Platinum outlook dims

London - Platinum output in South Africa is likely to end up lower than forecast this year due to snowballing labour and safety stoppages, supporting metal prices but boosting costs for producers and dampening share prices.

Many analysts had expected South African platinum production to rise this year, creating a global surplus of the metal, mainly used in jewellery and in catalytic converters to clean auto exhausts.

South Africa is by far the world’s biggest source of platinum, accounting for three quarters of global output.

Announcements by miners of expansion plans helped to depress platinum prices last year, which fell by a fifth, but the firms are facing difficulties following through, said analyst Michael Widmer at Bank of America-Merrill Lynch in London.

“You have to look at what’s happening on the ground, and even if they wanted to increase production, it just looks challenging,” he said.

A significant wild card is an unexpected surge of labour trouble after a new trade union sought to challenge the dominant National Union of Mineworkers (Num).

Impala Platinum Holdings [JSE:IMP], the world’s second largest producer of the metal, said last Thursday it had dismissed 17 200 workers during an illegal strike after drillers downed tools followed by a sympathy strike amid the recruitment of workers by a new union.

“I think the most critical thing that is happening right now in the South African mining sector is that this new union is challenging the Num,” said an analyst in South Africa who declined to be named.

The Association of Mineworkers and Construction Union (AMCU), which was also behind an illegal strike at Aquarius Platinum [JSE:AQP] late last year, is using Implats as a test case, the analyst added.

“If they do manage to get recognition at Impala, it’s going to be open season - they’re going to challenge Num all over the place and these guys are really quite radical.”

The new union has not publicly stated its aims.

Production shortfalls

In November, precious metals refiner Johnson Matthey said supplies of platinum from South Africa had the potential to rise modestly in 2012 from an estimated 4.775 million ounces last year and the global market would likely show a small surplus.

Johnson Matthey, due to update its estimates in May, said in November it was cautiously optimistic on South African output partly due to the fact that Implats and No. 1 producer Anglo Platinum signed two-year wage deals last year with the Num so labour disruption was less likely.

But analysts are already starting to revise their forecasts.

Analyst Edward Sterck at BMO Capital Markets in London said the Implats strike could result in the loss of 50 000 to 100 000 ounces of platinum this year.

“If the AMCU tries to make inroads into other operations, triggering further illegal strikes, the production disruption could be greater still,” Sterck added in a note.

Strike losses would come on top of disruptions due to periodic mine safety closures. The South African government has been cracking down in recent years on fatalities, forcing mines to shut temporarily following each death in a mine.

Sterck estimated that if safety closures in 2012 ran at the same pace as in the second half of 2011, an additional 400 000 ounces of platinum would be lost.

Global No. 3 platinum producer Lonmin [JSE:LON] recently said increased safety inspections boosted risks since they interrupted the flow of operations, and Aquarius said the government drive was leading to lengthier and more costly production halts.

Harmony Gold Mining Company [JSE:HAR] on Monday cut its full-year production target by 13% due to safety stoppages.

Metal vs shares

While further disruptions will support the platinum price, they will also pile more burdens on companies that are already struggling with high costs and declining productivity.

Credit Suisse recently initiated coverage of Anglo Platinum with an “underperform” rating and Implats with “neutral”, saying margin deterioration was expected this year.

JP Morgan, which expects PGM prices to rise this year, has advised buying metal rather than equities, favouring sister metal palladium over platinum.

“With unpredictable production disruptions and consequent cost pressure, higher PGM prices mightn’t translate into ’typical’ profit gearing and share price performance for the miners,” a note said.

An index of South African platinum producers has underperformed the platinum price by 30% since the start of 2011.

The spot platinum price has already gained 16% so far this year after falling by a fifth last year, partly due to worries over the global economy and Europe.

Europe is a key source of demand from its large fleet of diesel autos that have platinum-rich catalytic converters. Some of the boost to prices from any further supply disruptions may be capped if Europe falls into a recession and hits demand, analysts have warned.