Metals Surge as Rationing Cuts Power at Biggest Mines (Update1)
By Saijel Kishan and Gavin Evans
May 5 (Bloomberg) -- Chile's worst drought in five decades and power rationing from South Africa to China mean the price of aluminum, gold, copper and platinum will keep climbing as the lights go out in the world's biggest mines.
Those governments are being forced to choose whether to reduce power to their 1.4 billion residents or curtail energy supplies to the world's biggest copper, aluminum, platinum and gold factories. The energy used by China's aluminum smelters each week could provide enough power for more than 2 million people for an entire year.
Runaway growth in emerging markets that's squeezing world oil supplies has led to electricity shortages, cutting output of commodities needed for ever-rising demand. Platinum jumped to a record in January after mines in South Africa closed for five days as utilities rationed power. Cobalt gained 58 percent in the past year as production growth in the Democratic Republic of Congo was limited by electricity supply.
``There will be a sustained level of risk from power shortages in the commodities markets,'' said Michael Lewis, London-based global head of commodities research at Deutsche Bank AG. ``We are pricing bigger supply losses as a result.''
Metals are headed for a seventh straight year of price increases even as the worst U.S. housing slump reduced consumption in the world's biggest economy. Investors added $40 billion to funds indexed to commodity prices in the first quarter, more than in all of 2007, Citigroup Inc. estimates.
Platinum, Aluminum
Platinum, used in jewelry and car parts, climbed 25 percent since the end of December to $1,911 an ounce in New York today, while aluminum gained 21 percent to $2,920 a metric ton on the London Metal Exchange. Copper climbed 26 percent to $8,410 a tons on the LME.
Freeport-McMoRan Copper & Gold Inc., the world's biggest publicly traded copper producer, Cia. Vale do Rio Doce, the largest in iron ore, and gold producer Newmont Mining Corp. all say power shortages threaten to reduce future production.
Rio Tinto Group, the second-biggest aluminum producer, cut output at its New Zealand smelter by 5 percent, or 1,400 metric tons a month, on May 1 because of power constraints caused by drought. Anglo Platinum Ltd., the world's biggest producer of that metal, said April 29 that first-quarter output plunged 24 percent to 428,600 ounces because of cuts in the supply of electricity to its South African mines.
Congo Cobalt
Congo, the world's largest source of cobalt used in batteries and jet engines, asked mining companies May 2 to cut electricity use after power-transmission cables were stolen.
Credit Suisse Group, Switzerland's second-biggest bank by assets, raised its 2008 cobalt forecast by 50 percent to $45 a pound on March 26 because of Congo's electricity shortages. The price was at $48.50 on May 2, according to Metal Bulletin data.
The mining industry and the analysts that follow it have underestimated the extent of supply disruptions from strikes and power shortages, Rio Tinto Chief Economist Vivek Tulpule said April 21.
``Those phenomena will persist,'' Tulpule said. ``It wouldn't surprise me to see prices for some of the base metals continue to rise.''
Smelting aluminum uses about four times as much power as for copper and more than twice that of zinc, according to Barclays Capital. About 80 percent of world aluminum smelting capacity is in nations at risk of electricity shortages, according to Citigroup.
Structural Challenge
``Problems in South Africa and China with electrical capacity are not just bad luck, but result from a lack of investment,'' said Kevin Norrish, commodity research director at Barclays. ``Energy availability in the next 10 years is going to be a very important issue to the mining sector. We see these as structural changes, not cyclical changes.''
China built 549.3 billion yuan ($79 billion) of generators and power lines last year, according to state officials. Accelerating demand will tighten the nation's power supply again within two years, according to Citigroup, which estimates shortages there cut first-quarter copper output by 40,000 tons, zinc by 125,000 tons and aluminum by 600,000 tons.
``We're not going to solve these power shortages without new facilities,'' said Evy Hambro, who manages BlackRock Inc.'s $17 billion World Mining Fund in London.
Electricity Supplies Thin
Electricity supplies remain ``tight'' in more than half of China, the nation's top economic planner said last week, adding that warm weather may cut hydropower output this summer. Energy shortages in South Africa, the world's largest source of platinum, may last seven years, state-owned utility Eskom Holdings Ltd. forecasts. Rationing there looks likely until new power plants start up in 2012, Goldman Sachs JBWere Pty said.
``We've been through a period of 20 years when there hasn't been much built in terms of new capacity,'' said Tim Barker, who helps manage more than $54 billion of assets at BT Financial Group in Sydney. ``We're probably reaping the reward of that lack of foresight.''
Eskom is cutting electricity across cities and rationing power to industry including BHP Billiton Ltd. and Anglo Platinum, which mines a third of the world's supply of the metal. South Africa produces 10 percent of the world's gold and 78 percent of its platinum.
Chile, the world's biggest copper producer, faces the risk of energy rationing after the worst drought in 50 years lowered hydropower reserves amid a shortage of natural gas for generators.
Copper Outlook
Copper may have further to increase. In inflation-adjusted terms, the price hasn't yet reached a record, according to Barclays. In real terms, the metal is trading close to levels last seen a century ago, when the U.S. economy was expanding and the nation was being wired for electricity.
China, which is making a similar transformation, is building power stations and transmission lines that are exacerbating deficits in metals supply. As much as 80 percent of China's grid investment is spent on copper, said Yuan Genfa, secretary general of the Shanghai Electric Wire & Cable Industry Association.
``Over 50 percent of China's copper use is electrical use,'' said Na Liu, director of Institutional Equity at Scotia Capital Inc. ``The electricity grid, for the most part, is copper wire.''
Chile may be forced to limit power use for the first time since 1999 because drought reduced water levels at hydroelectric reservoirs, said Mauricio Canas, an analyst at research company Penta Estrategia & Inversiones in Santiago.
Government policies put in place this year to ease power demand, such as lowering electricity voltage, may not be enough to avert rationing if the drought persists, Canas said. Codelco and Freeport, the world's two biggest copper producers, have mines in provinces vulnerable to drought-related rationing.
``There just hasn't been enough planning to accommodate the growth of Asia's economies,'' said Francisco Blanch, London-based global head of commodities research at Merrill Lynch & Co. ``To allow China and India to have a middle class, we need to go back to the drawing board and boost investments in power infrastructure. And if this doesn't happen, we're going to see even more brown- outs.''
To contact the reporters on this story: Saijel Kishan in London at skishan@bloomberg.net; Gavin Evans in Wellington at gavinevans@bloomberg.net
Last Updated: May 5, 2008 00:25 EDT
