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Electricity crisis sends a clear message
Fanie Joubert and Doret Els
Posted: Wed, 27 Feb 2008
[miningmx.com] -- THE announcement from Eskom at the end of January that it could not guarantee constant electricity provision to the mining sector send a shock through the industry, causing mines to come to a five-day halt.
The state power firm later agreed with platinum, gold, diamond and coal miners that it would be able to meet only 90% of their electricity needs. On the 13th of February, Eskom announced that it will continue only meeting 90% of miners’ needs till 2012!
These developments provided upside support to commodity prices, with platinum enjoying most of the upside - South Africa produces around 80% of the world’s platinum.
The white metal surged around 35.0% between January and February 2008 ($2,100 per ounce, 18 February 2008).
The weaker US dollar and skepticism over the US economic outlook also acted as catalysts in pushing the gold price to
near $929 per troy ounce end of January 2008.
While investors (and speculators) in the precious metal market might be smiling, the threat posed by the constrained electricity supply to the South African economy, and the mining sector specifically, remains on the forefront.
It is very difficult to estimate the extent to which Gross Domestic Product (GDP) could be impacted, but we have made a few calculations that could potentially explain the possible effect of a three hour power cut on the economy: The GDP per workday equals R8.3bn.
By allocating equal weights (according to productive hours per day) to the different GDP sectors the loss per day equals R1.1bn, or a 13.3% cut in normal daily production.
To refine the calculation, the weights per GDP sector are varied and this results in the loss per day to rise to R1.9bn, i.e. a stellar 22.8% drop in production! We have revised our average GDP growth estimate for 2008 from 4.6% previously to 3%.
While assumptions will likely change, the fact remains clear that economic growth is subject to severe downside risks.
The decrease in power supply will necessarily lead to a reduction in production, from which the mining industry is not excluded. One could easily be led into thinking 90% electricity availability translates into mines operating at 90% capacity.
This is not the
case however, with platinum miners commenting that actual production will be closer to 75% of original output and gold miners also suggesting output losses between 15% – 20%. At such high levels of decrease, mining CEO’s worries go beyond that of declining revenue to inevitable, employee lay-offs.
An industry source calculated that a one percent reduction in mining production will translate into a one percent reduction in required workforce. Applying this estimation to mines losing 20% of production on average and the industry having a workforce of near 400,000, the amount of workers that could potentially face job losses can be as high as 80,000.
The impact of retrenchment will not only be limited to the workers themselves, but will also be felt by the estimated 8 people supported by each worker - aggregating the impact to a possible 640 000 people! In a country with an official unemployment rate of 25.5% (March 2007), and a declaration of ‘war on poverty’,
this needs to be seen in a very serious light.
The electricity crisis comes at a time when consumers are already under pressure from the 400 basis point rise in interest rates as evident from the latest retail and motor trade data. Hopefully the turmoil caused by the electricity crisis will send a clear signal to policy makers that timely planning and maintenance should remain a top priority, before making lavish promises.
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