JOHANNESBURG (miningweekly.com) – South Africa should diversify its commodity mix to take the pressure off the struggling gold and platinum mining sectors and to reduce its exposure to the potential threat of precious metals substitutions, Ernst & Young (E&Y) African Mining and Metals leader Wikus Botha said on Wednesday.

He said that the local economy’s principal dependence on only two mineral sectors placed these industries under excessive pressure to perform.

In addition, the significance of precious metals in the global economy was far lower than that of other commodities, such as base metals, which supported construction and infrastructure development.

“One of the things that we are underexposed to in our basket of commodities is the production of base metals; the stuff that builds cities and produces steel, such as coking coal, iron-ore, aluminium, copper and zinc,” said Botha.

“We have very few local producers of these commodities. While we are fortunate in the amount of manganese available, this is only one component [of the required commodity mix]. In addition, while we produce a lot of thermal coal, we produce little coking coal,” he commented, adding that that the current economic slowdown provided a good opportunity to expand South Africa’s basket of commodities.

E&Y indicated in its yearly ‘Business risks facing mining and metals 2013-2014’ report, released on Wednesday that, in economies where one or two commodities dominated the market share, substitution was a credible threat, particularly when the commodity’s recent price had been high, or there was a regulatory push that effected its prolific use.

The report cautioned that the threat of substitution was one that could unexpectedly build momentum should conducive conditions prevail.

For South Africa, the trend towards substitution could emerge through the increased replacement of platinum by palladium, as E&Y transactions leader Bob Stall explained.

“Platinum-group metals (PGMs) are characterised by high and volatile costs, leading consumers to consider substitutes. Palladium can now be substituted for platinum on a one-for-one, ounce-for-ounce basis, which has strengthened the market for palladium in gasoline catalytic converters,” he said.

Advances in catalytic converters involved the continual fine-tuning of technology to steadily “thrift down” the required PGMs to meet given emission standards, which could have a destructive effect on international platinum demand and, consequently, the local platinum industry.

The effects of substitution were already in evidence in the US coal market, added Botha, which had been transformed by the shale gas boom and the subsequent gas-for-coal substitution.

“Threat of substitution has been transformational for the US coal market, and has had global ramifications. For other commodities, it has the capacity to radically and rapidly change their market should the right conditions prevail,” he said.