South Africa: World Cup Mania May Cause PGMs to Spike

22 April 2010, 09:18 a.m. EST
By Daniela Cambone
Of Kitco News

 

Montreal (Kitco News) -- With the world’s largest sporting event occurring in South Africa in June, many analysts are certain that the FIFA World Cup will curtail the nation’s limited power supply and push up prices of the platinum group metals.

South Africa is the world's largest producer of PGMs and a rash of power supply problems during the past few years have had an impact on mining, and the same thing could happen this summer, said Shamim Mansoor, Head of Precious Metals Sales for ETF Securities.

With an increased demand in power supply, there could be a real shortage of electricity to the mining sector, in turn limiting production, Mansoor said. More than 400,000 people are expected to descend on South Africa for the event and Mansoor does not see how a strain on the country’s limited electricity supply can be avoided.

The country’s state-owned company, Eskom, generates 95% of South Africa’s electricity as well as two-thirds of the electricity for the African continent.  Mansoor said that Eskom has 36 200 megawatts (MW) of net generating capacity, of which 32 100MW is coal-fired (90%).  In 2008, due to the unavailability of coal and to a delay in new power stations being built, Eskom declared force majeure in turn affecting the mining industry and causing a spike in the price of PGMs.

During the load shedding of 2008, platinum went from $1700 to $2100, palladium from $390 to $560, and rhodium hit $10,000 an ounce, said Mansoor.  “All of these are impacted because 75% or more of all commodities are produced in South Africa,” she said. 

Mansoor said that Eskom did not have sufficient supply to meet demand in 2008 and emphasized that occurred in the South African summer. "The demand peaks in the winter, in the months of June and July, which is when the World Cup is being held,” said Mansoor, a native South African. “The last estimate I saw was that 475,000 people would be descending on the country and that is most likely going to push up electricity demand during a period that is already at its peak,” she said.   

Even though the World Cup is only one month, Mansoor thinks the repercussions will be felt early on. “The players come down early for practices, the journalists come beforehand, and many visitors will take an extended holiday; the impact will be felt a lot longer than the four weeks,” she said.

Mansoor noted that the high demand of power will not only come from the stadiums but from broadcasting centers, FIFA’s headquarters, hotels, and restaurants. 

In order to meet the increased demand, Eskom may need to once again declare force majeure, freeing itself from any liability, and may have to introduce load shedding. Metals prices are likely to spike in such a scenario, said Mansoor. However, she does not feel the impact will be felt on gold prices, since only 10% of production comes from South Africa.

A spokesman for Eskom told Kitco News the company is not concerned about a lack of power supply. “We are confident that Eskom will be able to deliver sufficient bulk electricity supplies, ensuring reliable power supply during the World Cup," said Eskom spokesman Sibusiso Duma. "According to the FIFA requirements, each stadium will be powered by dedicated on-site generators - the load for Eskom would therefore be reduced by this action.”

In early April, the World Bank approved South Africa’s request for a US$3.75 billion loan to co-finance a new power plant in Lephalale, Limpopo Province. Mansoor said, however, the loan comes too late. “All the power stations they had planned to build for World Cup have not been built,” she said.
  
Recently, South Africa’s Energy Minister Buyelwa Sonjica warned that the country was continuing to suffer from a perilously low electricity reserve margin, and reiterated the government’s call for power savings of 10%.

Workforce

For George Topping, Managing Director of Base Metals Research for Thomas Weisel Partners, the issue is not so much the lack of electric power but rather, a lack of willpower. “You will be more inclined to find that your workforce won’t be very productive," said Topping. "It is going to impact productivity quite a bit. The World Cup goes on for four weeks and an event like this is just huge in a soccer-mad country.”

Rik Visagie, a mining analyst for Octagon Capital, echoed Topping’s view. “This is the most important event they have had in the country outside the vote – so I can’t see anyone actually focusing on work. South Africa is a strong sports country and it will affect the price of platinum. “

Platinum along with palladium and rhodium are part of the platinum group metals (PGMs), primarily used to manufacture automobile emission control devices. Last year, South Africa produced 79% of the world’s supply of platinum and 86% of the global supply of rhodium.

--By Daniela Cambone of Kitco News, dcambone@kitco.com