South African Power Outages Drive Issues in Mining

Alan Penny

11 December 2019

3 min read

  • South African state-run power company struggling to fulfill power needs
  • Effects multiple hard commodities

South Africa has been struggling with several power issues as of late, as state power company ESKOM has been moving towards load shedding. This means that it will cut 6000 MW from the South African national power grid. But they have recently stated that they may be able to make that only 4000 MW. While it doesn’t resonate as an obvious issue, the reality is that South Africa is a major player when it comes to mining several hard commodities, and this will have a knock-on effect around the world.

there could be quite a bit of volatility in certain metals markets due to a lack of supply

Sibanye-Stillwater and Harmony Gold both have been forced to cut their South African mining operations due to record shortages in power. This was also seen by Impala Platinum, as well as some diamond miners such as Petra Diamonds. This suggests that there could be quite a bit of volatility in certain metals markets due to a lack of supply, especially when it comes to some of the less liquid ones like palladium. In fact, palladium has already seen a massive spike higher.

Look to the “side markets”

Close attention to the so-called “side markets” must be done to see how this is affecting the global economy. These are important but aren’t quite as liquid as some of the other ones. For example, Anglo-American has lowered its production forecast for iron ore, diamonds, and coal for the next two years. This is due to the power cuts that are very likely to be more longer-term than not. Having said that, they also expect overall production to improve by 3% next year.

Price of palladium skyrockets

The palladium market has rocketed as South Africa produces 40% of the world supply, and it makes sense that a lack of production drives a price in the simple supply and demand trade. This is a major problem that South Africa needs to get its hands-on, or there will be more speculation in some of these less liquid markets.

One thing that is helping the market a bit is the fact that the global economy has been slowing down. Demand for iron isn’t quite what it once was, as well as palladium. Nonetheless, both have seen significant gains so while very bullish, they haven’t gotten out of control yet.

Ultimately, South Africa will need to do something about its power grid to help its economy, so eventually, this should sort itself out. In the short term though, expect to see a lot of these markets show lack of supply, and therefore it could provide a floor.

In a bit of irony, the Russians continue to pump out massive amounts of lab-grown diamonds, so in that market, we may not see any difference. Gold is, of course, moving based upon speculation of central banks around the world. It will take a greater lack of supply to get gold to move to the upside. At least based upon this news, the Australians will be more than happy to fill the void.

Written By
Alan Penny

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