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Energy crisis hurts S Africa's precious metals industry

"The higher prices should help the economy ... but we can't make full use of it because of the energy crisis."

Mike Schussler, economist at T-Sec investment firm

South Africa, producer of 30 percent of the gold in circulation today, is unable to profit fully from record prices for the precious metal as a crippling electricity crisis hampers production.

The price of gold, of which South Africa was the top producer from 1906 to last year, when it was dethroned by China, passed the US$1,000-an-ounce mark for the first time on Thursday.

"The higher prices should help the economy ... but we can't make full use of it because of the energy crisis," said Mike Schussler, an economist with investment firm T-Sec.

State power utility Eskom, its ageing infrastructure incapable of keeping up with the demands of a booming economy, started imposing intermittent savings cuts from late last year, paralyzing the mining industry for five days in January.

Subsequently, it imposed a quota of 90 percent of historic use on mines in the country, recently lifted to 95 percent, to keep the country afloat while building new electricity infrastructure.

Gold production dropped 16.5 percent year-on-year in January.

"Operating with 90 percent electricity supply has proved especially difficult," said Chamber of Mines chief economist Roger Baxter.

Reliable electricity supply is crucial to ensuring safe working conditions underground, including proper ventilation and water drainage.

Savings were thus accrued by reducing the use of production equipment.

"The impact [of the power rationing] is not 10 percent of production, it can be 20 percent," Baxter said.

Mining group Gold Fields said last month that the energy crisis could cut long-term production by up to a fifth and may force it to shed nearly 7,000 jobs.

Company spokesman Andrew Davidson said on Friday the higher gold price was welcome.

"Obviously any increase of the gold price is beneficial for the gold producers ... it is a great help," he said.

But "if we are not receiving enough power, we will have to close some shafts, therefore only more power will assist us to minimize job losses," he said. "If we could produce more, it [the higher price] would be good for exports, for employment and the economy in general."

"This is an opportunity lost for South Africa," he said.

This was all the more depressing, the analysts said, as a gold price hike would ordinarily have been just what South Africa needed to lift it out of a patch of economy slowdown.

Economic growth slowed last year to 5.1 percent from 5.4 percent the previous year, and the government last month cut its prediction for this year from 5 percent to 4 percent.

Baxter said gold price rises in 2005 and 2006 helped finance the restoration of ageing wells and the opening of new ones, enabling mines to increase output.

Gold mining contributes 2 percent to South Africa's overall GDP.

Overall, things were not looking rosy, Schussler said -- pointing to South Africa's negative balance on its trade and current accounts, the declining value of the rand (currently at US$0.128), and climbing inflation.

Consumer inflation stands at 9 percent, way outside the central bank's target of between 3 percent and 6 percent and interest rates are at their highest in years.
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