South African Power Cuts Affect Precious Metal Markets Future

By: Julian D. W. Phillips | Wed, Apr 9, 2008
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The South African government will give state-owned power utility, Eskom, R80 billion in funding it was announced in the annual budget on 20th February to help it boost electricity generation. Since then it is clear that Eskom will be able to access the needed total funding of well over R300 billion [$37.5 billion] to expand capacity. Since then Eskom has confirmed that it needs to see South Africans cut power demand by 10% for the next few years. At the moment the main city of South Africa is suffering power outages every second day for between 1 and 3 hours at a time. It has recommended too that expansion plans for the mines, smelters in the country, housing projects and new ventures be curtailed until Eskom can guarantee the needed electricity to operate them. It expects power cuts to continue until at least 2013. So that one, on the outside, can gain some perspective of the problem and how it will be handled in the future, it would be good to see just how such a SNAFU could have happened.

More than 10 years ago there was excess power capacity in Eskom's hands, but it foresaw that this would be taken up and growth would be accommodated easily, but there would be a requirement for one power station a year thereafter. But the company falls under the Department of Minerals and Energy. It requested funding, so we are told, but was refused it on the basis that Eskom had too much capacity and too many well paid engineers. So the excess power capacity was mothballed expansion was halted. Even maintenance was cut to the minimum. Well, as we know from the man who fell off the 50 story building said as he passed the 12th floor, "So far, so good", all was not well!

The one day late in 2007 power was cut and the story came out much to the embarrassment of all in government and all in Eskom [Just as the top echelons were awarding themselves shares and incredible bonuses and salary increases.] The government tried to put a good spin on it, and said the crisis could be contained, by Eskom recently announcing that it would have to change its tune, it was far worse than they thought.

Then one saw the Minister of Finance pleading that Electricity prices had to go up 53% or 100% next year. With the damage scheduled to go on until 2013 and the country being taken off the good investment list, R30 billion worth of government stock has been sold sucking out the [carry trade investments] 'hot money' that has enjoyed a strengthening Rand and very high interest rates of over 13%. The Rand then fell from R6.8 :$1 to R8.2:$1 in a matter of weeks.

Given that South Africa continues to have a high trade deficit that is unlikely to slow, the Governor of the Reserve Bank is in a muck sweat. He has warned South Africans to tighten their belts. He had to weigh up the negatives of imposing Exchange Controls on this departing money with the future needs for foreign capital against each other. The money then flooded out.

Just below 10,000 jobs were going to be cut in the mining industry and a lot more outside it [up to 80,000?] if Eskom didn't play it right, so Eskom decided that household supply was more important than mining supply,until it was realized in the mining industry, in particular the gold sector would definitely have to shed jobs if this was done. The deep gold mines need half their power to light and cool the mines to make work conditions bearable or they would have to close shafts for safety reasons if they only got 90%.

Mining executives have pointed out that cuts in electrical power have a non-linear effect on gold mines. The typical deep level gold mine allocates roughly 50% of its electrical feed to refrigeration, ventilation and pumping. These facilities need to run at 100% before men can be put down the shafts, meaning that a 10% cut in overall electrical feed to a mine would in fact translate into a 20% cut in the balance of the mine's power usage. It was not so bad in the coal mining industry and in Platinum mining where the mines are relatively shallow.

Eventually after some heavy duty negotiations, the government decided to supply shallow mining industries with only 90% of their previous requirements [as they could cut back a fair way] and to supply the deep level mines with 95% of their needs, allowing production close to previous levels to resume again.

The consequences -

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Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.

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