New Energy market report from Business Monitor International: "South Africa Power Report Q2 2013"

Boston, MA -- (SBWire) -- 07/05/2013 --BMI View: BMI sees the South African economy continuing its uneven recovery over the medium term, with real GDP growth estimated at a tepid 2.3% in 2012. We continue to see space for a moderate increase in consumption, although BMI Country Risk analysts see the South African economy continuing its uneven recovery over the medium term, with real GDP growth forecast expected to rebound to a tepid 2.8% in 2013. Although the supply side is still lagging behind, we see space for a moderate increase in consumption. Relatively positive demographic and economic fundamentals, alongside some big-ticket projects that are under construction or in the pipeline, support a cautiously optimistic outlook in the medium to long term. That said, a key downside risks continue to stems from industrial unrest in the mining sector.

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As predicted over previous quarters, a combination of self-reinforcing domestic and global headwinds hindered the potential of the South African power market in 2012, confirmed by the latest monthly electricity indicators reported by Stats SA, which highlighted a contraction in the total volume of electricity available for distribution. Despite this backdrop of bleak growth, we remain of the view that positive demographic and economic fundamentals (including substantial reliance on and development of energy-intensive industries), together with some big projects under construction or in the pipeline, provide support for a relatively optimistic outlook in the medium to long term. New generating capacity is necessary to meet growing demand, as illustrated by the continued shortages, as well as by news that Eskom's margin between available capacity stood at a mere 1% in September 2012.

That said, a number of downside risks remain pertinent:

- The so-called 'Marikana Massacre' is weighing heavily on investor sentiment. The incident and the subsequent handling thereof has undoubtedly dented support for Zuma, fuelling policy uncertainty.
- Inflationary risks, together with growing warnings from business, labour and civil society groups that further above-inflation power price increases will negatively affect a number of sectors, particularly mining and manufacturing, are curtailing the scope for a much-needed increase in power tariffs.
- This point is evidenced by the fact that the average yearly tariff increase of 16% being sought by power utility Eskom under the third multiyear price determination period (MYPD3) was rejected. New tariffs were then approved in February 2013. Eskom is now allowed to raise prices by an average 8% in each of the next five years. We had previously highlighted that Eskom's margins have often been sacrificed for economic and political reasons, and it is not surprising that the government tried to balance the socioeconomic impact of raising electricity prices against the financial viability of Eskom.

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