Dineo Faku

Next year South Africa’s platinum sector would weather the storm brought about by subdued global industrial production, Deloitte Mining Solutions executive lead Ebrahim Takolia said in a report yesterday.

Takolia’s report explores the challenges in the platinum mining sector. It suggests that the distress in the industry presents opportunities not only to find alternative uses for platinum, but also for mining houses to acquire low valuation assets and later reap the benefits when metal prices have rebounded.

“In the long term the sector has to promote use of catalytic converters in Asia, which has high levels of pollution,” he said.

China, where industrial production grew significantly between 2002 and last year, could be a major factor in the revival of platinum as its demand for the precious metal increased 25 percent over the period, with the bulk of the demand, about 84 percent, coming from the jewellery industry.

In contrast to gold, more than 50 percent of the demand for platinum comes from industrial applications and during periods of sustained economic growth, the platinum price tends to be as high as that of gold.

According to Takolia, the platinum group metals producers seem to have lost their grip on input costs, which have doubled while productivity has declined. In the past decade cash costs have quadrupled, with cost inflation running well above global averages.

Local players are under pressure as half of the industry is operating at break-even or losses.

“The cost of power has nearly doubled, the prices of diesel and steel rose at twice the inflation rate and the average wage increases were consistently a few points ahead of the consumer price index (CPI),” it said.

Lonmin granted wage increases of between 11 percent and 22 percent after 34 protesters were killed at its Marikana mine on August 16, and its competitors have also awarded above-inflation wage pay hikes.

London-based platinum research company Johnson Matthey forecast earlier this month that significant disruption to platinum production would lead to a market deficit of 400 000 ounces this year.

It said global supply would drop 10 percent to 5.84 million ounces due to labour disruption and mine closures in South Africa.

Months of labour unrest, which spread from platinum mines to gold, iron ore and coal mines, led to credit downgrades of South Africa this year.

Takolia said platinum mining companies were rationalising their operations, which were losing money.

“We are going to have a situation where for a time mining companies will look at rationalising operations.

“The global market is in surplus this year and oversupply is forecast for the next few years. The oversupply is likely to keep the price of the metal in the range of $1 450 to $1 750 an ounce, which does not cover the costs and stay-in-business capital of more than half of the South African platinum mining operations,” his report stated.

Even at this level, the metal was expensive for many end users.

“This stimulates recycling of platinum from spent automotive catalysts and the jewellery sector, which already accounts for 2 million ounces a year, even if less than half of the potential recycling sources are accessed.”