The impact of South Africa’s power crisis

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By Reinhard Cluse and John Orford

Power shortages are due to under-investment and high downtime
Power shortages reflect low reserve margins and poor plant availability due to high levels of unplanned maintenance. Planned energy capacity expansion and demand savings will boost reserve margins but this represents, in our view, a best-case scenario. Slower capacity expansion and lower demand savings are more likely.

Erratic power supply is a constraint on growth
Even assuming the best-case scenario, maintenance rates similar to those in January result in peak demand exceeding available supply in the medium term. Consequently, we expect repeats of the blackouts experienced in January and view power as a constraining factor for economic activity in the next two to four years.

Slower growth, increased macro vulnerability, but rates on hold
Power shortages will result in slower growth and we have cut our 2008 GDP forecast to 3.2% from 4.0%. We expect deterioration in inflation and external balances and see the potential for further currency weakness. However, we expect interest rates to remain on hold this year.

Stock level winners and losers
The table below summarises our view of potential winners and losers. Gold stocks are most badly affected while platinum stocks benefit from higher metal prices.

Click on the thumbnail for the table of relative winners and losers.

ubs-power-shortages-sa.jpg

Click here for the full report.

Source: Reinhard Cluse and John Orford, UBS Investment Research, March 3, 2008

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