Monday, January 10, 2011

Global PGM Supply - Lights Going Out in South Africa Agagin?

Many platinum and palladium investors remembers the spectacular rally of platinum and palladium price in the first few months of 2008, when electricity crisis in South Africa forced the PGM mining industry in the country to shut down for 5 days, causing a market panic that sent platinum price to $2300 per ounce and palladium to near $600 in short order.

While the world's attention is focused on the Australian flood which disrupts the country's coal supply, causing a big rally in international coal price, few notice that it rains on South Africa's coal mines just as well, just as it did 3 years ago!

Are we setting up for a re-run of the early 2008 PGM panic rally? How is South Africa's electricity grid coping today, comparing with early 2008?

I pointed out that South Africa has reached Peak Coal. So the coal and electricity supply situation in South Africa will get worse, not better, in the coming years.

I pointed out that ESKOM, the semi-governmental national electricity company of South Africa, could not solve the electricity problem because it does not have the money. Even after several boosts of electricity tariff, South Africans are still paying the lowest electricity tariff in the world: about 0.29 rands per kwh, or US$0.04 per kwh, while international coal price is running at $129 per ton and going higher. It costs 0.55kg of coal to generate one kwh of electricity. So if fuel cost is half of the cost of generating electricity, a fair electricity price should be US$0.14 per kwh. According to the latest ESKOM annual report, they paid roughly $25 per ton for coal acquisition. So imagine what kind of low quality discard coal they have been burning over the years if that's the kind of coal price they have been paying!

In response to concerns of ESKOM's coal supply, amid the disruption due to heavy raining, and due to increased export demand, here is what ESKOM said: "Eskom is buying high-quality coal for affected stations and taking steps to improve operating procedures in the coal stockyards. We are upgrading operating processes and procedures for the power station coal stockyard to improve coal handling in wet weather".

I am pretty sure ESKOM is paying $25 per ton and getting the kind of high quality discard coal, wet and mixed with free dirty mud, while the Chinese and Indians, turned away from Australian coal export harbors, are paying $125 per ton and they are getting the low quality coal with no freebie dirts. I will believe that ESKOM is getting guaranteed supply of high quality coal, when I see that they are paying a price that tops the offers of the Indians and the Chinese.

I think we are probably set up for a re-run of the 2008 PGM supply panic soon. To leverage this investment opportunity, investors should acquire physical physical platinum and palladium metal bullions and coins, as well as stocks of the only primary PGM mining companies outside South Africa, namely SWC and PAL.

P.S. The author is heavily invested in palladium mining companies SWC and PAL, and has big long positions in coal mining companies PCX, ACI, ICO, etc.

13 comments:

Montyhigh said...

Why not buy a couple of platinum futures or futures options?

MontyHigh, www.worldofwallstreet.us

cici said...

what about ptm or arq?
do you follow uranium?
what stocks do you suggest?

Hondo said...

JJ, can you revisit why you don't like PPLT, the platinum ETF? I am skittish about investing in platinum miners, particularly SWC. SWC seems to always have some event to throw a wrench in the story, such as these from the past few years:

1. Norilsk Nickel doing dilutive share sales.
2. Risks of being unable to roll over their bank loans and other debt in the depths of the credit crisis
3. Miners' labor issues and threatened strikes

So I prefer PPLT. In particular, if there really is an Eskom-related loss of platinum production in the near term, the spot price will spike, benefiting PPLT. Miners like SWC and PAL won't be able to get it out of the ground fast enough to sell at the high spot price.

They could, of course, sell platinum futures to lock in profits on production in months to come. So I guess I would also ask the same question as other commenter MontyHigh: why don't you own platinum futures?

smile and think said...

Why is PAL AND SWC so low right now, I'm long on both but very concerned!

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hou said...

So I prefer PPLT. In particular, if there really is an Eskom-related loss of platinum production in the near term, the spot price will spike, benefiting PPLT. Miners like SWC and PAL won't be able to get it out of the ground fast enough to sell at the high spot price.
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