"Platinum the principal gainer in African power crisis" (Source: Mineweb)

A week of huge impacts on the world economic sector and not least on the gold, platinum and base metals sectors.

Author: Lawrence Williams
Posted: Saturday , 26 Jan 2008

LONDON -

What a week to return from a 14-day holiday in laid-back Goa! Markets crashing and partially recovering, a 0.75 percent US Fed interest cut, a rogue trader losing Soc Gen $3.5 billion and Africa's economic powerhouse descending into banana republic chaos through incredibly bad forward planning by its state-owned electricity utility, resulting in virtually all the country's major mines being shut down for safety reasons. What are we due for next week?

Hopefully things may calm down a bit as traders sit back and assess the global economic situation and the commodities sector a little more rationally - but perhaps that's too much to ask for. There are obviously winners and losers out there - metals commodities are mostly seeing signs of strength, but the stock markets in general are in an extremely nervous state with most observers believing that there is more adverse financial news to come and wondering if the U.S. can really stave off a recession.

As far as the mining sector is concerned, the southern African power supply crisis is likely to have the biggest impact. It's not only South Africa which is suffering, but also Zambia, Zimbabwe, Botswana and now Namibia which are having problems - the latter because it had previously relied on South African grid power for a key proportion of its electricity needs and has been told that this cannot continue. Zambia is getting some relief by importing power from that model of democratic stability the DRC!

Where does this African chaos leave the metals commodity sector? The commodities most likely to be affected are copper and cobalt, primarily from Zambia , diamonds from Botswana, uranium from Namibia and most of all platinum and gold from South Africa.

But it is not only current production that is being affected, but planned expansions and new projects will be strongly impacted as extra power consumption from national grid supplies will just not be available until perhaps the middle of the next decade. This means that new operations in particular, if they are to go ahead, will require to install massive independent power generation facilities which are expensive to purchase or hire and to run and could seriously affect capital and operating costs and make some projects unviable. With banks being cautious about providing major loan facilities while the global credit crunch continues, there are bound to be major delays in bringing many of southern Africa's new projects on stream which will be giving number-crunching commodities analysts a fair amount of work to do over the next month or so as they will have to rework their new metals supply forecasts.

As we pointed out here yesterday, the biggest short term impact is likely to be in the platinum group sector. South Africa is by far the dominant world supplier due to its huge reserves on the Bushveld Complex northwest of Johannesburg, and with some interesting new areas being opened up too nearer the Botswana border. Because of the power crisis the country's three biggest producers, Anglo Platinum, Impala and Lonmin have all closed their operations until they can be assured of continuity of power supplies which, according to power utility Eskom, may yet take two to four weeks.

There is no doubt, though, that systems will be put in place to enable the mining companies to restart and maintain their operations sooner rather than later as mothballed power stations are brought back on line, maintenance work is accelerated and major industrial users manage to save power consumption in all possible areas. But, new projects are likely to suffer badly as the country just can't afford to supply major new power consumers until the system can support them.

As the markets realised yesterday, the overall impact on the world gold sector, despite South Africa's major contribution to world supply, is not as significant to the global commodity sector as the initial surge in the gold price might suggest, and the gains were rapidly cut back for the yellow metal to close at lower levels. But the impact on world platinum supplies could be tremendous.

Platinum supply is already seen as being in deficit and even a temporary shutdown of the major producing mines will have a significant short term impact. But perhaps more importantly virtually all the projected new mine supply increases under way are in South Africa and some of these projects are now bound to be delayed through lack of power or altered economics. This will adversely affect future supply predictions and as a consequence platinum group metals prices will remain stronger for longer. Perhaps platinum ETFs may prove as good a way as getting into this investment sector as any as projected earnings for the miners themselves may not be as good as past estimates would suggest as expansions are delayed.

The power problems in Zambia will also have an important impact on copper supplies, and of cobalt, although here the ‘rescue' with power from the DRC being specifically targeted at the Copperbelt operations may mitigate the effects somewhat, but here again new copper projects in the whole southern African region will be delayed. Projected new uranium production in Namibia will also likely be held up, which could herald a slight recovery in yellowcake prices.

In crises like these there are always going to be those who gain. But be aware that the positive increases in price likely as a result of the power crisis may not benefit those producers who are also having their costs and production programmes adversely affected!