Amplats finding solo sales strategy difficult

Lulekane Sithole and Ali Kgantago, utility technicians at Anglo American Platinum, on the slag heap at the company's Polokwane smelter. Photo: Supplied

Lulekane Sithole and Ali Kgantago, utility technicians at Anglo American Platinum, on the slag heap at the company's Polokwane smelter. Photo: Supplied

Published Oct 2, 2014

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Clara Denina and Silvia Antonioli London

LESS than a year after tearing up a $57 million (R642m) annual supply contract with its main buyer, Anglo American Platinum (Amplats) is struggling to implement a new strategy of selling directly to end-users against a backdrop of weak prices, sources say.

Late last year the biggest platinum producer ended a long-standing deal through which it had sold the bulk of its output at a discount to refiner Johnson Matthey, in exchange for marketing.

The idea was to make more money by cutting out the middleman, going direct to traders and car makers and seizing profit opportunities by financing or lending metal and arbitraging different locations and grades. To achieve that, the company has expanded its marketing and sales teams in London and Singapore.

Amplats’s parent company, Anglo American, whose portfolio spans iron ore, thermal coal, nickel and copper, is also undergoing a big overhaul as it tries to improve returns after years of underperformance compared with its peers.

It has made a series of high-ranking personnel changes within its wider commercial department, hoping to boost the division’s earnings by $400m a year by 2016.

But market sources say Amplats’s plan to lure platinum business away from brokers and banks, which could shake up a market worth $5.4 billion a year, is proving hard to put into practice.

“Anglo’s new chiefs have this bee in their bonnet that banks are scalping margins from them and their business and by setting up their own trading organisation they can get a better average price for their metals,” a banking source said. “The expectation on what they can get from it is too high, especially at a time when the market is really weak.”

Prices of platinum, used in jewellery and autocatalysts, have fallen 7.3 percent already this year and are at a level that producers say barely covers the cost of mining.

On top of that, an unprecedented five-month labour strike at mines in South Africa saw Amplats lose about 40 percent of its mined output and register an almost 90 percent fall in earnings in the first half of this year.

“Look at the financial performance, at the always-possible force majeure due to strikes and the fact that they terminated a huge contract with a company they did business with for decades,” a German trader close to the car industry said. That was a reason end users were reluctant to deal with Amplats directly, he said.

Amplats said it had more than offset the reduction in the amount of metal it sold to Johnson Matthey through the acquisition of new customers, including some in the automotive industry, but declined to provide details.

“We have been selling platinum to our customers for many years, independent of the previous relationship with Johnson Matthey,” a spokesman for the company said.

Industry sources said the company lacked the right infrastructure to deal with plenty of new smaller accounts, which meant having to ship the metal to many different delivery points and oversee payments from potentially riskier counterparties. Also, Amplats had little experience in the industrial supply chain, they said.

One source at a London trading house said Amplats’s exposure to politically unstable countries such as Zimbabwe deterred his firm from buying its platinum directly. The lack of an established credit relationship between the trading house and Amplats was also a source of concern.

Analysts say producers are more prone to declaring force majeure in the face of supply disruptions, while market middlemen can rely on more than one supplier.

“The problem is that Johnson Matthey were not simply a conduit or a go-between, but they would provide some level of quasi-banking arrangements, in terms of stock holdings, for example,” Ross Norman, the chief executive of bullion broker Sharps Pixley, said.

“Anglo Platinum is looking to do in months what Johnson Matthey took decades to achieve, which is approval at the industrial end.”

Sources said Amplats had been replacing long-term contracts with car makers with shorter-term arrangements based on the London spot price.

Long-standing customers of Amplats include Japanese car makers Toyota and Honda, German refiners Heraeus and BASF, and Japanese trading house Tanaka, among others, it shows on its website.

“Their idea of selling directly is not paying off yet. It may come through once they learn how to do it,” a source said. – Reuters

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