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Every American knows that raw material prices are soaring and the finger pointing has just begun as to what is the cause.

As with most things, there are many causes and one contributor is half a world away in a country that most Americans haven’t thought about much since the days of apartheid…South Africa.

Recently the government of South Africa declared a national emergency because instability of their power grid is threatening the collapse of the entire power network.

So what does this have to do with life in America?

South Africa provides the world with coal, aluminum, gold, palladium, and platinum.  Moreover, rare minerals like ferrochrome and vanadium (which are used in the production of steel) are mined there as well.

As electric output has faltered, so have mining operations because the South African government has had to choose between sending power to the people or power to the mines. Thus far they have chosen to shut down the mines.  That has led to strategic material shortages that are now being felt world wide. 

The situation in Johannesburg has deteriorated to the point where traffic lights are failing to function, bringing traffic to a standstill and leaving motorists frustrated and angry.  Restaurants are closing because cooks can’t cook.  Businesses that can afford generators are buying them just to keep operations going.

Meanwhile, the government finance official Trevor Manuel belittles business sector complaints saying industry’s loss estimates are “overcooked and utter garbage.”

The long-term concern is this problem will not go away. If the mines don’t get power, then the government loses revenues…revenues which are needed to repair the utility grid.  Plus, every time there is a power outage, crime increases further sapping government resources.  Thus, there is a reinforcing downward spiral.

Of course the secondary effect is this is pushing commodity prices higher for everyone.  For example, platinum prices are up 43% since the power crisis began. Gold and palladium prices are hitting record highs.  China, India and the US need raw materials to power their economies and a strategic supplier is in danger of going off-line.

So how did a former first-world nation like South Africa get to this point?

Certainly, government intervention didn’t help.  The South African Government mandated everything from rates, to approved suppliers, to maintenance priorities.  Beyond this, politicians demanded that certain people be placed in certain jobs irrespective of their qualifications.  That encouraged a “brain-drain-of-the-able” who got disgusted and quit.

In addition, there is evidence that the South African government subsidized large industrial users like BHP Billiton, which paid less than a third of the going electric rates.

When demands were made to rectify the situation, remarkably the government chose to reduce demand rather than increase supply.  Rate increase, fines, and penalties are now the norm for so-called power-hoarders.  If power use is deemed “excessive,” the government disconnects the user…regardless of the productivity of the user.

Meanwhile in the US, it is not difficult to see different issues leading to the same result.  Last summer in California brown-outs were a common occurrence and the corruption inside former energy trading giant Enron is still imbued in America’s collective consciousness. 

Beyond this the utility industry is struggling to balance the demands of political, environmental, and regulatory officials while still trying to post a profit.   Numerous studies show that our infrastructure is aging and that we need resolution fast. 

But resolution will require environmentalists, politicians, and business-interests to be of one accord.  Otherwise, we could go the way of South Africa and see political gridlock lock up the grid.