Platinum price 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 blackouts (or load shedding) on March 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-Q , AAL-L) announced it closed three of its open-pit coal mines in the area because of the rain. The company is uncertain when the New Denmark and Kriel mines in Mpumalanga and the New Vaal mine 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 megawatts during the day and could only produce 30,000 megawatts.

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 by far the world’s largest platinum producer. Anglo Platinum (ANP-L, AMS-J), the world’s top platinum producer, said the 10% power reduction would lead to a 5% drop in mineproduction. Impala Platinum Holdings (IPLA-L, IMP-J) 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 U. S. 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, his 2010 estimate to US$1,900, and his long-term prediction to US$1,000 per oz.

On March 18, spot platinum closed at US$1,951 per oz., up US$8 from the previous day. During March, the price has ranged from a high of US$2,275 per oz. to a low of US$1,950.

While mining power consumption has been restricted, the rest of South Africa has not seen blackouts since January. In reference to that, Anglo American CEO Cynthia Carroll told Johannesburg newspaper Business Day that mining should not be targeted when power supply becomes an issue. The country’s mines use about 15% of its power, but contribute 7-8% of its gross domestic product. And Anglo American subsidiary Anglo Coal has agreed to provide 2.9 million tonnes or 60% of the 5.4 million tonnes 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 statement, union leaders said they planned to discuss possible legal remedies if workers should lose their jobs due to the Eskom crisis.

The South African power crisis stems from a failure by Eskom to predict increasing power demand spurred by strong economic growth. The utility failed to develop new power plants or maintain older ones over the last 10 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%.