POWER SOLUTIONS: Effects Of Electricity Increases
Recent Western Cape Business News
THERE are concerns about inflation, price increases across the board and the effect increased electricity prices will have on businesses, says Wayne Basson, industry analyst, Coface South Africa.
The next three years will see many organisations managing their cash flow very carefully as they move out of recession. This unfortunately co-incides with the phasing in of rate increases for electricity which will put continued pressure on companies as they work through the recovery phase of the recession.
While the increase in the cost of power will affect all South African’s across the board, different industries will be affected more severely than others because of their reliance on power.
In the agricultural sector, electricity price increases will have a marked impact on the grain and fruit markets.
The impact on the grain and wheats market will remain controllable from the farmer’s point of view because electricity is a small cost component for grain and maize production. But it will place pressure on the procurer’s margins. The end-user will be affected to a larger extent as the tariff increase will affect the supply chain up to the point of purchase by the consumer, Basson says.
The fruit export market will be more affected because this sector utilises cold storage facilities as well as packaging and sorting amenities to facilitate the export process. This element of fruit farming production represents a large percentage of the cost component associated with this type of farming.
On average the electricity component contributes 2% - 3% of the input cost component for the farmer while packaging contributes from 25% - 48% of the input cost component.
In the fruit industry, there are concerns that South African fruit exports may lose their competitive edge as farmers adapt the price of fruit to accommodate the increase in input costs.
Building and Construction
The greatest concern in this industry is the impact the increases will have on the input costs for the building and construction manufacturers, who are dependent on electricity to operate industrial machinery.
Building and construction wholesalers and retailers will be hit by the increase in the cost of power in their daily running expenses in addition to the cost that will be carried over from manufacturers.
The final price increase will eventually be carried over to the consumer. This could slow down building activity even further as consumers reassess the cost of enhancements or refurbishments to buildings.
The greatest concern in terms of this industry are small emerging companies who are expected to take the brunt of the change in the industry. These companies will need to adapt to survive which may result in some consolidation in the industry, according to Basson.
Manufacturers of drugs will be affected by an increase in their fixed costs. Electricity is a major input cost component. The production and storage of many pharmaceutical products requires electricity. As a result, the increase in the cost of power will have an effect on the operating cost of these products. Pharmaceutical companies will be forced to pass this cost on to consumers. Companies will either hike prices or look for ways of reducing their operating costs. We will likely see higher prices of some drugs, those outside the Single Exit Price range – which are not government capped.
The steel industry will be heavily influenced by the increase in the cost of power. This is because of the high usage of electricity in steel production. This is particularly concerning when looking at steel furnaces and smelters.
Downstream industries that add value to produce different steel products will also have to contend with higher electricity bills, and will have to look for savings elsewhere in their business or pass on the costs to their clients.
The biggest concern is that fewer discretionary projects will be entered into. Although this will not be a significant factor in the market, it will make life a little more difficult for the smaller retailers.
There are a variety of industries that will not be as negatively affected by the increase in the electricity prices IT, media and advertising, wholesalers and retailers of electronic goods, furniture and food. It is however expected that where necessary the additional running costs or the cost increase in products will be passed on to the consumer.
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