daniel chigunwe
Economy Uncensored with Tapiwanashe Mangwiro
The mining sector, contributing around 12 percent to GDP, is the cornerstone of the economy. However, the ongoing electricity shortages and soaring tariffs are beginning to erode its profitability, efficiency, and ultimately its ability to sustain a high level of economic impact.
Electricity is a critical input for mining operations, and without affordable, reliable power, the industry’s productivity is compromised, leading to diminished economic returns and ripple effects across other sectors dependent on mining.
This week we explore the significant challenges posed by current electricity issues, including high tariffs, unreliable supply, and their broader implications for the economy.
High electricity tariffs: A profitability crisis
Electricity costs have become one of the most significant cost drivers for the mining industry. Most respondents in a recent survey (95 percent) indicated that the current electricity tariffs — pegged at an average of US14,21c per kilowatt-hour (kWh) and peaking at around US19c per kWh — are unaffordable and uncompetitive.
By comparison, mining executives would prefer a tariff of less than USc10 per kWh, which would be more in line with regional averages. At these levels, tariffs do not only burden operational costs but also make the sector less attractive to investment.
Mining is an energy-intensive industry; the higher the electricity tariff, the higher the production cost. In practical terms, this leads to reduced profit margins, meaning that even as the sector produces more, the financial gains are minimised by steep power costs.
Mining companies also have limited bargaining power with electricity providers, and as tariffs continue to rise it will result in the weakening of the sector’s international competitiveness, as global investors may choose more cost-effective markets over a costly operating environment.
Unreliable power supply: Production losses and output decline
Adding to the challenge is the fragile power supply, with an overwhelming 99 percent of mining executives reporting power outages averaging around 8 hours per day. Such interruptions lead to direct production losses, with 76 percent of respondents indicating that they lose up to 10 percent of their production potential due to outages.
More worryingly, 24 percent of respondents lose more than 10 percent of potential output. These power disruptions are especially critical for industries like ferrochrome, which are heavily reliant on consistent, high-voltage power to maintain production levels. The survey reveals that ferrochrome producers were instructed to cut power demand by as much as 10 megawatts, further reducing their output and compounding losses.
The volatility of electricity provision has forced mining companies to invest in diesel-powered generators as a backup. However, diesel generation is not only inefficient but also exceedingly costly, with an implied tariff of over USc30 per kWh — more than double the current unsustainable electricity tariff.
As a result, diesel generators may serve as a temporary fix but are far from a viable long-term solution.
The industry’s increasing reliance on these generators, projected to rise by 12 percent by 2025, only exacerbates operational costs and further deteriorates profit margins.
The broader economic impact of mining’s decline
When the mining sector suffers, the economy as a whole feels the impact. Mining is interlinked with other sectors, including manufacturing, transport, and trade, all of which are dependent on a thriving mining industry.
Declines in mining output due to power issues lead to lower exports, reducing foreign exchange inflows and affecting currency stability. Moreover, the loss in production potential directly translates to a decline in tax revenues, limiting the government’s ability to finance essential public services and infrastructure.
As power shortages and high costs persist, the sector faces a decline in profitability, which could lead to job cuts and the stalling of planned expansions.
This downturn has a cascading effect on employment, as the mining sector is a significant employer both directly and indirectly, supporting numerous ancillary jobs. In a country where mining contributes a substantial portion to GDP, any reduction in its output will be felt broadly across the economy, amplifying unemployment rates and reducing disposable incomes.
Future outlook: An urgent Need for structural reform
The outlook for 2025 suggests a further deterioration in power availability, with demand expected to grow by 18 percent. The projected increase in demand, coupled with the current supply instability, suggests a widening gap that could bring more severe impacts on production and costs.
Without immediate reform to the electricity tariff structure and improvements in grid reliability, the mining sector’s economic contribution could fall sharply.
There is an urgent need for government and industry stakeholders to collaborate on solutions. Lowering tariffs, securing alternative energy sources, and investing in infrastructure improvements could help alleviate the pressure on the mining industry and enhance its sustainability.
Moving towards affordable, consistent energy sources would not only benefit mining but also secure broader economic stability.
However, in an exclusive interview with The Herald in October, ZESA executive chairperson Sydney Gata said the big companies will now handle their own energy supply risks instead of relying on the Government and ZESA.
“We decided that those customers we now describe as competent customers must fend for themselves, but we are assisting them,” he said.
“There have been considerable investments. We now have captive power plant projects, they are six, which together add up to more than 1 000MW that are being commenced, most of them in the next month (November 2024).”
Next year up to December 2025, ZESA says it shall have commissioned at least six of the projects lined up, aggregating to an additional new capacity of 2 690MW which is almost double our current dependable capacity.
Gata said another step the power company has taken to reduce currency risk is to manufacture all the equipment used in the electricity supply industry within the country.
He said solving the power issue in the country is not a quick fix but involves a mix of solutions that will also help future generations.
In summary, the electricity challenges facing the mining industry pose a real threat to the economy, as the sector’s decline would result in lower GDP contribution, job losses, and reduced government revenues. Addressing these issues is essential to safeguarding the sector’s economic role and ensuring it remains a pillar of economic growth.
Tapiwanashe Mangwiro is a resident economist with the Business Weekly and writes this column in his own capacity. @willoe_tee on twitter and Tapiwanashe Willoe Mangwiro on LinkedIn
Bongani Ndlovu