Rising Output in Platinum a Blessing and a Curse to SA Platinum Sector

While increasing production sounds like a great thing for most companies as it reflects proper utilization of resources and output maximization, it may not always be good for all stakeholders.

South Africa is faced with an enormous rising costs, labour unrest and weak metal prices that has pushed South Africa’s platinum mining companies into radical restructuring, however, they are yet to cut production if at all.

In an attempt to ramp up production in the first quarter of this year following last years- five month strike-South African output of platinum group metals jumped to significant highs. This sounds like a blessing to the business- however, it’s also feeding into a 35% platinum price drop over the last five years, which has been only partly offset by rand weakness.

Given that the higher the supply as compared to demand the lower the price- reducing supply will act as a catalyst to raising the current prices. Some analyst are putting the number of 500,000 ounces of platinum to be cut per year from SA production to raise prices. This will be devastating for jobs in the sector if it were to happen. The sector already suffers from labour issues and political pressures.

The announcement last week by Lonmin to restructure its operations and to cut 3,500 jobs did not come as a surprise to many South Africans but yet has devastating effects on the economy. While restructuring the company and to become more profitable will be the most sensible thing to do to regain investor confidence in the sector, how this is done will be critical for the long term sustainability of the sector.

lonmin

Lonmin has seen its share price down 53.07 percent in the past three years as investors vote with their feet in response to the issues in the Platinum sector and fallen prices globally of this precious metal. Lonmin and all other platinum producers need to do something drastically to regain investor confidence. However, a balance between cutting down cost and minimizing job losses will have to be stroke.

Anglo American Platinum – the world’s largest platinum producer, has already said it will sell assets and lay off workers, while Impala has announced an overhaul of its Rustenburg mines to boost productivity.

The devil is in the detail as none of these companies, has indicated that they will cut production.

Closing shafts is not cheap, and it even becomes politically more difficult to cut jobs in a country with 25% unemployment.

Reopening shuttered production is also lengthy and expensive, meaning that if prices do respond to closures, those producers who have cut will be worst positioned to benefit.

In the short term, cutting costs may seem like a better option. But inflation will limit the impact of that policy.

Members of the Association of Mineworkers and Construction Union (Amcu) won pay hikes of about 20% annually after last year’s strike. Analysts say the producers are banking on a rise in metals prices.

The fallen prices of the precious metal has offered investors long term investment potential. There is upward potential on the demand side from auto manufacturers in the medium to long term and this will stimulate the price of the precious metal.

 

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