Something has to give in SA’s platinum sector

The ongoing strike in SA - 10 weeks now - has much bigger implications than mere impacts to miners' earnings.

http://www.mineweb.com/mineweb/content/en/mineweb-whats-new?oid=235621&sn=Detail

Cape Town (Moneyweb) -

A few decades from now, we may well look back on 2014 as a watershed year for the South African platinum industry. 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 bullet-proof may be part of the very problem it’s facing.

In 2013 South Africa produced about three-quarters 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 that is unmatched in any other mining market.

This dominance is well understood and 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 the South African mines, prices of platinum group metals (PGMs) have to be based to some degree on how much it costs to get them out of the ground.

See: The potential for a PGM price spike

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.

However, one has only to look at how the platinum price has behaved since the start of the strike to question whether this assumption is correct. The metal is actually cheaper today than it was on January 23 when the unions walked out.

“The reality is that the 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.”

As an observer from outside the country, Ferguson expresses a sense of disbelief that the strike has gone on for so long without any clear progress.

“I think Amcu is being unrealistic looking for a 30% rise in year one against the 9% being offered,” she says. “They are going to have to close that gap in some way. I don’t think that companies can push through anything close to 30%, or even 20%.”

The truth is the market is not entirely elastic. The price of platinum can’t stretch just to suit South Africa‘s production costs. There are more complex market forces at play, and they extend far beyond the North West and Limpopo.

“As long as global vehicle population continues to rise, the demand for South Africa’s PGMs is guaranteed,” says independent 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 ultimately influenced by economic trends. ”

That reality means that mines still have to take care of costs. And Maposa suggests that one long-term implication of the strike is that the mines will do this by turning to greater automation and reducing their dependence on human labour.

“The PGM sector is under profitability pressures due to escalating costs, so a proactive instead of reactive stance is needed to deal with labour issues,” he says. “Although one or two mining companies have been burnt in the past, down-sizing and automating is the way forward from a costs perspective.

“Mechanisation of mines is inevitable,” Maposa says. “Australia and Canada have shown how to do this right. 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.”

SP Angel’s Ferguson does say labour shouldn’t take all the blame for the current situation. She believes the mining companies and government also missed an opportunity by implementing flawed economic empowerment regulations and these need to be addressed.

“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. But the way it’s structured at the moment, it’s very much biased towards just a few individuals.”

What has become clear is that industry stakeholders cannot simply continue to blunder along under the impression that everything will work out in the end.

“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, because many would say it’s inconceivable. There is no cost-effective alternative to platinum in catalytic converters and there is no viable alternative to the huge reserves in South Africa.

But you also have to believe that if South Africa’s supply continues to be unreliable because of repeated strikes, and production costs become ever more unwieldy, the market will lose patience.

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. It may not be immediately obvious, but it probably does exist, and if the incentive is strong enough, someone will find it.

“It’s less about price than an enabling environment,” Kavanagh says. “As long as you have labour that is hostile and a regulatory environment that is hostile, you don’t even get to the debate about price. We should be producing the metal as efficiently and cost-effectively as possible and let the market forces determine what the price will be.”

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Anglo American considers closing platinum mines in S. Africa