By Saijel Kishan and Gavin Evans
Bloomberg News
Sunday, May 11, 2008

Chile's worst drought in five decades and power rationing from South Africa to China mean the price of aluminum, gold, copper and platinum will keep climbing as the lights go out in the world's biggest mines.

Those governments are being forced to choose whether to reduce power to their 1.4 billion residents or curtail energy supplies to the largest copper, aluminum, platinum and gold factories. The energy used by China's aluminum smelters each week could provide enough power for more than 2 million people for an entire year.

Runaway growth in emerging markets is squeezing world oil supplies and has led to electricity shortages, cutting output of commodities needed to meet ever-rising demand. Platinum jumped to a record in January after mines in South Africa closed for five days because utilities were rationing power. Cobalt rose 58 percent in the 12 months ended May 2 as production growth in Congo was limited by electricity supply.

"There will be a sustained level of risk from power shortages in the commodities markets," said Michael Lewis, London-based global head of commodities research at Deutsche Bank. "We are pricing bigger supply losses as a result."

Metals are headed for a seventh straight year of price increases even as the worst U.S. housing slump reduced consumption in the world's biggest economy.

Through May 2, platinum had risen 24 percent so far this year, to $1,899.50 an ounce, in London trading. Aluminum gained 21 percent, to $2,920 a metric ton. Copper climbed 26 percent to $8,410 a ton.

Freeport-McMoRan Copper & Gold, the world's biggest publicly traded copper producer; Cia Vale do Rio Doce, the largest in iron ore; and gold producer Newmont Mining all say power shortages threaten to reduce production.

Rio Tinto Group, the second-biggest aluminum producer, cut output at its New Zealand smelter by 5 percent, or 1,400 metric tons a month, May 1 because of power constraints caused by drought. Anglo Platinum, the world's biggest producer of that metal, said April 29 that first-quarter output plunged 24 percent, to 428,600, ounces because of cuts in the supply of electricity to its South African mines.

Smelting aluminum uses about four times as much power as for copper and more than twice that of zinc, Barclays Capital said. About 80 percent of world aluminum smelting capacity is in nations at risk of electricity shortages, according to Citigroup.

Congo, the world's largest source of cobalt used in batteries and jet engines, asked mining companies May 2 to cut electricity use after power-transmission cables were stolen.

Credit Suisse Group, Switzerland's second-biggest bank by assets, raised its 2008 cobalt forecast by 50 percent, to $45 a pound, on March 26 because of Congo's electricity shortages. The price was at $48.50 on May 2, according to Metal Bulletin data.

"Problems in South Africa and China with electrical capacity are not just bad luck, but result from a lack of investment," said Kevin Norrish, commodity research director at Barclays. "Energy availability in the next 10 years is going to be a very important issue to the mining sector. We see these as structural changes, not cyclical changes."

China built 549 billion yuan ($79 billion) worth of generators and power lines last year, state officials said. Accelerating demand will tighten the nation's power supply again within two years, reported Citigroup, which estimated that shortages there cut first-quarter copper output by 40,000 tons, zinc by 125,000 tons and aluminum by 600,000 tons.

Chile, the world's biggest copper producer, faces the risk of energy rationing after the worst drought in 50 years lowered hydropower reserves during a shortage of natural gas for generators.

Copper may have further to increase. In inflation-adjusted terms, the price has not yet reached a record, according to Barclays. Adjusted for inflation, the metal is trading close to levels last seen a century ago, when the U.S. economy was expanding and the nation was being wired for electricity.

China, which is making a similar transformation, is building power stations and transmission lines that are exacerbating deficits in metals supply. As much as 80 percent of China's grid investment is spent on copper, said Yuan Genfa, secretary general of the Shanghai Electric Wire & Cable Industry Association.

"Over 50 percent of China's copper use is electrical use," said Na Liu, director of Institutional Equity at Scotia Capital Inc. "The electricity grid, for the most part, is copper wire."

"There just hasn't been enough planning to accommodate the growth of Asia's economies," said Francisco Blanch, London-based global head of commodities research at Merrill Lynch. "To allow China and India to have a middle class, we need to go back to the drawing board and boost investments in power infrastructure. And if this doesn't happen, we're going to see even more brown-outs."

Reporters Carli Lourens in Johannesburg and Xiaowei Li in Shanghai contributed to this report.