We need platinum to make low emission cars.

To make platinum, takes power.

~To generate power, S Africa needs to build coal power stations. Thus
increasing emissions of CO2.

Or go nuclear.. ;-)

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Not just price of platinum to blow
By John Dizard
Published: February 3 2008 22:24 | Last updated: February 3 2008 22:24
Right at the moment when we really didn’t need another gasket to blow in
the economic-financial engine, one has. This time it isn’t a leveraged,
insured, hedged, guaranteed, recapitalised, disclosed, rated,
structured, financial “asset”.

It’s a real world process: the mining and refining of platinum.
Leverage, or the dependence of a lot of stuff on a little bit of stuff,
is a property not only of balance sheets, but of industrial processes.
Without sufficient platinum, it is not possible to produce automobiles,
trucks, and diesel engines that can be sold in North America, Europe,
Japan, and much of the rest of the world. The catalytic converters
required by environmental laws do not work without it. And right now, we
are on a clear track to running short of the platinum needed to
maintain, let alone increase, the production of gasoline and diesel engines.

The problem is the chronic electricity shortages in South Africa. All of
the greenhouse gases produced last month by the conferees in Davos did
not result in this problem being “addressed”, as their organisers would
put it. Now the only way to maintain existing clean air standards in the
developed world is to build and operate, as rapidly as possible, a
series of new coal-fired power stations to supply the country’s mines
and refineries.

That won’t happen until 2012 at the earliest. In the meantime, the
already absurdly high platinum price (up more than 40 per cent from a
year ago), probably has to rise even higher to squeeze demand out of
less critical applications such as jewellery. You can expect some
fallback in the current price as you read headlines about South African
mines and refineries restarting, reassurances from government ministers
and electricity supremos, and so on. That correction won’t last, at
least in the absence of a collapse of auto and diesel production. For
one thing, the very speculators who will help with this price-rationing
process will set aside more stocks with which to trade, which will also
reduce usable supply.

Substitutions? More efficient use? Already thought of that. Platinum has
been very expensive for a long time, which is why they name credit cards
after it. Engineers have been making incremental reductions in platinum
content for years, and they will continue to do so. Slowly. The stuff is
just too useful as a catalyst, which means it helps promote a chemical
reaction, such as breaking down pollutants, without itself being
consumed in the process.

South Africa’s mines and refineries supply nearly 80 per cent of world
production. In the rest of the world, for the most part, platinum is
supplied as a by-product of mines principally supplying nickel,
palladium, and other metals. That makes it hard to increase alternative
supplies, even if the mining engineers and skilled workers were
available, which they aren’t.

How did South Africa, and the platinum industry, wind up in this mess?
Apart from what could be easily mistaken for pure ineptitude on the part
of the responsible ministries and the management of Eskom (the
electricity utility), the country made a huge bet on the rapid
development of hydroelectric resources in neighbouring countries. The
state was strongly encouraged to do so by its political supporters among
international organisations and foreign governments, since the
alternative, coal-fired power, was not environmentally acceptable. The
hydroelectric developments, principally around Inga Falls on the Congo
River, would have been ambitious even if the political stability and
engineering skills existed.

So it’s back to the drawing board, and on the drawing boards are going
to be a series of coal stations. Power rationing plans have been
devised, which now call for a reduction of 10 per cent in electricity
use by key industrial customers.

That’s worse than it sounds, by the way. You don’t make up for cutbacks
on that scale in a metals operation by using compact fluorescent bulbs.
In the short term, at least, power cutbacks will lead to
disproportionate cutbacks in metals production. The very deep mines need
to be constantly pumped, cooled, and maintained, lest they flood or
collapse. So it is likely that ore will be piled up next to the
refineries. The ore can only be used as doorstops or paperweights; to
get platinum products you need the refineries.

Michael Jones, the president of Platinum Group Metals, which is building
two new platinum projects in South Africa, says: “We can use diesel
generation for mining our relatively shallow ounces [of reserves]. As a
practical matter you cannot do that with smelting. This [power crisis]
will obviously have an enormous impact both in gold and platinum. There
is a new engineering factor which has to be taken into account, which is
megawatts [of power] per ounce.”

There is another interesting possible impact on markets from the power
cutbacks. A lot of South African gold production has been hedged through
short sales. It may be the case that the banks who lent the gold for the
short sales have suggested that the cutback-plagued mines cover their
short sales with open market purchases. That could have fuelled part of
the gold pop in recent weeks.



Copyright The Financial Times Limited 2008