Profit prospects are poor for South Africa's platinum miners as they collectively hold back from making the deep production cuts necessary to reduce a market surplus and force higher prices.
They have felt some respite this year from the tightening margins that have plagued them since the financial crisis hit in 2008, with platinum rising 24 percent, chiefly on the back of a violent strike at Impala Platinum's Rustenburg mine.
But prices remain some $600 below 2008's record $2,290 an ounce, at an historically unprecedented discount to gold and well below the level miners say they need for future growth as they face an appreciating rand and fast-rising production costs.
They may have to consider cutting production further and focusing on improving margins of their best-performing assets. But this is a move they are unlikely to make.
A pan-industry production cut would benefit prices and the platinum mining sector as a whole, but it would take a brave miner to be first to cut output in a bid to raise prices.
“If one cuts, obviously they would suffer, because they will not produce those ounces, their cost of production will rise and the other miners benefit,” said Standard Bank analyst Walter de Wet. “That's why it's difficult to say if they would cut.”
Aquarius Platinum said it would optimise its Everest mine, but any significant and deliberate output cuts have yet to be announced.
“Aquarius has announced that its Everest mine is on an optimisation programme, Impala obviously has a strike at the moment, which will certainly pull ounces out of the system,” said Justin Froneman, an analyst at SBG Securities.
“But whether we actually see broad and widespread closures either of capital investment or shaft closures at this point, I think will be doubtful.”
Price support is unlikely to come from the demand side of the market. Platinum slid by more than a fifth last year despite gains in other precious metals like gold, as demand from the key European car market was hurt by the spreading debt crisis.
The relatively muted price reaction to this year's supply disruptions, compared with the sharp price spike seen in early 2008, reflects a belief that demand for the white metal is unlikely to rise significantly this year, analysts say.
“A lot of the autocatalyst market has gone to palladium, because of the shift away from platinum in gasoline and the increasing share of palladium in diesel (catalysts),” said Mitsubishi analyst Matthew Turner.
“If we do see a broad-based recovery in the economy I am sure we would see higher prices,” he added. “But platinum is the metal most focused on Europe. The auto sector (is heavily dependent) on the European economy.”
Industry stocks of the metal are still plentiful, according to dealers in Europe.
GFMS estimated in April 2011 that some 3.9 million ounces of platinum were held in above-ground stocks, equal to about 80 percent of annual South African production. The country is home to four-fifths of global reserves.
“With demand where it is right now, the reality is that South Africa is actually producing too much platinum,” said GFMS analyst Peter Ryan. “We've got underlying surpluses going back quite a few years, and we expect those to continue for some time.”
South Africa's platinum miners agree they need much stronger prices. Mine sector inflation hit 14 percent in 2011, nearly three times the average inflation rate, as higher power and labour costs ate into miners' profits.
Producers including Anglo American Platinum's chief executive, Neville Nicolau, say the platinum price would need to be sharply higher to give them an incentive to invest in new mines.
“If we don't get the platinum price to around $1,900 an ounce in today's rand environment, then this industry is in trouble,” Nicolau said.
The miner's parent Anglo American said last week it would review the unit to improve returns, fuelling speculation that it may be planning to sell parts of the business or at least put production on hold to boost prices.
But such action has been limited.
“If we look back at the previous global financial crisis, it did unfortunately take the producers a long time to react,” said Froneman. “It will be interesting to see whether anyone does cut down on capacity in any major form on the back of these prices.”
Standard Bank forecasts the platinum market will be 136,000 ounces in surplus this year, de Wet added.
“If we can see 200,000 ounces cut, that could put the market in a deficit, which might see prices going slightly higher. Ultimately, the fundamentals are the only real handle on these things.” - Reuters