts would be pointless, Mr de Ruyter said.

“We recognise as Eskom that we have no right to anybody’s money. We can’t go and demand pension fund money, we can’t go and demand equity injections,” said Mr de Ruyter. “What we have been advocating for as a more equitable way of ensuring the sustainability of Eskom is cost-reflective tariffs.”

Eskom is not seeking “subsidies for money corruptly spent” but it needs higher tariffs to refurbish ageing and failing coal plants at the heart of the blackouts and invest in newer supply, as it faces a power generation gap over this decade, Mr de Ruyter said.

South African businesses already hard-pressed by the pandemic and lockdown measures are likely to push back against having to pay more for electricity.

Mr Ramaphosa’s government and Eskom must tread carefully with any debt plan. Rating agencies could class it as default if they judged creditors were being made to accept a restructuring that imposed losses on their debts.

Restructuring “is not at all what we are contemplating” and all of Eskom’s debt will be repaid, Mr de Ruyter said. “The debt isn’t going to go away . . . in a debt to equity conversion, that equity will have to be serviced,” he said.

This year South Africa’s Public Investment Corporation, Africa’s biggest asset manager that oversees government employee pensions, tabled a draft proposal to swap nearly R100bn in Eskom bonds into shares in the utility.

The PIC told the FT that it was “investigating a wide range of possible options in this regard, in light of the impact of energy security on all investments”.

“Whatever solution the PIC eventually supports, if any, will be informed” by the investment mandates of the pension fund clients and their appetite for risk, it added.

Analysts have said that such a swap would risk ending up with worthless shares if Eskom lacks the cash to pay dividends, and may also be classed as a default.

An offer to investors to swap their Eskom bonds for sovereign paper would be more effective because Eskom debt is already widely seen as a de facto government obligation, said Peter Attard Montalto, an analyst at South Africa’s Intellidex research firm. 

Mr de Ruyter said Eskom was also looking for cheap loans from global development banks in return for the faster decommissioning of decrepit coal power plants. “We have had a number of discussions . . . there is an extraordinary amount of money available to fund decarbonisation,” he said. 

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Emerging Markets

Tech-heavy Taiwan stock index plunges on Covid outbreak

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Taiwan’s stock market, home to some of the world’s biggest tech companies, suffered one of the largest drops in its history as investors were rocked by a worsening Covid-19 outbreak.

The Taiex fell as much as 8.55 per cent on Wednesday, the index’s worst intraday fall since 1969, according to Bloomberg. It finished down 4.1 per cent.

Construction, rubber, automotive and financials — sectors retail investors had been shifting into from technology in recent months — were the worst hit in the sell-off.

The world’s largest contract chipmaker, Taiwan Semiconductor Manufacturing Company, which has a 30 per cent weighting in the index, fell as much as 9.3 before recovering ground to be down 1.9, while Apple supplier Hon Hai Precision Industry, also known as Foxconn, dropped 9.8 per cent before paring losses to be down 4.7 per cent.

While Taiwan’s sell-off was related to domestic Covid-19 problems, it followed recent declines in global markets as investors worried about possible inflationary pressures.

The falls came as Taiwan’s government was expected to partially close down public life to contain a worsening coronavirus outbreak — something the country had managed to avoid for more than a year.

“The reason that triggered the escalated sell-off during the trading session is the new [Covid-19] cases to be reported this afternoon, and probably the raising of the pandemic alert level,” said Patrick Chen, head of Taiwan research at CLSA. “On top of that, the market before today was already at a point where the index was at an inflection point.”

Taiwan’s strict border controls and quarantine system and meticulous contact tracing measures had helped it avoid community spread of Covid-19 until recently.

That success, which allowed Taipei to forego lockdowns, helped boost the local economy, which grew about 3 per cent last year and 8.2 per cent in the first quarter of 2021.

But health authorities announced 16 locally transmitted confirmed cases on Wednesday, for three of which the infection source was unclear — a sign of widening spread in the community. Authorities had confirmed seven untraced cases on Tuesday, and domestic media reported that the government might introduce partial lockdown measures.

President Tsai Ing-wen called on the public to be vigilant but avoid panicking.

Taiwan’s stock market rose almost 80 per cent over the past year, peaking at a historical high late last month. It is now down 8.5 per cent from that mark.

Retail investors have increasingly moved out of technology stocks in recent weeks, reducing the sector’s weight in trading volume from almost 80 per cent at its height to just over 50 per cent.

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China factory gate prices climb on global commodities boom

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The price of goods leaving factories in China rose at the fastest pace in more than three years, on the back of a rally in commodities supported by the country’s economic recovery.

The producer price index rose 6.8 per cent in April year-on-year, beating economists’ expectations and surpassing March’s increase of 4.4 per cent.

The rate was driven in part by comparison with a low base last year in the early stages of the pandemic. But it also reflects a global surge in the prices of raw materials that was first stoked by China and now incorporates expectations of recovering global demand.

While PPI prices in China have leapt, economists suggested there was limited spillover into consumer prices and that the central bank was unlikely to react. China’s consumer price index added just 0.9 per cent in April, the National Bureau of Statistics said on Tuesday, although it touched a seven-month high.

“It tells us that demand at this moment is super strong,” said Larry Hu, head of greater China economics at Macquarie, of the PPI data, although he suggested policymakers would see the increase as “transitory” and “look through it”.

“We’re going to see some reflation trends,” he added.

Signs of tightening in China’s credit conditions have drawn scrutiny from global investors eyeing the prospect of higher inflation as the global economy recovers from the pandemic, especially in the US, which releases consumer price data on Wednesday.

China’s PPI index remained mired in negative territory for most of 2020 following the outbreak of coronavirus, but has started to gather momentum this year. Gross domestic product growth in China returned to pre-pandemic levels in the final quarter of 2020.

An industrial frenzy in China has stoked demand for commodities such as oil, copper and iron ore that make up a significant portion of the index and have helped to push it higher. 

Policymakers in China have moved to tighten credit conditions, as well as attempted to rein in the steel sector. Ting Lu, chief China economist at Nomura, said the relevant question now was “whether the rapid rise of raw materials prices will dent real demand, given pre-determined credit growth”.

Retail sales in China have lagged behind the growth rate of industrial production, putting downward pressure on CPI, which has also been weakened by lower pork prices that rose sharply on the back of African swine fever. Core CPI, which strips out food and energy, rose 0.7 per cent in April 

Julian Pritchard-Evans, senior China economist at Capital Economics, said that producer prices were feeding through into the rebound in consumer prices, but also suggested that pressures on the former were “likely to be mostly transient”.

He added that output prices for durable consumer goods were rising at their fastest level on record.

China’s rapid recovery has been driven by its industrial sector, which has churned out record quantities of steel and fed into a construction boom that policymakers are now trying to constrain. On Monday, iron ore prices hit their highest level on record, while copper prices also surged.



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Iron ore hits record high as commodities continue to boom

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The price of iron ore hit a record high on Monday in the latest sign of booming commodity markets, which have gone into overdrive in recent weeks as large economies recover from the pandemic.

The steelmaking ingredient, an important source of income for the mining industry, rose 8.5 per cent to a record high of almost $230 a tonne fuelled by strong demand from China where mills have cranked up production.

Other commodities also rose sharply, including copper, which hit a record high of $10,747 a tonne before paring gains. The increases are part of a broad surge in the cost of raw materials that has lasted more than a year and which is fanning talk of another supercycle — a prolonged period where prices remain significantly above their long term trend.

The price of timber has also hit a record high as US sawmills struggle to keep pace with demand in the run-up to peak homebuilding season in the summer.

“Commodity demand signals are firing on all cylinders amid a synchronised recovery across the world’s economic powerhouses,” said Bart Melek, head of commodity strategy at TD Securities.

Strong demand from China, the world’s biggest consumer of commodities, international spending on post-pandemic recovery programmes, supply disruptions and big bets on the green energy transition explain the surge in commodity prices.

Commodities have also been boosted by a weaker US dollar and moves by investors to stock up on assets that can act as a hedge against inflation.

The S&P GSCI spot index, which tracks price movements for 24 raw materials, is up 26 per cent this year.

Strong investor demand pushed commodity assets held by fund managers to a new record of $648bn in April, according to Citigroup. All sectors saw monthly gains with agriculture and precious metals leading the way, the bank said.

Agricultural commodities have had an especially strong run owing to rising Chinese demand and concerns of a drought in Brazil. Dryness in the US, where planting for this year is under way, is also adding to the upward rise in prices. Corn, which is trading at $7.60 a bushel and soyabeans at $16.22, are at levels not seen since 2013.

“From a macro economic environment to strong demand and production concerns, the ingredients are all there for the supercycle,” said Dave Whitcomb of commodity specialist Peak Trading Research.

Rising copper and iron ore prices are a boon for big miners, which are on course to record earnings that will surpass records set during the China-driven commodity boom of the early 2000s.

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JPMorgan reckons Rio Tinto and BHP will be the largest corporate dividend payers in Europe this year, paying out almost $40bn to shareholders. Shares in Rio, the world’s biggest iron ore producer, hit a record high above £67 on Monday.

Brent crude, the international oil benchmark, has crept back up
towards $70 a barrel, which it surpassed in March for the first time in
more than a year, recovering ground lost as the pandemic
slashed demand for crude and roiled markets.

Supply cuts by leading oil producers have helped to bolster the market
as consumption has begun to recover around the world.

While some Wall Street banks have hailed the start of a new supercycle, with some traders talking of a return to $100 a barrel oil, others are less convinced. The International Energy Agency said oil supplies still remain plentiful meaning any talk of a supercycle is premature.



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