The World Is Missing The Significance of the ESKOM Problem

The South African Utility, ESKOM is lurching towards possible disaster. That is a strong word - and my base case is that the utility "muddles through" - but the precious metals markets do not appreciate the risks emanating from ESKOM.

An April 3, 2019 article appearing in Fin24.com (a very good resource on South African news) noted the following:

"ESKOM chair Jabu Mabuza said two weeks ago that the debt laden power utility is battling with an ageing fleet and that over the past five years expenditure on plant maintenance had been reduced. He said the diversion of these funds was being investigated."

"The utility's CEO Phakamani Hadebe said ... its ageing infrastructure is unable to keep up with electricity demand."

"There are five key design defects at Medupi power station, which was meant to ensure that ESKOM would have enough available capacity to meet rising demand."

The results have been what the South African's refer to as load shedding, which is temporary power shut downs, clearly creating issues for the mining sector. This particularly impacts the South African PGM miners, where 70% of the world's platinum is mined. 

Endemic deferred maintenance, coupled with a huge debt load that impedes appropriate investment to solve the problem, along with corruption, and political motives that interfere with a purely economic choice leave South Africa with a potentially chaotic power supply. One of the immediate "fixes" is to raise rates which was done (almost 30% over 3 years) creating margin pressure for the miners, and effectively the possibility of closing of mine shafts... so not a fix at all.



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