Platinum volatile as South African power crisis continues

Vancouver – Broken generators and cold, wet weather are once again threatening operations at South African mines and forcing the country’s residents to endure rolling blackouts.

The state-owned electrical utility company Eskom announced emergency load shedding (the term it uses for blackouts) on Mar. 17. The power company could not meet demand after nine generators tripped at a time when another nine were down for scheduled maintenance. Eskom runs some 160 generators.

Persistent rain in the northeastern Mpumalanga province, where many of the country’s coal mines and coal-fired power stations are located, compounded the problem. In fact, Anglo American (AAUK-N, AAL-L) announced it closed three of its open cast coal mines in the area because of the rain. The company is uncertain when the New Denmark and Kriel collieries in Mpumalanga and the New Vaal colliery in Free State province would be back in operation.

By the following morning two generators were back on line and another two were expected to return to service by the evening. Nonetheless, Eskom expected power usage to peak at 32,000 MW on Tuesday and could only produce 30,000 MW.

At the end of January, operations at all South African mines were suspended for four days during an acute power shortage due to maintenance backlogs and low coal supplies. Since then the country’s mines have been restricted to 90% of their normal power consumption.

In the meantime, the price of platinum has demonstrated its vulnerability to a disruption in South African supply. South Africa is the world’s top platinum producer. Anglo Platinum (AGPPY-O, ANP-L, AMS-J), the world top platinum producer, said the 10% reduction would lead to a 5% drop in production. Impala Platinum Holdings (IMPUY-O, IMP-J, IPLA-L) estimated the power limit would reduce production by 2%, to 2 million oz. from 2.03 million oz. in 2007.

Since then, platinum prices have risen 30%, due primarily to South African power uncertainties but also because of increasingly stringent mine safety control in the country and the weakening US dollar.

When the latest power disruption occurred Raymond James analyst Bart Jaworski revised his 2008 platinum price forecast from US$1,450 per oz. to US$2,125 per oz. He also increased his 2009 estimate to US$2,000, 2010 estimate to US$1,900, and his long term prediction to US$1,000.

On Mar. 18 spot platinum closed at $1951 per oz., up $8 from the previous day. During March the price has ranged from a high of $2,275 per oz. to a low of $1,950 per oz.

While mining power consumption has been restricted, the rest of South Africa has not seen load shedding since January. In reference to that, Anglo American CEO Cynthia Carroll was quoted pointing out that mining should not be targeted when power supply becomes an issue. The country’s mines use about 15% of its power but contribute 7% to 8% of its gross domestic product. And Anglo Coal has agreed to provide 2.9 million tons or 60% of the 5.4 million tons of coal that Eskom requires for the next three months of operations.

Adding another layer of difficulty, leaders of the Solidarity trade union representing mine workers were to hold an emergency meeting over fears the power shortages could lead to job cuts. In a press release union leaders said they planned to discuss possible legal remedies is workers should lose their jobs due to the Eskom crisis.

The South African power crisis stems from a failure by Eskom to predict increase power demand from strong economic growth. The utility failed to develop new power plants or keep up with maintenance of older ones over the last ten years and now has to play catch up.

Eskom has reportedly earmarked as much as 300 billion rand (over US$42 billion) for construction of new power plants and infrastructure. But with the long lead-time needed for such major undertakings, it could easily be five years before any significant new generating capacity is added to the grid.

The government is urging everyone citizens and businesses alike to cut power consumption by 10%.