Identifier
Created
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07JOHANNESBURG35
2007-02-02 14:47:00
UNCLASSIFIED
Consulate Johannesburg
Cable title:  

SOUTH AFRICA: MINERALS AND ENERGY NEWSLETTER "THE ASSAY" --

Tags:  EMIN ENRG EINV ECON SF 
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UNCLAS SECTION 01 OF 04 JOHANNESBURG 000035 

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: EMIN ENRG EINV ECON SF
SUBJECT: SOUTH AFRICA: MINERALS AND ENERGY NEWSLETTER "THE ASSAY" --
ISSUE 1, JANUARY 2007

JOHANNESBU 00000035 001.2 OF 004


This cable is not for Internet distribution.

UNCLAS SECTION 01 OF 04 JOHANNESBURG 000035

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: EMIN ENRG EINV ECON SF
SUBJECT: SOUTH AFRICA: MINERALS AND ENERGY NEWSLETTER "THE ASSAY" --
ISSUE 1, JANUARY 2007

JOHANNESBU 00000035 001.2 OF 004


This cable is not for Internet distribution.


1. (U) Introduction: The purpose of this monthly newsletter,
initiated in January 2004, is to highlight minerals and energy
developments in South Africa. This includes trade and
investment as well as supply. South Africa hosts world-class
deposits of gold, diamonds, platinum group metals, chromium,
zinc, titanium, vanadium, iron, manganese, antimony,
vermiculite, zircon, alumino-silicates, fluorspar and phosphate
rock, and is a major exporter of steam coal. South Africa is
also a leading producer and exporter of ferroalloys of chromium,
vanadium, and manganese. The information contained in the
newsletters is based on public sources and does not reflect the
views of the United States Government. End introduction.

---
Key
---

2. (U) Key to some of the terminology and abbreviations used is
given to facilitate understanding.

BEE (Black Economic Empowerment) - the scheme whereby the South
African Government promotes black participation in business.

t = tons,
t/d = tons per day,
c/l = cents per liter,
t/m = tons per month,
t/y = tons per year,
oz = troy ounces (31.1 grams),
cmg = centimeter grams,
mcf = million cubic feet,
tcf = trillion cubic feet,
R = SA currency (rand),
MW = megawatts,
kt = thousand tons,
bbl/d = barrels per day,
MW = megawatts,
PGM = platinum group metals.

--------------
HOT NEWS
--------------
The Inconvenient Truth about SA Electricity Supply
-------------- --------------

3. (U) On January 18, South Africa was hit by widespread power
failures that affected five provinces. Although these were
cleared by the weekend, their occurrence has given rise to
concerns about the adequacy of electricity supply over the next
few years and the likely impact this could have on critical
operations and future investment in energy-intensive industries.
South Africa generates some 50% of the continent's electricity
and is heavily reliant on power to drive its energy-intensive
economy, including mines, smelters, refineries, and factories.

According to the spokesman for the state-owned utility Eskom, in
addition to plants closed for routine maintenance, six stations
failed, including one unit at the Koeberg nuclear power
facility. As a consequence, about 9,500 MW of Eskom's 36,800 MW
of generating capacity was not available during the power
failure. Of that, 4,900 MW was unplanned and the rest was
closed for maintenance.


4. (U) The cause of the failure is thought to be the automatic
shutdown of the Koeberg unit (900 MW),which overloaded a system
already experiencing unplanned and planned outages. Other
fingers point to poor government and management planning, a
shortage of skilled technical staff, and coal delivery problems.
An investigation into the cause of the outages should reveal
the truth, in time. Whatever the reason, South Africa is in for
a difficult power supply period until major new capacity comes
on line in 2008. The inconvenient truth is that while the
international norm for spare generation capacity is 10%-15%,
South Africa's spare capacity is well below 10% and some
authorities believe it to be as low as 2%, leaving little margin
for unplanned supply cuts.


5. (U) In the mid-1990's, the newly elected SAG put a freeze on
Eskom's power plant construction, in the name of privatization.
Since then numerous energy experts, including Eskom itself,
predicted that the country was heading for a power crunch unless
the government rapidly facilitated the building of new capacity.
The SAG vacillated for nearly eight years, believing that the
private sector would get in line to build new capacity. This
did not materialize.


6. (U) By 2004, it was clear that growth in electricity demand
far exceeded government projections as a result of the country's
strong economic growth and that by about 2007 peak demand would
exceed supply capacity. At that point the then Minister of
Trade and Industry, Alec Erwin, rescinded the freeze and once

JOHANNESBU 00000035 002.2 OF 004


again mandated Eskom as South Africa's major supplier of
electricity. It was also decided that Eskom would remain in
State hands and that it would resume the role of the country's
foremost energy provider. In order to continue to engage the
private sector, they were asked to take responsibility for
building 30% of new capacity with Eskom responsible for the
remaining 70%. Government has budgeted $14 billion to upgrade
generation capacity by 8,000 MW over the next five years, with
first new power due in 2007-8. Until then South Africa seems
set for a winter of planned load shedding.

Domestic Steel Sales Set New Records
--------------

7. (U) South Africa's five carbon steel producers dispatched
5.337 million tons of primary carbon steel products to the
domestic market during 2006. This was the highest total on
record and is 26 % higher than the 4.230 million tons delivered
in 2005. During the same 12 month period, 2.351 million tons
were exported. This was 30.8% less than the 3.397 million tons
exported in 2005. In 2006, total sales increased marginally by
0.8% to 7.688 million tons.


8. (U) During 2006, imports of primary steel products into SA
increased to 456,000 tons for the first ten months giving an
annualized figure of 540,000 tons for the full year. This
represents an increase of more than 60% over the 336,000 tons
for 2005 and is the highest level of imports for 30 years.
Based on projections, domestic consumption of steel should total
about 5.8 million tons for 2006. This is an increase of 27%
over the 4.56 million tons consumed in 2005 and 10% higher than
the previous record of 5.27 million tons in 1981. The record
demand for steel, cement and other construction materials is
indicative of the economic and construction boom that the
country is experiencing.

--------------
PLATINUM GROUP
--------------
Platinum Group Metal Ruthenium is up 1658% since 1999
-------------- --------------

9. (U) A recent report by PGM analyst Anthony Lipmann, reviewed
the price movements of the top ten metals between April 1, 1999
and January 15, 2007. Of the PGMs, Ruthenium was the best
performing metal with a price rise of nearly 1660% and worst
performing was palladium. The performance of the other
PGM-associated metals is given below for interest. Not to be
outdone by these 'exotics', many industrial commodities and
their ores also performed well, including copper, lead, zinc,
tin, steel and iron ore, nickel, chromium, cement and a number
of others.


10. (U) The overall increase in the price of most commodities
clearly shows the general strength of the world economy, driven
by China with a year-on-year growth rate of more than 10% and
followed, to a lesser extent, by India. China is responsible
for more than 50% of the increased demand for copper and a
number of other metals. The figures below show prices of some
commodities as of January 15, 2007, and their percentage
increases over prices on April 1, 1999:

Rhodium $185,666 per kg - up 600%
Platinum $36,940 per kg - up 220%
Ruthenium $21,540 per kg - up 1660%
Gold $20,184 per kg - up 125%
Iridium $12,699 per kg - up 2.5%
Osmium $12,217 per kg - down 5%
Palladium $10,673 per kg - down 8.5%
Rhenium $5500 per kg - up 292%
Copper $2.54 per lb - up 274%

--------------
COMPANIES
--------------
Exxaro - a Major New Mining Company is Born
--------------

11. (U) Exxaro, the black-empowered JSE-listed mining company,
was formed when Kumba Resources, 67% owned by Anglo American,
was split onto Kumba Iron Ore and Exxaro Resources. Anglo
retained its majority holding in Kumba, which owns the huge
Sishen iron ore mine, one of the top ten such deposits in the
world. Exxaro was set up as a BEE-owned company to hold all
non-iron ore assets, including coal, and immediately merged with
another BEE coal producer, Eyesizwe Coal, to create the biggest
coal producer in South Africa. Anglo also gave Exxaro the
option of taking over some of its other so-called non-core
assets, which they are in the process of exercising. These
include Anglo's mineral sands operation Namakwa Sands and a 26%
stake in its zinc and lead operation Black Mountain. This will
position Exxaro as one of the world's largest suppliers of
titanium dioxide feedstock and zircon and strengthen its

JOHANNESBU 00000035 003.2 OF 004


position in the South African zinc market. Exxaro will pay $300
million in cash for the Namakwa plant and mine and $30 million
in cash for the stake in Black Mountain, which includes the
Gamsberg project - one of the world's largest undeveloped low
grade zinc deposits.

De Beers Cutting Technical Diamond Capabilities in South Africa
-------------- --------------

12. (U) De Beers is about to retrench 200 staff from its head
office of 800 people, affecting many of the most experienced
technical and exploration staff. This is the third round of
cuts over the past two years and is specifically aimed at De
Beers Consolidated Mines (DBCM) which houses the group's South
African mines. The layoffs will also affect the separate De
Beers Group operation that services its international
operations.


13. (U) De Beers' posture in South Africa has changed
substantially over the past five years. Five out of seven of
its mines are considered to be non-profitable - depending on who
is making the evaluation. The new SAG has from the very start
viewed De Beers with suspicion and much of the new legislation
and government rhetoric against the white-controlled mining
industry has been directed at De Beers. The draft royalty,
beneficiation and diamond bills have all singled out diamonds
for special treatment and higher tariffs and levies based on
assumptions that South Africa is competitive with India and
China in diamond cutting and jewelry manufacturing despite
higher local wage rates and lack of capacity.


14. (U) De Beers' new CEO Gareth Penny, appointed in February
from the Diamond Trading Company (DTC),has developed a
different business model for De Beers, which relies on
purchasing technical skills rather than developing technology
inhouse. His background is in marketing. He is in the process
of driving an aggressive process to retrench technical and
scientific staff. As a consequence, De Beers is not a 'happy
place' to be currently employed.


15. (U) De Beers Diamond Company began life by consolidating the
fabulously rich diamondiferous kimberlitic pipes in Kimberley,
South Africa. They developed technologies for exploiting these
discoveries and conducted extensive research and exploration
work into finding and exploiting alluvial and marine deposits.
Until the mid-1990's, De Beers acted as custodian, promoter and
chief nurturer of the global industry, using monopolistic
practices to maintain the price of diamonds. This enabled the
industry in Africa to grow and prosper.
Unfortunately, this also gave rise to some less beneficial side
effects including 'conflict diamonds'.


16. (U) De Beers also established partnerships with world-class
research groups to develop synthetic industrial diamonds and to
understand and develop the science of the genesis of diamonds.
Progress in this latter venture opened the world to diamond
exploration and contributed to finds in Canada and elsewhere.
De Beers have been more than simply a producer of diamonds.
They have developed new technologies and skills that have wider
applications in medicine and other disciplines and this has been
of considerable benefit to host countries. Their greatest
strength has been its great depth of in-house technical diamond
mining, processing and exploration expertise. This is
apparently changing under the new leadership.

--------------
South Africa's Minerals
--------------

17. (U) The following are some of the major minerals produced in
South Africa, according to the South African Council for
Geoscience

Platinum Group Minerals (PGMs)
--------------

18. (U) South Africa hosts the Bushveld Complex (BC),the
world's largest basic igneous intrusion covering an area of some
65,000 square kilometers. It is a veritable treasure chest of
minerals, the best known being the platinum group minerals
(PGM): platinum, palladium, rhodium, ruthenium, osmium and
iridium. South Africa is the world's major producer of PGMs and
possesses over 87% of the known reserves. In 2005, the total
sales value was $6 billion. The major use of PGMs is in
catalytic converters, used in most modern cars to ensure that
they meet increasingly stringent emissions control legislation.
The Merensky Reef has produced the bulk of the world's platinum
to date, although other important reefs, namely the UG2 - Upper
Group chromitite seam number 2 - and the Platreef will become
increasingly important as new mines are developed on the eastern
and northern limbs of the BC, respectively.

Coal

JOHANNESBU 00000035 004.2 OF 004


--------------

19. (U) Coal represents a reliable and abundant source of
affordable energy and is fundamental to the development of the
South African economy. The country possesses the seventh
largest resource-base in the world and coal has contributed
significantly to South Africa's industrial and economic
development. In addition to being used for energy production,
coal is vital in the metallurgical industry where it is used to
reduce iron ore to steel and steel alloys. South Africa is a
world leader in the production of liquid fuels and chemicals
from coal and Sasol produces some 30% of the country's liquid
fuel needs. Sasol also markets its coal-to-liquid (CTL) and
gas-to-liquid (GTL) technology world-wide. In 2005, the total
sales value of coal was $5.6 billion, of which 69 million tons
were exported, 112 million tons went to generate electricity, 45
million tons was converted to liquid fuel, and 20 million tons
went to the domestic market.

Gold
--------------

20. (U) Gold mining in South Africa began in 1871, in the
Eesteling goldfield in the Limpopo Province. Subsequent
exploration revealed several other goldfields, the most
important of which were Barberton, Sabie, and Pilgrim's Rest,
all located in Mpumulanga Province. These fields yielded over
18 million ounces (560 tons) of gold. In 1886, the fabulous
Witwatersrand goldfield was discovered, which transformed the
South African gold mining industry into the world leader, a
position it still holds today. The Witwatersrand is by far the
largest known goldfield on earth, and has produced more than 1.5
billion ounces (46,650 tons) of gold. Its remaining resources
amount to more than one billion ounces. Although production is
declining, total sales in 2005 were worth $4.2 billion.

Diamonds
--------------

21. (U) The name diamond derives from the Greek word meaning
invincible and refers to the minerals extreme hardness and
resistance to acids and alkalis. Diamonds were discovered in
South Africa in 1866 and thereafter the country totally
dominated world production until 1930. The country has remained
a smaller but significant producer and in 2005, it produced 15.7
million carats worth $1.7 billion. This made it the world's
fifth biggest producer by weight and fourth by value. It was in
South Africa that diamonds were first found in their primary
deposits, namely in kimberlite pipes (volcanic) and fissures and
South Africa is the only country where diamonds are mined from
primary and secondary alluvial and marine deposits.
COFFMAN