A report from BNP Paribas Fortis Metals Monthly says how South Africa's Eskom, the monopoly electricity utility in the world's main source of platinum group metals is caught between the devil and the deep blue sea.

Eskom needs a vast amount of fresh investment - and rather swiftly - if it is to avoid a repeat of the January 2008 fiasco, when the country was crippled by several days of power cuts. One way it might start to get itself out of its financial mess would be to jack up tariff charges - but Eskom is so heavily subject to political interference that route is looking increasingly thorny. But without some decisive action in 2010 a fresh - and possibly more serious - power failure is almost inevitable at some point.

Here comes the World Cup! From June 2010 the world's attention will be more than usually turned towards South Africa, the host country for the premier international football event. According to FIFA, the International Football Federation, the cumulative television audience was more than 26bn for the 2006 World Cup, and the same number is expected this time round. The country's government will be hoping that next year's winter - between May-July - will be warmer than usual, not because it wants the world's football stars to have easier playing conditions, but to guarantee that the country's creaking electricity network does not collapse under the strain during what is traditionally the peak period of demand.

Within South Africa, Eskom has become a byword for inefficiency, synonymous with power failure rather than power supply. And this power failure is not just its inability to cost-effectively deliver sufficient electricity; it's become in the last month a metaphorical power failure, as the company has drifted into a leadership vacuum that extends far beyond the corridors of Eskom and into government itself. On 11th November Eskom's CEO, Jacob Maroga, was physically locked out of his office, according to local South African reports. Two days before that, the company's chairman, Bobby Godsell, handed in his resignation.

This boardroom fallout reflects the structural mess that Eskom now finds itself in. Interestingly enough, the government later asked Godsell to reconsider his resignation, but Maroga remains out in the cold. Godsell declined the offer, which is a bad sign - if an experienced old hand like Godsell does not want any more of this poisoned chalice, many other equally talented managers will be deterred from considering it.

Godsell, a hard-nosed businessman who used to run AngloGold Ashanti, had demonstrated an unwillingness to disguise the fact that Eskom needed - needs - a clear and determined managerial overhaul. That can only be achieved by permitting the utility to escape the clutches of various political factions now seeking to assert their voice in running the country, all vying for the attention of President Jacob Zuma, who so far has been unwilling to involve himself too directly in the affairs of the troubled company.

The ruling ANC government's militant wing, the Youth League, called for Godsell to resign, as did the Black Management Forum, which describes itself as a "non-racial thought leadership organisation."

The Forum went so far as to accuse Godsell of adopting a "baas/boy" mentality towards Maroga, in other words accusing Godsell of being a racist.2 Godsell is a big enough player to defend himself against such a slur - what's important in all this is the extent to which the ANC government is permitting one of the most serious structural failures now facing the country to be distorted into a mud-slinging matter, diverting attention from the underlying reality - which is that South Africa faces a medium-term electricity supply crisis, one that could cripple supply of around 70% of the world's production of platinum group metals.

That may not matter so much when the world is in a recession, and new car sales are in a slump - but what might happen when the recession is over? Both platinum and palladium prices have recovered strongly this year, up almost 70% and more than 100% since the start of 2009, without any real prospect of a massive surge in new car sales in the major markets in 2010. Both metals are vital ingredients in autocatalysts; if and when new car sales do pick up, they will be in much greater demand than today and the prices of both are likely to rise much higher than they are currently. The world needs South Africa's PGMs; South Africa's PGM's producers need electricity; and Eskom needs to deliver without interruption.

Massive investment needed

This on-going crisis first emerged in January 2008. On 25th January that year Anglo Platinum and AngloGold Ashanti, among others, said they had been forced to completely shut down their mines, as Eskom could not guarantee security of power supply. South Africa accounts for some 80% of global platinum supply and more than 40% of palladium. In the weeks succeeding the shutdown Eskom managed to get supply up and running again, albeit still today at just 95% of capacity - but that did not prevent the platinum price from soaring to a new record of $2,200/oz.

Eskom is today caught between a rock and a hard place. According to Eskom's own plans, to meet future demand growth for electricity supply it needs to invest some Rand 385bn ($52.5bn) and it has yet to secure around 20% of that. Earlier this year it proposed to put up its tariffs by 45% a year over the next three years, starting in 2010. That was greeted with howls of outrage by all sectors of society, from trade unions through to mining companies.

At the start of December Eskom backed-down a little - and claimed that it could squeeze by with putting up tariffs by 35%/year for the next three years. Even this is too much for the Congress of South African Trade Unions (Cosatu), which said in response it " would still be too high." The ruling ANC government, which is in a tripartite alliance with the South African Communist Party and Cosatu - inevitably backs Cosatu. In a statement the government said: "We see the Eskom proposal to NERSA [the National Energy Regulator of South Africa] not assisting South Africa's economic growth." It's both an energy mess and a political nightmare - many South Africans are understandably asking themselves, if Eskom can really make do with 35% increases then why did it ask for 45% in the first place? It looks like bending to political pressure - and a very thin end of a long, fat wedge.

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