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Whither SA's platinum sector?

Cape Town - With the Association of Mineworkers and Construction Union's (Amcu's) strike moving towards the three-month mark, a question mark hangs over the industry.

"The mix of silence from the government and the inability of the mining companies to budge – but instead talking about shaft closures – begs the question, what exactly is the long-run sovereign strategy for platinum in South Africa?" asked Nomura emerging markets expert Peter Attard Montalto in an Economic Insights update.

Unlike gold, which has been in terminal decline for decades, platinum seems to have "turned a corner after a peak in 2008 in value of output or in 2009 in volume terms, as strikes become more prevalent and the global platinum market started to enter surplus", said Montalto.

Another factor is that supply from South Africa is beginning to face competition from recycling as well as Zimbabwe's increased output. Montalto pointed out that the cost structure of the Rustenburg mines "isn’t in the right place for the current labour market in this backdrop".

Also, with the price of platinum below $1 500 per ounce Montalto put forward the statistic that 60% of  platinum sector jobs were at risk of restructuring. The significant softening of the rand since then has changed the dynamic slightly, said Montalto, who has now put breakeven at $1 425 to $1 450 per ounce.

"The type of long-run restructuring announced, and then scaled back, by Amplats [Anglo American Platinum] that is applicable in similar ways to the other companies is still a factor (and ongoing by attraction to some degree)," said Montalto.

A possibly "more interventionist government in the sector – ie, resource nationalism as the replacement for mine nationalisation (after its rejection within the ANC)" may also be part of the mix, said Montalto. He added that the Mineral and Petroleum Resource Development Act Amendments, which should soon become law, would also have an effect.

Brics cartel hopes

Another significant factor is that Mining Minister Susan Shabangu is expected to retain a cabinet position after the election, which Montalto reckons could be the department of mineral resouces position. "Mr (Jacob) Zuma’s choice will be key to see the tenor of policy and how interventionist it will be over the coming period."

The last point Montalto touched on is SA's ambition to create a platinum production cartel with its Brics nations partner Russia.

"Under such a scenario, platinum would have to be declared a strategic mineral with export restrictions to limit global supply and raise prices. The government would be the centralised buyer and implicit subsidiser of over-production," said Montalto.

He reckons this a "legally nearly impossible" prospect, in the light of existing long-term supply contracts and the existing constitutional framework of private companies.

"There would also be severe political complications around the impact of output restrictions on job creation. So while it may seem simple to cure the problems of platinum production, in reality it may well be impossible," said Montalto.

It is the government’s statement of intent which matters in trying to gain insight into their goals for the platinum sector, said Montalto.

"Overall, we conclude that the platinum sector needs major change to ensure its long-run sustainability as a key export driver beyond simply short-run cash generation that is occurring now due to the strike," said Montalto. Although union Amcu could be a catalyst for this, "its actions seem self-destructive".

"Greater labour competition and greater regional competition, as well as government intervention that recognises the problems but doesn’t go too far, will all be needed to allow the industry to shift onto a sustainable path," said Montalto.

Mining companies must tread with care in the "post-election environment", not only "to keep government onside with a very slow pace of restructuring, but also persuade the government of the fundamental changes needed in the industry".

Here the private sector and not the  government will likely be the driver if there is to be a positive outcome for investors, said Montalto.


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