Power Production Problems & Platinum & Palladium Prices

South Africa’s ESKOM once was a world class utility. It is now on the verge of collapse. 

This appeared last night in the publication, Fin24.com:

“More load shedding for Thursday as Eskom scrambles to prevent total collapse of power system

On Wednesday evening, Eskom issued a warning that it is experiencing "severe generation capacity challenges" and that stage 2 load shedding will continue on Thursday. 

"In order to protect the power system from a total collapse or blackout and having taken into account all the recovery efforts currently being implemented, our prognosis for tomorrow (Thursday) is that stage 2 rotational loadshedding will be implemented from 09:00 to 23:00," Eskom acting CEO Jabu Mabuza said in a statement.”

While the mines do have some diesel capacity, this not only is dependent on access to diesel supplies, but also certainly raises costs and tends to be more as an emergency backup than as an energy source for production. 

The implications? Although the mines, as the currency engine for the country, have historically been prioritized, at a minimum the status of ESKOM has lead and will continue to lead to higher power costs and in the extreme, to lost production. This tends to be a graduated scale. Stage 1 and 2 loadshedding involve a 10-15% reduction in electricity supply and can typically be managed without significant effect, however Stage 3 and 4 will directly impact mine production.

Such a scenario, involving anticipated supply that falls short, can lead to major price moves in the platinum group metals with markets like rhodium and palladium already in deficit mode.

Certainly the impact on each individual company will vary, but all will face higher costs, reduced production, and incrementally higher revenue on production that remains due to likely higher prices. 

While rotational power shortages are a South African fact of life, Jabu Mabuza’s quote, as acting ESKOM CEO, can not be taken for anything other than underscoring the extraordinary, dire power situation in the world’s leading platinum producer.

Does the market have any clue about the fragility of the world’s platinum group metal (PGM) supply? Not Really! Already palladium and rhodium are in the midst of a trajectory reflecting a successful rocket launch, with no excess inventories, and no available substitues for what is a critical part of the auto production chain... along with other uses.

Yes, there will be a time when platinum, now trading at almost a remarkable 50% discount to palladium, will be substituted in catalytic converters leading to a collapse in the now historic spread in the prices of these two metals.

But let’s not forget how small these markets are... annual world platinum supply is 8 million ounces worth about $7 billion. That is truly a tiny figure for a metal that is essential to the world’s military and civilian economies. It is representative of the fact that the market values of the other PGMs,  rhodium, ruthenium, iridium and osmium, are far smaller, and that palladium’s $14 billion is also tiny in the context of world money and its utility.

As I have often said, whether the catalyst is a power shortage, investment demand, industry demand for inventory, or government strategic demand, strap on for what will likely be an explosive rocket ride.

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