Patrick Cairns
3 minute read
2 Apr 2014
6:00 am

End game nowhere in sight for platinum strike

Patrick Cairns

A few decades from now, we may well look back on 2014 as a watershed year for the South African platinum industry.

Picture: Neil McCartney.

There is growing consensus that the sector has reached a point where something has to give and what happens from here could determine whether it flourishes or becomes an embarrassing failure.

The latter scenario may sound melodramatic, but we shouldn’t kid ourselves into thinking it’s impossible. The attitude that platinum mining in South Africa is bulletproof may be part of the very problem it’s facing.

In 2013 South Africa produced about 75% of the world’s platinum and nearly 40% of its palladium. Between them, Anglo American Platinum, Impala Platinum and Lonmin dominate the global industry in a way unmatched in any other mining market.

Observers talk about how the three are in a unique position to influence the commodity’s price. Because the market is so dependent on what comes from their mines, prices of platinum group metals (PGMs) have to be based to some degree on how much it costs to extract them.

That also seems to be part of the premise from which the Association of Mineworkers and Construction Union (Amcu) is operating. It believes that whatever the platinum producers have to pay their labour will be recovered with a higher platinum price.

But the metal is actually cheaper today than it was on January 23 when the unions walked out.

“The reality is companies don’t have that much room to move, given their current cost base,” says Carole Ferguson, a mining analyst with SP Angel Corporate Finance in London. “But Amcu doesn’t seem able to grasp that.

“I think Amcu is being unrealistic looking for a 30% rise in year one against the 9% being offered,” she says.

The truth is the price of platinum can’t stretch just to suit South Africa’s production costs.

“As long as global vehicle population continues to rise, the demand for South Africa’s PGMs is guaranteed,” says mining consultant James Maposa. “So pricing may be impacted by the unrest over the short term, but not in the longer term. Longer-term pricing of PGMs is down to supply and demand from the world’s largest automotive producing nations, whose production trends are influenced by economic trends.”

Maposa suggests that one long-term implication is that the mines will turn to greater automation, reducing their dependence on human labour.

“Although one or two mining companies have been burnt in the past, downsizing and automating is the way forward from a costs perspective …

“Of course, the worry for developing nations is what happens to unskilled and semi-skilled labour if mines increase their automation and mechanisation levels. But this burden should not be passed on to mining companies. The responsibility lies with government.”

Ferguson says labour shouldn’t take all the blame. She blames flawed economic empowerment regulations.

“The BEE Charter has just not worked,” she says. “But if they introduced some other form of empowerment, where an employee trust was created so employees got to share more of the dividends that came out of a profitable business, that could change the dynamic.”

What has become clear is that industry stakeholders cannot blunder along under the impression that everything will work out.

“One of the fundamental flaws that underlies corporate, labour and government relations is the assumption that the world needs South Africa’s mined metal and therefore should have to pay whatever price for it,” says Noah Capital’s metals and mining analyst Michael Kavanagh. “But I would argue that the biggest likely long-term implication of

the strike is that the world will reduce its dependence on South African PGMs.”

This is a startling suggestion, many would say inconceivable. There is no alternative to platinum in catalytic converters and South Africa’s huge reserves.

But if users grow weary of the constant trouble in our mining sector, they will be forced to look for an alternative – and there must be one out there; if the incentive is strong enough, someone will find it.