Rising Electricity Costs Set To Keep Metals Prices High

Electric Shock Set To Keep Metals Prices High

Date 30/07/2008

The Right Side

Erin-And-Isabel

Electricity is the lifeblood of the mining industry. It is used in transport of material, people and ore not to mention machinery and mineral processing. It is the only power source for health and safety applications like pumping water, ventilation and refrigeration. In one South African gold mine 70m litres of ground water is pumped out daily to keep the mine safe!

After labour, energy is the biggest cost for miners. Without electricity mines, grind to a halt - just look at how power outages in January hit production in South Africa. And the cost of electricity keeps rising. Energy research firm Global Insight expects US rates to rise by as much as 5.7% nationally this year.

The cost of coal has shot up

In West Virginia and Kentucky, electricity is up by as much as 15% and 12% respectively. Coal is the culprit! Snow in China and floods in Australia (the world’s biggest coal exporter) meant that demand for US coal to fuel electricity in emerging economies has risen dramatically. Central Appalachian coal, a benchmark grade widely used by power plants, rose from around $40/tonne in early 2007 to nearly $90/tonne today.

Talking of China, its mines also face rising electricity costs. This month, the National Development and Reform commission raised the electricity tariff by 4.7%. Like elsewhere, the hike was in response to rising costs of the nation’s power plants. Australia, another big metals producer, which gets 80% electricity from coal, has also seen electricity price hikes.

It’s even worse in Africa

And let us not forget Isabel’s birthplace either, where power is a double struggle. In July the National Energy Regulator of South Africa (NERSA) announced a further 13.3% increase for miners. That wouldn’t be so bad if it hadn’t already raised rates 14.2% back in April.

And the result is an additional R1.6bn cost to the industry for the period April 2008 to March 2009. For large-scale deep level gold and platinum mines, where electricity costs are about 10% of cash production costs, this electricity price increase raise cash costs by about 2.5%.

This is what happens when electricity suppliers, like South Africa’s state-owned Eskom, fail dismally to invest in infrastructure.

South Africa’s problems impact its neighbours too. Namibia’s NamPower, which imports 50% of its electricity from South Africa, recently raised energy rates by 18.6%. And Botswana’s diamond mines are struggling to keep the lights on too.

The uncertainty continues to constrain supply

Uncertain supply and unpredictable pricing of electricity prices can be devastating for miners. Long lead times are needed to get mines to production. And in these times of high metals prices and exorbitant costs, productivity is crucial.

Nowhere is this more evident than in South Africa. A platinum mining chief recently told Isabel that more clarity is needed going forward with respect to pricing and availability of electricity. Without this he reckons miners will be plunged into darkness and the spark of exciting growth projects snuffed out.

At this rate it looks unlikely that new metals will flood the market any time soon. So, investors are likely to continue to back metals until this electric storm has passed.

Keep mining,

Erin and Isabel

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