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Stakeholders weigh in on future of SA’s platinum industry

30th May 2014

By: Anine Kilian

Contributing Editor Online

  

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Ongoing wage negotiations, protracted strike action and declining production in the platinum mining sector have raised concerns about the current state of platinum mining in South Africa, with certain mining houses re-evaluating their platinum assets and considering divestment.

Consulting firm Deloitte associate director Dr Jacek Guzek tells Mining Weekly that labour unrest, strike action and general workforce opposition to the industry’s restructuring and return to profitability will further remove a significant volume of the precious metal from the primary supply through lower productivity, safety stoppages and labour lost owing to strikes.

“Supply is likely to stagnate or decrease even further as a result of the systematic holding back of expansion capital throughout the South African platinum mining industry, while the existing mines become older, deeper and more difficult to mine, which is compounded by metal grades,” he says.

Guzek predicts that, if there is critical undersupply or the platinum-group metals (PGMs) basket price rises significantly, new sources of the metal for recycling will need to be accessed. Diesel vehicles will become available in the scrap market in large numbers for the first time, and recycling is likely to exceed the current two-million ounces a year in material terms.

He points out, however, that there is potential for increased demand in the sector.

“With several new, more-stringent fuel emissions standards being legislated this year in Europe and Russia, and with Europe’s demand for platinum having diminished in the last few years, the platinum sector will pick up and will be sufficiently compensated by China’s increasing demand,” Guzek explains.

He notes that new PGM consumption regions, such as South America and South-East Asia, will develop steadily and that the industry is likely to face a significantly higher deficit than last year.

SUPPLY CONSTRAINTS, PRICE PREDICTIONS
Mining major Anglo American Platinum (Amplats) executive head of marketing Andrew Hinkly tells Mining Weekly the platinum price remains depressed and below levels where investment in mining provides sustainable returns.

“This is largely due to supply from cumulative above-ground stocks. Further, despite the significant reduction in these stocks as a result of the 2012 and 2013 deficits, there has not been a meaningful rise in the platinum price as South African mining producers have continued to supply customers by selling the metal from working inventory,” he says. The market has, therefore, been ade- quately supplied.

“However, with reducing above-ground stocks and with the long-term supply-demand fundamentals for platinum still attractive, expectations are that, in the medium term, cumulative deficits will drive price recovery. Platinum price discovery in this liquid global market is effective and efficient,” Hinkly states.

Meanwhile, platinum mining major Impala Platinum (Implats) corporate relations group executive Johan Theron notes that, after four months of strike action, which, at the time of going to print was still ongoing, final metal inventories and processing inventories are largely drawn down and the industry is, subsequently, no longer in a position to supply metal at prestrike levels to its customers.

“As a result of prestrike metal inventories and our ability to draw down on processing inventories, we were able to supply metal to the market at ‘near normal’ levels until the end of April,” he says.

Theron adds that the industry’s first priority is to secure a return to work for the striking workforce to enable regular metal deliveries as soon as possible.

However, any agreement that secures miners’ return to work will have to be affordable enough to preserve jobs and secure the financial viability and sustainability of the industry.

“Currently, 60% of Amplats’ and 40% of Implats’ mining operations remain unaffected by the Association of Mineworkers and Construction Union (AMCU) members’ strike in Rustenburg, in the North West. Therefore, 60% of South Africa’s platinum supply, and 45% of the global supply, are impacted on by the strike,” he says, noting that, despite this, metal prices in the industry have not reacted significantly.

Theron notes that this is best explained by the availability of above-ground metal in the market, which is secured by industrial providers in the absence of newly mined metal from the Rustenburg mines.

The size and price mobility of above-ground stocks are not known with any degree of certainty, he says, but estimates range between two- million and seven-million platinum ounces.

“As an industry, we will make available as much metal as we can to the market for the foresee- able future, with the balance available to our customers from the available above-ground stocks in the open market,” assures Theron.

BOLSTERING DEMAND 

Hinkly states that Amplats’ customers are concerned that prolonged strike action will impact on their businesses and that some might possibly have chosen or may choose to increase their own stock levels by taking their business elsewhere, though there has been no evidence of this to date.

He adds that platinum has a compelling investment proposition, as it provides exposure to the growing global industrial demand for platinum, with platinum exchange-traded funds (ETFs) providing investors with an efficient equity-based product.

“ETF holdings are visible and provide some proxy for investor sentiment. The Absa South African rand-based platinum ETF provided an additional demand of about 900 000 oz in 2013 and assisted in reducing above-ground stocks,” he says.

Hinkly points out that investing in the development of PGMs markets is critical in ensuring the sustainability of the South African platinum industry and supporting the green economy – to which PGMs are indispensable – and that Amplats’ active marketing and commercial strategy includes a specific focus on market development.

“Amplats invests more than $50-million a year in direct market development and we jointly fund the global platinum jewellery market development with our two largest South African peers,” he says, adding that Amplats is committed to expanding industry participation in the manu- facture of jewellery and the development of industrial and investment demand.

“We have committed $100-million over five years to our PGM Development Fund, which stimulates international market demand, specifically in the industrial sector, where it provides start-up capital for investments in new PGM-using or PGM-enabling technology businesses,” he notes.

LABOUR RELATIONS
Meanwhile, Lonmin Platinum spokesperson Sue Vey says that the mining major signed a new recognition agreement with AMCU – the miner’s majority union – in August 2013, which signals a new working relationship to which the company is committed.

“We acknowledge that employees choose the union they prefer to represent them. While negotiations are ongoing to resolve the current dispute, we have worked hard to rebuild relationships with our unions in what is a changing landscape – not only in the mining industry but also in other sectors.”

Vey explains that Lonmin is working hard to establish a continuous, all-inclusive and consultative dialogue with the unions.

“We have a very different relationship with AMCU now than we did in August 2012. We believe in negotiating peaceful solutions for difficult issues and that, by communicating with AMCU and all unions represented at Lonmin, both sides’ commitment to creating peaceful and sensible solutions to these issues is reflected,” she says.

Vey says Lonmin is amenable to considering structural changes to the labour system, but adds that structural change can only be achieved over time through a carefully considered labour compact that considers not only the disposable income of workers but also the socioeconomic wellbeing of workers.

Vey also highlights the mining communities that are impacted on by Lonmin’s operations, as well as the profitability and sustainability of these operations, as key areas of consideration.

Meanwhile, Theron says that, to a large degree, Implats has taken note of the changing labour dynamic after the mine unrest in 2012 and has revised and repositioned its labour policies and strategy accordingly.

“The current strike has, basically, only reaffirmed our previous assessment and strengthened our resolve to implement these provisions,” he states.

MECHANISATION
Guzek notes that increased mechanisation is being considered by platinum miners to reduce cost, improve safety and potentially resolve labour relations issues that are plaguing the industry.

“A cost-effective mechanisation of the existing deep mines, however, does not seem to be feasible using the conventional mining equipment currently available, as is reflected by Lonmin’s previous mechanisation expe- rience.

“It could be a different proposition if mechanisation is considered from the outset in the mine design phase of new start-ups,” he says.

Vey concurs that much has been discussed at Lonmin about the impact of the strike on the future viability of operations and implementing mechanisation.

“Mechanisation is an option at some operations, but cannot be implemented immediately – nor is it entirely desirable. Our country needs more, not fewer, jobs,” she says.

Theron points out, however, that Implats was well on its way to modernising and mechanising its operations before the strike, which started in January.

“The strike has definitely increased our resolve to reduce these timelines as far as possible,” he says.

LOOKING FORWARD


Industry stakeholders agree that South Africa’s platinum fundamentals remain strong, as the future is based on urbanisation and development.

Guzek adds, however, that, while South African PGM producers dominate the world’s PGMs supply, the local industry’s approach to production and investment is very fragmented and individualistic, which has diminished the industry’s potential to be a material price setter in the global market.

“A lack of government macroeconomic strategy with respect to the South African platinum endowment does not help. Perhaps the current crisis presents an opportunity for the development of a pact among key stake- holders, including platinum majors, labour and government, in much the same way the gold industry was saved in the 1990s.”

Theron states that local customers will be prioritised to preserve local beneficiation and manufacturing jobs.

“No force majeure notices to customers are expected, as customers have agreed to accept reduced metal deliveries,” he says.

Guzek adds that other PGM-producing countries, such as Russia, Canada and, notably, Zimbabwe, which all have lower PGMs cash costs than South African producers, may benefit from the current crisis in South Africa and could increase their relative share of the precious metal supply.

At the time of going to print, platinum producers Amplats, Implats and Lonmin advised that facilitated mediation between the companies and AMCU were continuing under the auspices of the Labour Court. The producers reaffirmed their commitment to finding a common solution to this dispute. Contrary to some media reports, no agreement has yet been reached.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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