Gold and platinum at record levels

Gold and platinum prices hit record levels on Monday as investors struggled to assess the impact of a power supply crisis on South Africa’s mining industry.

Virtually all of South Africa’s power is generated by coal-fired power plants, supplied from local mines. But Eskom, which provides 95 per cent of the country’s electricity, is running short of coal supplies with less than five days of stock remaining, according to South African reports.

Gold rose 1.8 per cent to a record $929.20 a troy ounce in late London trading, while platinum hit a record $1,720 a troy ounce, up 2.9 per cent.

Traders described the crisis as a “wake-up” call that would prompt debate about South Africa’s ability to grow its economy when faced with a shortfall in power generating capacity that might not be fixed within five years.

Even before news of the latest power supply disruptions to South African production, the global platinum market was very tight as supply deficits over the decade have significantly diminished available stocks.

“If there is a prolonged shutdown of South African mines, the [platinum] price could spike significantly higher,” warned Rebecca O’Dwyer of Investec, who said it was impossible to estimate how long mines could remain shut.

South Africa accounts for almost 80 per cent of global platinum output and if all of the country’s production was halted, it would result in the loss of about 22,000 ounces of platinum output a day, according to Investec’s estimates.

“We are now concerned that the shortfall in production will need to trigger a structural change in the platinum market,” said John Reade of UBS.

“Supply deficits of more than 700,000 ounces a year will result over the next three years. The only way the market can be brought back to near balance is for higher prices to displace jewellery demand and encourage scrap (supplies) and profit taking from investors,” Mr Reade said.

Steve Shepherd, an analyst at JP Morgan wondered if South Africa’s government might consider limiting the energy available to the gold miners but not to platinum producers.

“Such a radical strategy may also help to head off a dangerous spike in the platinum price that could damage the long-term wellbeing of the nascent platinum industry,” said Mr Shepherd.

Oil consolidated around the $90 level as traders speculated about possible outcomes to this Friday’s Opec meeting in Vienna amid mounting pressure from consuming countries for an increase in crude supplies.

Opec has continued to insist that high oil prices are the result of speculative interest in the market. The cartel’s members members are known to be concerned about the impact on oil demand of a possible recession in the US, fearing a possible collapse in the price of crude.

Traders also pointed out that any changes to Opec’s production quotas would mean more supplies reaching key Asian markets and the US by late April. This would coincide with the end of the spring maintenance season for refineries and the beginning of peak refining activity to build gasoline stocks ahead of summer.

The weakness in the US dollar is another important factor which could dissuade Opec’s members from increasing supplies as they need high nominal prices to defend the real value of their oil exports. Many Opec members also face rising inflationary pressures and need to defend their buying power, either for infrastructure investment or social spending.

However, some analysts think this next Opec meeting could also reveal some tensions within the cartel over the preferred price range for oil and that output cuts will most likely become a focus of discussion among the delegates.

Nymex March West Texas Intermediate slipped 36 cents to $90.35 a barrel, while ICE March Brent crude added 10 cents at $91.00 a barrel.

Fears about a possible US recession prompted speculators to cut back heavily on bets that oil prices would rise further, according to the latest data from the Commodity Futures Trading Commission. The speculative net long position on crude fell by 55.8 per cent to 37,142 lots in the week to January 22 when WTI reached $89.21.

Francisco Blanch, head of global commodity research at Merrill Lynch, says the resilience of oil demand to a sharp downturn in the US economy has increased over time, due partly to the growing importance of transportation fuels.

“A relatively short and ‘mild’ US recession will have a very small impact on transportation fuels, such as gasoline, jet and diesel, supporting overall US consumption,” said Mr Blanch.

In Chicago, CBOT March wheat rose 21 cents to $9.51 a bushel with further robust overseas buying interest expected from Asia ahead of the Lunar New Year (in early February).

The US has already forward-sold 277m bushels of spring wheat versus the USDA’s projection of 275m bushels for the current marketing year.

Traders’ attention is also focusing on South America with dryness affecting grain production in Argentina. One Argentine analyst, Agripac, has lowered its corn output estimate to 23.2m tonnes against the November estimate of 26.4m tonnes.

CBOT March corn dipped 1 cent to $4.97¼ a bushel, while CBOT March soyabeans were steady at $12.43 a bushel in early trading. Only one-quarter of Argentina’s soybean growing regions have received adequate moisture supplies.