Platinum in crisis

2014-02-02 06:00

Platinum sits as the largest component of the mining sector by GDP and employment and as the sector’s second-largest foreign exchange earner.

Its contribution to the country’s economy is impressive and we neglect it at our peril.

But it is an industry in crisis, with almost half of the country’s mines marginal or unprofitable at present.

Let’s take a look at the latest figures. In 2012, platinum mining delivered 4.1% of the nation’s GDP directly and indirectly, 9% of our merchandise exports, paid R34.4 billion in wages to the almost 198 000 people it employed directly.

Add in the jobs created indirectly, and 440 000 people depend directly and indirectly on our platinum mines for their wages.

With a dependency ratio approaching 10 to one, some 4.4 million people depend on platinum for their daily subsistence. These figures are far from insignificant.

And, with some 80% of the world’s global platinum reserves, last year South Africa delivered an estimated 53.4% of the year’s platinum supply, 26.4% of its palladium and 58.7% of its rhodium supply.

But, these past 10 years have seen challenges from lower-cost producers elsewhere and from rising amounts of recycled material.

In 2003, we supplied 51% of all platinum group metals (PGMs) – by last year it was down to 39.8%.

We produce less platinum now than we did in 2003, partly because of labour disruptions.

In 2012, the PGM mining industry accounted for 4.1% of GDP assuming the inclusion of the direct, indirect and induced effects of platinum mining.

The sector has significant expenditure multipliers that help create economic activity in many parts of the economy.

In 2011, the sector’s expenditure was a significant R83.2 billion, comprising significant expenditures on salaries, stores and materials, steel, electricity, and stay in business and long-term capital expenditure.

Collectively, the platinum producers formal social and labour programme expenditure is more than R500 million per annum in areas such as education and community development, housing, enterprise, infrastructure, health and job creation.

In 2011, the top five platinum producers spent R17.6 billion on capital investment, paid over R7 billion in corporate taxes and royalties and paid R4 billion to the providers of capital, the shareholders.

There is no doubt that the platinum mining industry has a profound positive impact on the economy and society of our country.

While platinum mining is the largest employer in the mining sector, its employment numbers have fallen sharply in the past 18 months due to global and local pressures affecting the viability of many mines.

Between June 2012 (just before the major strikes in July 2012) and September last year, employment on South Africa’s platinum mines declined by 15 627 to 191 286 jobs.

In the past two decades, real earnings per employee have more than doubled in platinum to reach R173 919 per employee in 2012.

It’s simplistic to believe that PGMs are indispensable because they are currently used in auto exhaust catalysts and as catalysts in many chemical processes.

Users are thrifting and finding alternatives, and they are likely to look to suppliers they consider to be more reliable if South Africa’s output is seriously disrupted.

As I have said, the South African platinum mining industry is in crisis. Demand for PGMs has reduced in Europe and demand growth has slowed in China.

South Africa’s producers have been affected by falling demand and prices and by rapidly escalating costs (mostly driven by electricity prices and labour costs) exacerbated since 2011 by strike activity.

In 2012, the platinum sector lost R13 billion in sales revenue due to strike activity.

This excludes the lost sales to suppliers, the wages not earned and the costs incurred while the mines stood still.

Based on an average platinum price of $1 434/oz in January 2014 and combining cash costs with sustaining capital expenditure, 45% of our platinum mines are either marginal or lossmaking.

Many mines need to restructure and close shafts, with potential job losses.

A contributing factor to depressed prices has been the balance between global supply and demand for PGMs.

Chemicals and precious metals company Johnson Matthey estimates that the global PGM market swung into from an oversupply position of 450 000 ounces in 2011 to a deficit of approximately 340 000 ounces in 2012.

Global new mine supply shrank by 12% to 5.7 million ounces as strike activity affected production.

When last year’s figures are calculated they are expected to show production little changed at around 5.7 million ounces and the gross deficit is expected to have risen to 605 000 ounces for the year.

But that is not affecting prices.

Warehouse stocks were increased by more than 1 million ounces in the oversupply years of 2009-2011, and that oversupply weighed on prices.

Now there is plenty of metal in warehouse stocks, sufficient to make good the deficits to the extent that weak market fundamentals have therefore kept the platinum price depressed.

For South African producers the production-weighted basket price of platinum is more than $263 per ounce lower than the spot price of platinum.

In the meantime, South Africa’s platinum producers are battling rising cost pressures.

High operating costs can be attributed to systemic structural changes such as declining head grades, increasing mining depths, reducing productivity and increasing capital intensity.

The recent labour unrest and safety stoppages have exacerbated the situation.

The shift away from Merensky Reef towards UG2 ores has affected grades.

The rapid increase in “administered prices” such as electricity and water, diesel fuel and wages and salaries, and the import-parity prices charged for inputs such as steel are key upward drivers of costs. Between 2007 and 2012:

» Electricity tariffs for the mining sector have risen by 238% from 18c per kilowatt hour in 2007 to 61c per kilowatt hour in 2012.

» Diesel costs have increased by 69.3% on the back of higher international oil prices.

» Reinforcing steel prices have increased by 57.5%,

» Average remuneration paid per worker employed in the South African mining sector grew by 60% in total over five years or by a compound 10% per annum, more than four percentage points higher than producer inflation.

The upshot has been an 18% annual increase in the average cost of producing an ounce of platinum. And this is clearly unsustainable.

The industry and the relevant stakeholders all have a significant role to play in reducing these cost pressures and increasing productivity.

The alternative is too awful to contemplate.

» Baxter is the chief operating officer of the Chamber of Mines of SA

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