[miningmx.com] — XSTRATA is the first company to publicly declare force majeure on supplies out of South Africa because of the power crisis there.
The news is important not only for the steel industry, which is the major consumer of ferrochrome and vanadium, but because it sends out a signal from a major resource investor in South Africa that all is not well and that it cannot guarantee production.
Force majeure is declared by a company when an event beyond its control affects its ability to deliver into contracts and excuses it from liability.
In this case, the event was caused by reduced power supplies from the monopolistic power utility Eskom because of poor planning and poor operational control – be it not maintaining sufficient coal stock piles and/or sensible maintenance.
It has left not just Xstrata but the entire South African mining industry enraged. The sector is in deep shock. Millions of dollars worth of production and thousands of jobs could be lost at a time when the commodities markets are as strong as they’ve ever been.
For Xstrata to invoke what is a very serious protection gives an indication of just how much the serious the situation in South Africa has become.
It must raise questions about the competence of those in charge of essential services, particularly when the power issue has been flagged repeatedly over the past decade or more. Investors will surely look afresh, and with a great deal of scepticism, at whether South Africa is a viable destination for long-term investment.
Unbelievably mines were given barely any notice by Eskom in a force majeure declaration of its own that power supply could no longer be guaranteed. This was on 25 January and the mines stopped production.
As Terence Goodlace, the head of Gold Fields’ South African operations, said during Thursday’s results presentation: “We were effectively stopped dead in our tracks with no notification.’
To make matters worse, Eskom was unable to allow mining companies to lift their power offtake to 90% of normal in line with expectations on Thursday night.
Gold and platinum prices have been pushed to record highs over supply concerns from South Africa, the world’s largest producer of the metals.
The steel industry must be equally as anxious about their supplies of chrome from the world’s single largest supplier. The declaration from Xstrata must have confirmed their worst fears.
Bear in mind, however, that Xstrata said it might be able to deliver ferrochrome and vanadium, but there is a possibility that it might miss delivery agreements.
“Xstrata Alloys has declared force majeure to its ferrochrome and vanadium customers as a precautionary measure in the light of reduced electricity supply to its ferrochrome and vanadium operations from Eskom, as part of a national energy shortage in South Africa,” Xstrata said.
“It is not possible at present to evaluate accurately what impact these restrictions will have on the supply of ferrochrome and vanadium to our customers, but we will work to mitigate any impact on customer deliveries as far as possible,” it said.
Reuters reported that ferrochrome and vanadium prices have already shot higher on supply concerns from South Africa.
You can bet the South African government is deeply embarrassed by the power crisis and will do all it can, as Africa’s largest economy, to resolve the shortage and try win back investor confidence. It’s a question of how long will it take before mining companies will again feel entirely comfortable that power will not just be switched off again.
