Cape Town - Ratings agency Moody’s lauded South Africa’s three-year wage agreement in the platinum sector as a “credit positive” for the mining sector and the economy as a whole.
In a credit outlook review published on Monday, Moody’s said the agreement reached a week ago whereby the Association of Mineworkers and Construction Union (Amcu) and the three largest platinum producers signed a wage agreement will bring much needed stability to the mining sector and South Africa’s GDP.
READ: Amcu, Amplats agree on wage deal
The salary hike that results from the wage deal will be applied retrospectively from 1 July 2016 and represents an annual increase of around R1 000 or a 7% increase for three years.
“The agreement is a credit positive for both South Africa (currently rated at Baa2 negative) and platinum mining companies because it avoids a strike and the loss of platinum production, which would have eroded mining companies’ profits and the government’s tax collection,” Moody’s said.
“Weak platinum prices are challenging mining companies, while South Africa’s tax revenue collection is at risk of falling short of budget projections amid fragile real GDP growth that is marginally above zero this year and the gradual pick-up that we project for 2017 remains fragile.”
Moody’s said the 2014 strike in the platinum sector cost South Africa more than 1.3m ounces in lost platinum production, which amounted to roughly R24bn – close to 1% of GDP.
The wage agreement, Moody’s said, marks the first time since 2009 that negotiations went smoothly.
“In 2012, strikes at Lonmin’s mines led to violence and financial and human losses. In 2014, a five-month strike by platinum workers hurt the entire platinum mining industry so severely that companies underwent restructurings to remain profitable and miners lost their jobs."
South Africa produces more than 70% of the global platinum supply and holds around 80% of global platinum reserves. The importance of mining in South Africa is currently “under-represented”, Moody’s said.
READ: Do not underestimate SA's platinum - expert
“Although the sector constitutes around 8.6% of GDP, many sectors directly and indirectly rely on it for their revenues. For example, downstream industries utilising mining for their inputs include electricity, steel and cement, while side industries that sustain mining include infrastructure and housing.”
Moody’s said apart from safeguarding South Africa’s GDP, the wage agreement will also protect the country’s foreign reserves that would have been depleted following production losses due to a strike.
“The mining sector accounts for around 50% of foreign currency earnings, an important contributor to South Africa’s ongoing ability to service foreign currency debt.”
According to Moody’s the wage agreement in the platinum sector will most likely also boost consumer and business sentiment, which have not rebounded from the record lows in 2009.
The wage increase, which includes pension contributions, housing rent subsidies and living allowances, will equal a 6.74% average increase in overall labour costs for platinum miners during the length of the contract, Moody’s said.
“Knock-on benefits also include better operating margins for mines and the increased likelihood of miners holding onto their jobs if platinum prices weaken again. The agreement, which follows a similarly constructive wage negotiation process for the gold sector last year, also has a positive bearing on further wage negotiations being amicable.”
Read Fin24's top stories trending on Twitter: Fin24’s top stories