Commodities | Oct 03 2008
By Andrew Nelson
According to analysts from South Africa’s Salman Partners, the supply of Chromium, Gold, Manganese, Palladium, Platinum, Vanadium and Uranium is under threat. Despite the credit crisis being much to blame for the recent downturn in commodities demand across the board, it is also due to the credit crisis that we will soon be facing a shortage of many metals.
Analysts Raymond Goldie and Patrick Donnelly from Salman Partners think that the prospect of of such shortages will not disappear overnight.
They point to hit list of reasons laid out by Companhia Vale during a conference call last February, where the Brazil mining giant explained why the world’s miners have not been able to create enough new capacity to claw back some of these shortages.
The miner said that most major ore bodies have already been found and that the discovery of new ore bodies was happening less and less frequently. Permitting is becoming more difficult as companies have to jump through an increasing number of hoops to cut through what is now being called “green tape”.
But in a precursor to what current market economics now makes all but obvious to even the simplest of market watchers, the company confirmed last February that capital costs had started to increase faster than general inflation rates and that increasing costs mean a shortage of capital goods. Add to that the ever present demon of the mining and exploration market, shortages of skilled labour, and you’ve got the recipe for dwindling supply.
Goldie and Donnelly chip in with a few of their reasons as well, highlighting the shortage of capital resulting from the credit crunch, high energy prices and unpredictable, irregular and generally insufficient supply, especially in developing countries where much of the exploration and production expansion is meant to be taking place.
While you can’t be blamed for thinking that recently easing crude prices will help the energy shortage situation, the analysts point that for most mining companies, electricity is far more important than oil. Thus, the easing of oil costs has done little to alleviate the unfortunate fact that so many countries have coincidently maxed out their electricity generation capacities at around the same time. This has served to not only restrict development, it has also delayed countless projects and added significantly to operational costs.
But even if exploration and production was cheaper, energy supplies sufficient and regulatory restrictions relaxed, the single biggest problem facing the sector is the shortage of skilled labour. The analysts point out that while the other issues can be remedied in the short to medium term, it takes a decade or more to make an experienced mining engineer.
It gets worse, labour shortages affect mining companies indirectly as well because not only do the mining companies themselves suffer from staff shortages, but so do the power generation and other infrastructure providers that the miners rely upon, creating a skilled staff double whammy.
The best evidence of this comes from South Africa, which has just about run out of electricity, with major explorers, miners and producers suffering from significant power cutbacks, which is hitting both exploration and production.
Simply put, the supply of electricity is now woefully inadequate to support continued economic growth in that country, and this, say the analysts, illustrates both the points made about global shortages of electricity and also the effects, on capital projects. Escom has also gone on the recruiting warpath, admitting that it has a significant and sustained shortage of the people it needs to expand both its generation and its transmission capacity to help solve the problem, which also highlights the global shortage of skilled labour.
In fact, the analysts believe that largely because of Eskom’s staffing issues, South Africa is likely to suffer chronic shortages of electricity for at least another five years.
Now here comes the silver lining, with the analysts saying that this staffing outlook has positive implication for the prices (if not supply) of metals of which South Africa is a major producer like chromium, gold, manganese, palladium, platinum and vanadium and, in the medium term, possibly uranium.
But until major markets start to feel the pinch from dwindling supply, precious metals prices (let’s take gold out of this, as its economies are different than the others) will continue to fall on a slowing global economy. Taking platinum as one exapmle, its price has fallen 50% since August alone. At some point prices will have overshot their demand/supply balance.