29

Platinum: All Lights Out in South Africa

 

2008

Due to ongoing supply bottlenecks of electricity from Africa’s largest energy provider, Eskom, South Africa’s major mining companies restrict their production, and the price of platinum explodes.

“South Africa needs at least 40 new coal mines to prevent shortages over the long term.”

—Brian Dames, Eskom

“Restoring energy security for the country is an absolute imperative.”

—Cyril Ramaphosa, president of South Africa in 2019

Two years before the World Cup kickoff in June 2010 in South Africa, the country faced its worst electricity supply bottleneck in decades. In spring 2008 the government declared an energy emergency. The national utility company Eskom—the largest electricity provider in Africa—shut down power for several hours every day for weeks, since its capacity lagged far below demand. For 20 years the country’s economy had been growing at a rapid pace. Electricity demand had risen 50 percent since the end of apartheid in 1994, but the South African government and Eskom had failed to provide additional capacity. The electricity company had repeatedly stressed that the nation’s power plants would have to be overhauled and new power plants built, but government agencies ignored these warnings.

Because there was not enough power available, electricity was rationed at various intervals and in different zones, resulting in two- to three-hour power outages every day. Particularly affected were Johannesburg and the Gauteng region, the center of gold and platinum production. Around half of the mining companies’ energy demand was needed just to maintain infrastructure. Without electricity, the water could no longer be pumped out of the mines, and getting sufficient oxygen several kilometers deep became critical. The impact on actual production was even more dramatic. The Miners’ Union said that the companies sent tens of thousands of workers home or for training. At the end of January, the situation worsened. The energy company operated the world’s largest coal-fired power plant, the Kendal power plant, and Eskom’s coal reserves were being soaked by rainfall. At this point international precious metal prices began to react.

Eskom turned off the power for the mining companies.

Precious Platinum and Palladium

The group of platinum metals (PGMs) includes platinum, palladium, rhodium, iridium, osmium, and ruthenium, but the economically important metals in this group are platinum and palladium, whose trading is overseen by the London Platinum and Palladium Market (LPPM). South Africa and Russia together account for around 90 percent of the world’s platinum metals production. Smaller producer countries are Canada, the United States, and Zimbabwe. The major companies are Anglo American Platinum (Amplats), Impala Platinum (Implats), Lonmin in South Africa, and Norilsk Nickel in Russia. In recent years, Sibanye has also grown into a new player through takeovers and acquisitions.

Platinum is mainly used for catalysts (50 percent) and jewelry (25 percent); while for palladium, in addition to those applications, dentistry and electronics are important. Price-determining factors for both metals are Russian and South African production, Russian inventories, and global growth rates.

South Africa had been the center of global gold production since the end of the 19th century, though it had fallen back over the past 30 years to eighth place. However, South Africa still has a dominant position in producing platinum. Around 80 percent of the world’s production comes from that country, with the overwhelming majority being produced in the Bushveld complex. The prices for platinum are correspondingly sensitive to any negative news from South Africa.

Prices for platinum had been rising steadily since mid-2005, but the momentum increased significantly in late 2007 and early 2008. For the first time in seven years, the multinational firm Johnson Matthey, the world market leader in auto catalysts and thus the largest customer of platinum, expected falling shipments for the entire year.

Figure 26. Platinum prices in USD/troy ounce, 2004–2009. Data: Bloomberg, 2019.

At the end of January 2008, the news that the three largest gold producers in South Africa and the largest platinum producer were reducing production in all mines caused prices to jump. Amplats, with a 40 percent market share, expected production losses of 9,000 ounces per day. The number-two firm, Impala Platinum, claimed to lose about 3,500 ounces per day. Overall, South Africa’s platinum miners feared a 2008 production loss of 0.5 million ounces.

By March 2008 the price of platinum rose to more than 2,200 USD/oz.

In addition to gold, the price of platinum in particular rose overnight by almost 100 USD to more than 1,700 USD. At the beginning of March 2008, the price of a troy ounce of platinum closed at more than 2,250 USD, a temporary price maximum.

Electricity supplier Eskom slowly began to regain control of the situation, but industry production was still running at only 90 percent capacity, and the company predicted that supply problems would continue until at least 2020.

And the years of mismanagement and corruption continued. In February 2019 the situation escalated again, as Cyril Ramaphosa, the president of South Africa following Jacob Zuma, declared Eskom to be “too big and too important to fail” during the Indaba mining conference in Cape Town. Besides its aging coal-fired plants, the company suffers from a debt level of more than 30 billion USD. A breakup, a government rescue plan, as well as a 15% increase in its tariffs to its industrial customers are in the cards for 2019. At the same time, an ounce of platinum costs 800 USD—a new price rally is about to unfold!

Key Takeaways

•In 2008, South Africa faced its worst electricity supply bottleneck in decades, and the government declared an energy emergency. Eskom, the national utility company and the largest electricity provider in Africa, shut down power for several hours every day.

•Although South Africa’s golden days of gold mining were over, it remained the dominant force in platinum group metals, with about 80 percent of the world’s production.

•At the end of January 2008, the three largest gold producers and the largest platinum producers all reduced their mine production as a result of continuing power outages.

•That development spurred prices for platinum, which had been rising steadily since mid-2005 and had already reached 1,000 USD. By March 2008, the price of platinum climbed above 2,200 USD per troy ounce, its highest price ever!